AARP INVESTMENT PROGRAM FROM SCUDDER
PROSPECTUS
FEBRUARY 1, 1998
The family of 15 AARP Mutual Funds offers a choice of pure no-loadO mutual
funds, generally each of whose goal is to seek to provide competitive returns
but with less risk of loss to its portfolio than similar mutual funds, as
measured by the frequency and amount by which total return fluctuates downward.
This risk of loss, as described in this Prospectus, may also be referred to as
"downside risk." The 15 Funds are organized into five Trusts.
Trusts AARP Mutual Funds
AARP Cash Investment Funds AARP High Quality Money Fund
AARP Income Trust AARP High Quality Short Term Bond Fund
AARP GNMA and U.S. Treasury Fund
AARP Bond Fund for Income
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 U.S. Stock Index Fund
AARP Global Growth Fund
AARP Capital Growth Fund
AARP International Growth and Income Fund
AARP Small Company Stock Fund
AARP Managed Investment AARP Diversified Income With Growth Portfolio
Portfolios Trust AARP Diversified Growth Portfolio
This combined Prospectus provides information about the AARP Investment Program
from Scudder that as a prospective investor you should be familiar with before
investing. Please keep this document for future reference.
The U.S. Government does not and has never insured or guaranteed shares of any
mutual fund, including the AARP Mutual Funds. The AARP High Quality Money Fund
and the AARP High Quality Tax Free Money Fund each seek to maintain a constant
net asset value of $1.00 per share. However, the Fund Manager cannot assure
investors that these Funds will be able to maintain a stable $1.00 per share or
constant net asset value.
You may get more detailed information in the combined Statement of Additional
Information (SAI) dated February 1, 1998, as amended from time to time. The SAI
is considered part of this Prospectus by reference to it. The SAI is on file
with the Securities and Exchange Commission (SEC) and is available along with
other related materials on the SEC's Internet Web Site (http://www.sec.gov).
You may get a copy of the SAI or a LARGE PRINT version of this Prospectus
without charge by calling 1-800-253-2277, or by writing to Scudder Investor
Services, Inc., P.O. Box 2540, Boston, MA 02208-2540.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
NOTES
PROSPECTUS
2
<PAGE>
INFORMATION CONTAINED IN THE PROSPECTUS
AND WHERE TO FIND IT
PAGE
----
A GLANCE AT THE AARP MUTUAL FUNDS FROM SCUDDER ............................. 4
FUND EXPENSES .............................................................. 6
FINANCIAL HIGHLIGHTS ....................................................... 10
A BRIEF OVERVIEW OF THE AARP INVESTMENT PROGRAM FROM SCUDDER ............... 21
SPECIAL FEATURES OF THE AARP INVESTMENT PROGRAM ............................ 22
OBJECTIVES AND POLICIES .................................................... 27
AARP MONEY MARKET FUNDS
AARP HIGH QUALITY MONEY FUND ......................................... 29
AARP HIGH QUALITY TAX FREE MONEY FUND ................................ 31
AARP INCOME FUNDS
AARP HIGH QUALITY SHORT TERM BOND FUND ............................... 35
AARP GNMA AND U.S. TREASURY FUND ..................................... 37
AARP INSURED TAX FREE GENERAL BOND FUND .............................. 39
AARP BOND FUND FOR INCOME ............................................ 41
AARP GROWTH AND INCOME FUNDS
AARP BALANCED STOCK AND BOND FUND .................................... 46
AARP GROWTH AND INCOME FUND .......................................... 48
AARP U.S. STOCK INDEX FUND ........................................... 50
AARP GROWTH FUNDS
AARP CAPITAL GROWTH FUND ............................................. 55
AARP SMALL COMPANY STOCK FUND ........................................ 57
AARP INTERNATIONAL FUNDS
AARP GLOBAL GROWTH FUND .............................................. 61
AARP INTERNATIONAL GROWTH AND INCOME FUND ............................ 64
AARP MANAGED INVESTMENT PORTFOLIOS
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO ........................ 69
AARP DIVERSIFIED GROWTH PORTFOLIO .................................... 69
OTHER INVESTMENT POLICIES AND RISK FACTORS ................................. 73
INVESTMENT RESTRICTIONS .................................................... 79
ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES ....................... 80
FUND ORGANIZATION .......................................................... 81
UNDERSTANDING FUND PERFORMANCE ............................................. 84
UNDERSTANDING SHARE PRICE .................................................. 86
OPENING AN AARP MUTUAL FUND ACCOUNT ........................................ 87
WIRE TRANSFERS ............................................................. 87
ADDING TO YOUR INVESTMENT .................................................. 87
EXCHANGES AND REDEMPTIONS .................................................. 88
SIGNATURE GUARANTEES ....................................................... 88
STATEMENTS AND REPORTS ..................................................... 89
OTHER MAILINGS ............................................................. 89
INVESTOR SERVICES .......................................................... 89
SOME COMMONLY ASKED QUESTIONS .............................................. 91
SERVICE PROVIDERS OF THE AARP MUTUAL FUNDS ................................. 92
TRUSTEES AND OFFICERS ...................................................... 93
PROSPECTUS
3
<PAGE>
A GLANCE AT THE AARP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AARP INVESTMENT
MUTUAL FUNDS OBJECTIVE*
- --------------------------------------------------------------------------------------
<S> <C>
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------------
AARP High Quality Money Fund Current income and stability
of principal
- --------------------------------------------------------------------------------------
AARP High Quality Tax Free Money Fund Current income free from
federal income taxes and
stability and safety of
principal
- --------------------------------------------------------------------------------------
INCOME FUNDS
- --------------------------------------------------------------------------------------
AARP High Quality Short Term Bond Fund High current income
- --------------------------------------------------------------------------------------
AARP GNMA and U.S. Treasury Fund High current income
- --------------------------------------------------------------------------------------
AARP Insured Tax Free General
Bond Fund High current
income free from federal
income taxes
- --------------------------------------------------------------------------------------
AARP Bond Fund for Income High current income
- --------------------------------------------------------------------------------------
GROWTH AND INCOME FUNDS
- --------------------------------------------------------------------------------------
AARP Balanced Stock and Bond Fund Long-term capital growth and
income
- --------------------------------------------------------------------------------------
AARP Growth and Income Fund Long-term capital growth and
income
- --------------------------------------------------------------------------------------
AARP U.S. Stock Index Fund Long-term capital growth and
income
- --------------------------------------------------------------------------------------
GROWTH FUNDS
- --------------------------------------------------------------------------------------
AARP Capital Growth Fund Long-term capital growth
- --------------------------------------------------------------------------------------
AARP Small Company Stock Fund Long-term capital growth
- --------------------------------------------------------------------------------------
INTERNATIONAL FUNDS
- --------------------------------------------------------------------------------------
AARP Global Growth Fund Long-term capital growth
- --------------------------------------------------------------------------------------
AARP International Growth and Income Fund Long-term capital growth and
income
- --------------------------------------------------------------------------------------
MANAGED INVESTMENT PORTFOLIOS
- --------------------------------------------------------------------------------------
AARP Diversified Income with Growth Portfolio Current income with modest
long-term appreciation
- --------------------------------------------------------------------------------------
AARP Diversified Growth Portfolio Long-term capital growth
- --------------------------------------------------------------------------------------
</TABLE>
* Each Fund's investment objective and investments are described in more
detail in the section entitled "Objectives and Policies." (See Table of
Contents for the page number for each Fund.)
PROSPECTUS
4
<PAGE>
MUTUAL FUNDS FROM SCUDDER
- --------------------------------------------------------------------------------
YOUR EXPECTED INVESTS
TIME HORIZON PRIMARILY IN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1 year + Money market securities
- --------------------------------------------------------------------------------
1 year + Federally tax-exempt high quality, short-term municipal
securities
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3 years + High-quality short-term U.S. Government, corporate and other
fixed-income securities
- --------------------------------------------------------------------------------
3 years + High-quality GNMA securities and U.S. Treasury bills, notes
and bonds
- --------------------------------------------------------------------------------
3 years + High quality federally tax-exempt municipal securities that
are insured
- --------------------------------------------------------------------------------
3 years + Short-, medium-, and long-term investment grade debt
securities
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3-5 years + Mix of dividend-paying stocks, high-quality bonds and cash
reserves
- --------------------------------------------------------------------------------
5 years + Dividend-paying stocks and fixed-income securities
convertible into common stocks
- --------------------------------------------------------------------------------
5 years + Stocks of S&P 500 companies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5 years + Stocks and convertible securities
- --------------------------------------------------------------------------------
5 years + Stocks of small U.S. companies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5 years + Stocks of established companies in a variety of developed
international markets
- --------------------------------------------------------------------------------
5 years + Dividend-paying stocks of established companies in developed
non-U.S. markets and in foreign convertible securities
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3-5 years + Managed Portfolio of AARP Stock and Bond Mutual Funds with an
emphasis on bond funds
- --------------------------------------------------------------------------------
5 years + Managed Portfolio of AARP Stock and Bond Mutual Funds with an
emphasis on stock funds
- --------------------------------------------------------------------------------
None of the AARP Mutual Funds invest in securities issued by tobacco-producing
companies. Purchasing, exchanging and redeeming information is described in more
detail later in this prospectus.
PROSPECTUS
5
<PAGE>
FUND EXPENSES
================================================================================
Shareholder Transaction Expenses
The AARP Mutual Funds do not charge sales fees or commissions--100% of your
investment goes to work for you.
o No fees to open your account
o No fees to open or maintain an AARP IRA or AARP Keogh Plan account
o No fees to buy shares
o No fees to exchange (move investments from one fund to another)
o No fees to sell (redeem) shares
o No marketing fees or distribution fees (12b-1 fees)
o No fees to reinvest dividends
Annual Fund Operating Expenses
There are Annual Fund Operating Expenses for each of the AARP Mutual Funds, but
you do not pay these expenses directly. The AARP Mutual Funds pay these expenses
before distributing net investment income to you. These expenses include the
management fee paid to Scudder Kemper Investments, Inc., (the Fund Manager) and
other expenses for services, such as maintaining shareholder records and
furnishing shareholder statements and fund reports. The expenses are reflected
in the AARP Mutual Funds' share prices or dividends and are not directly charged
to shareholder accounts.
The following tables present information on the projected costs and expenses of
investing in an AARP Fund. Use these tables to compare the fees and expenses of
the AARP Mutual Funds with other mutual funds.
PROSPECTUS
6
<PAGE>
Annual Fund Operating Expenses are expressed as a percentage of each AARP Fund's
average daily net assets.
The following table shows the expenses for each AARP Fund for the fiscal year
ended September 30, 1997, except for the AARP Bond Fund for Income, the AARP
U.S. Stock Index Fund, the AARP International Growth and Income Fund, and the
AARP Small Company Stock Fund, which were introduced on February 1, 1997. For
these four Funds, expenses have been estimated.
Annual Fund Operating Expenses
--------------------------------------------------
Effective
Management Other Total
Fund Fee Rate(%)* Expenses(%) Expenses(%)
AARP High Quality Money
Fund 0.39 0.52 0.91
AARP High Quality Tax Free
Money Fund 0.39 0.46 0.85
AARP High Quality Short
Term Bond Fund 0.48 0.45 0.93
AARP GNMA and U.S.
Treasury Fund 0.41 0.24 0.65
AARP Insured Tax Free
General Bond Fund 0.48 0.18 0.66
AARP Bond for Income (1) 0.00** 0.25** 0.25**
AARP Balanced Stock and
Bond Fund 0.48 0.43 0.91
AARP Growth and Income
Fund 0.48 0.23 0.71
AARP U.S. Stock Index
Fund (1) 0.00*** 0.50*** 0.50***
AARP Capital Growth Fund 0.61 0.31 0.92
AARP Small Company Stock
Fund (1) 0.35+ 1.40+ 1.75+
AARP Global Growth
Fund (2) 0.84 0.98 1.82
AARP International Growth
and Income Fund (1) 0.00++ 1.75++ 1.75++
(1) Estimated for first year of operations
(2) Until January 31, 1998, the Fund Manager waived a portion of its management
fee and reimbursed a portion of other expenses for AARP Global Growth Fund
to the extent necessary so that the total annualized expenses of the Fund
did not exceed 1.75% of average daily net assets. The above table shows
what the fees and expenses of the Fund would have been during the year
ended September 30, 1997 if expense maintenance had not been in effect.
* The AARP Mutual Funds' fee structure is designed to recognize the degree to
which the pooled resources of the Program provide economies in the
management of the AARP Mutual Funds. The fee consists of two elements: a
"Base Fee" and an "Individual Fund Fee." The combined Base Fee and
Individual Fund Fee is called the Effective Management Fee Rate.
** The AARP Bond Fund for Income was introduced on February 1, 1997. Fund
expenses are projected. Until July 31, 1998, the Fund Manager has agreed to
waive all or a portion of its management fee and other expenses for AARP
Bond Fund for Income to the extent necessary
PROSPECTUS
7
<PAGE>
so that the total annualized expenses of the Fund do not exceed 0.25% of
average daily net assets. If the Fund Manager had not agreed to waive its
fee and reimburse expenses, it is estimated that the total annualized
expenses of the Fund would be: investment management fee 0.55%, other
expenses 0.73% and total operating expenses 1.28% for the initial year.
*** The AARP U.S. Stock Index Fund was introduced on February 1, 1997. Fund
expenses are projected. Until July 31, 1998, the Fund Manager has agreed to
waive all or a portion of its management fee and other expenses for AARP
U.S. Stock Index Fund to the extent necessary so that the total annualized
expenses of the Fund do not exceed 0.50% of average daily net assets. If
the Fund Manager had not agreed to waive its fee, it is estimated that the
total annualized expenses of the Fund would be: investment management fee
0.29%, other expenses 1.60% and total operating expenses 1.89% for the
initial year.
+ The AARP Small Company Stock Fund was introduced on February 1, 1997. Fund
expenses are projected. Until July 31, 1998, the Fund Manager has agreed to
waive a portion of its management fee for AARP Small Company Stock Fund to
the extent necessary so that the total annualized expenses of the Fund do
not exceed 1.75% of average daily net assets. If the Fund Manager had not
agreed to waive a portion of its fee and reimburse a portion of other
expenses, it is estimated that the total annualized expenses of the Fund
would be: investment management fee 0.82%, other expenses 1.40% and total
operating expenses 2.22% for the initial year.
++ The AARP International Growth and Income Fund was introduced on February 1,
1997. Fund expenses are projected. Until July 31, 1998, the Fund Manager
has agreed to waive all or a portion of its management fee and other
expenses for AARP International Growth and Income Fund to the extent
necessary so that the total annualized expenses of the Fund do not exceed
1.75% of average daily net assets. If the Fund Manager had not agreed to
waive its fee, it is estimated that the total annualized expenses of the
Fund would be: investment management fee 0.84%, other expenses 2.37% and
total operating expenses 3.21% for the initial year.
Effective
Management Other Total
Managed Investment Portfolios Fee Rate(%) Expenses(%) Expenses(%)*
----------------------------- ----------- ----------- ------------
AARP Diversified Income with
Growth Portfolio 0% 0% 0%
AARP Diversified Growth
Portfolio 0% 0% 0%
* The AARP Managed Investment Portfolios are expected to operate at a zero
expense level. However, each Portfolio's shareholders will indirectly bear
that Portfolio's pro rata share of fees and expenses incurred by the
underlying AARP Mutual Funds in which that Portfolio is invested. The
investment returns of each Portfolio, therefore, will be net of that
Portfolio's share of the expenses of the underlying AARP Mutual Funds in
which that Portfolio is invested. The chart on the previous page shows the
expense ratios of each underlying AARP Mutual Fund after fee waiver or
reimbursement where applicable. Based on this information, the range for
the average weighted expense ratio borne by the AARP Diversified Income
With Growth Portfolio is expected to be 0.30% to 1.29%, and 0.40% to 1.64%
for the AARP Diversified Growth Portfolio. A range is provided since the
average assets of each Portfolio invested in each of the underlying AARP
Mutual Funds will fluctuate. Using the midpoint of the ratios set forth
above, an example of the expenses of each Portfolio is included in the
chart on the next page.
PROSPECTUS
8
<PAGE>
EXAMPLES OF WHAT THE EXPENSES WOULD BE ON A $1,000 INVESTMENT IN EACH AARP FUND
Based on the level of assets as of September 30, 1997 (and projected first year
of operation for the AARP Bond Fund for Income, the AARP U.S. Stock Index Fund,
the AARP International Growth and Income Fund and the AARP Small Company Stock
Fund), we have calculated the forecasted total expenses of a $1,000 investment
in each AARP Fund over specified periods. These examples assume a 5% annual
return. It has also been assumed that redemptions occur at the end of each
period, that all dividends and distributions are reinvested, and that total fund
operating expenses remain the same each year.
Fund 1 Year 3 Years 5 Years 10 Years
AARP High Quality Money Fund $9.00 $29.00 $50.00 $112.00
AARP High Quality Tax Free
Money Fund $9.00 $27.00 $47.00 $105.00
AARP High Quality Short Term
Bond Fund $9.00 $30.00 $51.00 $114.00
AARP GNMA and U.S. Treasury
Fund $7.00 $21.00 $36.00 $81.00
AARP Insured Tax Free
General Bond Fund $7.00 $21.00 $37.00 $82.00
AARP Bond Fund for Income $3.00 $8.00 N/A N/A
AARP Balanced Stock and
Bond Fund $9.00 $29.00 $50.00 $112.00
AARP Growth and Income Fund $7.00 $23.00 $40.00 $88.00
AARP U.S. Stock Index Fund $5.00 $16.00 N/A N/A
AARP Capital Growth Fund $9.00 $29.00 $51.00 $113.00
AARP Small Company Stock
Fund $18.00 $55.00 N/A N/A
AARP Global Growth Fund $18.00 $57.00 $99.00 $214.00
AARP International Growth and
Income Fund $18.00 $55.00 N/A N/A
AARP Diversified Growth
Portfolio $10.00 $32.00 N/A N/A
AARP Diversified Income With
Growth Portfolio $8.00 $26.00 N/A N/A
You should not consider these examples as representations of past or future
expenses or returns. Actual fund expenses may be higher or lower in the future.
For more information, including reference to a $5.00 wire service fee that is
charged in some cases, please see "Opening an AARP Mutual Fund Account."
PROSPECTUS
9
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
On the next eleven pages, you will find information about the income and
expenses of each AARP Fund. You will also find the following: (1) the net gain
or loss on the investments, (2) the distributions, if any, of income and gain,
and, (3) the change in net asset value per share from the beginning to the end
of the stated periods. Price Waterhouse LLP, the AARP Mutual Funds' independent
accountants, has examined this information. The Annual Report to Shareholders
includes their report on the Funds' most recent five years. To request a free
copy of the most recent Annual Report to Shareholders, which includes more
detailed information concerning the Funds' performance, complete portfolio
listings and audited financial statements, call us at 1-800-253-2277.
<TABLE>
<CAPTION>
AARP High Quality Money Fund For the Years Ended September 30
-------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning of
Period .......... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------------------------------------------------------------------------------------------
Net Investment
Income .......... .046 .045 .049 .028 .021 .040 .060 .073 .080 .060
Distributions
from Net
Investment
Income .......... (.046) (.045) (.049) (.028) (.021) (.040)(a) (.060) (.073) (.080) (.060)
------------------------------------------------------------------------------------------
Net Asset
Value at End
of Period ....... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------------------------------------------------------------------------------------------
Total Return %
(b) ............. 4.72 4.62 4.99 2.84 2.13 4.12 6.22 7.58 8.32 6.15
Net Assets End
of Period
($ millions) .... 471 412 384 333 254 323 357 376 324 224
Ratio of
Operating
Expenses to
Average Net
Assets % ........ .91 .963 .978 1.125 1.312 1.151 1.053 1.058 1.071 1.097(c)
Ratio of
Operating
Expenses
Before
Expense
Reductions
to Average
Net Assets % .... .91 .963 .978 1.125 1.312 1.190 1.132 1.169 1.181 1.178
Ratio of Net
Investment
Income to
Average Net
Assets % ........ 4.63 4.54 4.89 2.89 2.12 3.61 6.05 7.32 8.06 6.03
</TABLE>
(a) Includes approximately $.005 per share of net realized short-term capital
gains.
(b) Total returns would have been lower had certain expenses not been reduced.
(c) Reflects fees not imposed by the Fund Manager of $.001 per share.
PROSPECTUS
10
<PAGE>
<TABLE>
<CAPTION>
AARP High Quality Tax Free Money Fund For the Years Ended September 30
----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(b) 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning
of Period ....... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $.996 $.998 $1.008 $.998
----------------------------------------------------------------------------------------
Net Investment
Income .......... .028 .028 .029 .017 .016 .026 .055 .061 .059 .055
Net Realized &
Unrealized
Investment
Gain (Loss) ..... -- -- -- -- -- -- .004 (.002) (.010) .010
----------------------------------------------------------------------------------------
Total from
Investment
Operations ...... .028 .028 .029 .017 .016 .026 .059 .059 .049 .065
----------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income .......... (.028) (.028) (.029) (.017) (.016) (.026) (.055) (.061) (.059) (.055)
----------------------------------------------------------------------------------------
Total
Distributions ... (.028) (.028) (.029) (.017) (.016) (.026) (.055) (.061) (.059) (.055)
----------------------------------------------------------------------------------------
Net Asset Value
at End of
Period .......... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $.996 $.998 $1.008
----------------------------------------------------------------------------------------
Total Return % .... 2.80 2.80 2.99 1.76(a) 1.62(a) 2.58 6.10 6.02 4.98 6.65
Net Assets End
of Period
($ millions) .... 103 111 120 129 134 127 119 98 90 79
Ratio of
Operating
Expenses Net
to Average
Net Assets % .... .85 .85 .87 .90 .93 .95 1.06 1.12 1.17 1.27
Ratio of
Operating
Expenses
Before
Expense
Reductions to
Average Net
Assets % ........ .85 .85 .87 .91 1.15 1.13 1.13 1.12 1.17 1.30
Ratio of Net
Investment
Income to
Average Net
Assets % ........ 2.76 2.77 2.94 1.75 1.60 2.54 5.43 6.06 5.85 5.47
Portfolio
Turnover
Rate % .......... -- -- -- -- -- -- -- 39.88 21.28 62.73
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
(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
information prior to August 1, 1991 has been restated to reflect the stock
split and should not be considered representative of the present Fund.
PROSPECTUS
11
<PAGE>
<TABLE>
<CAPTION>
AARP GNMA and U.S. Treasury Fund For the Years Ended September 30
-----------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period ....... $14.91 $15.19 $14.73 $15.96 $16.19 $15.72 $14.95 $14.98 $15.11 $14.89
----------------------------------------------------------------------------------------
Net
Investment
Income .......... .98 .99 1.01 .93 1.15 1.22 1.26 1.31 1.31 1.37
Net Realized
& Unrealized
Investment
Gain (Loss) ..... .25 (.28) .46 (1.23) (.23) .47 .77 (.03) (.13) .22
----------------------------------------------------------------------------------------
Total from
Investment
Operations ...... 1.23 .71 1.47 (.30) .92 1.69 2.03 1.28 1.18 1.59
----------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income .......... (.98) (.99) (.98) (.93) (1.15) (1.22) (1.26) (1.31) (1.31) (1.37)
Distributions
from
Capital ......... -- -- (.03) -- -- -- -- -- -- --
----------------------------------------------------------------------------------------
Total
Distributions ... (.98) (.99) (1.01) (.93) (1.15) (1.22) (1.26) (1.31) (1.31) (1.37)
----------------------------------------------------------------------------------------
Net Asset
Value at
End of
Period .......... $15.16 $14.91 $15.19 $14.73 $15.96 $16.19 $15.72 $14.95 $14.98 $15.11
----------------------------------------------------------------------------------------
Total
Return % ........ 8.49 4.79 10.31 (1.90) 5.89 11.19 14.12 8.86 8.17 11.07
Net Assets
End of
Period
($ millions) .... 4,584 4,904 5,252 5,585 6,712 5,232 3,311 2,583 2,518 2,837
Ratio of
Operating
Expenses
to Average
Net Assets % .... .65 .64 .67 .66 .70 .72 .74 .79 .79 .81
Ratio of Net
Investment
Income to
Average
Net Assets % .... 6.51 6.55 6.77 6.09 7.15 7.69 8.23 8.71 8.76 9.09
Portfolio
Turnover
Rate % .......... 86.76 83.44 70.35 114.54 105.49 74.33 86.64 60.54 48.35 84.72
</TABLE>
PROSPECTUS
12
<PAGE>
<TABLE>
<CAPTION>
AARP Insured Tax Free General Bond Fund For the Years Ended September 30
------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning of
Period .......... $15.82 $16.01 $15.05 $17.19 $16.44 $15.71 $14.63 $15.04 $14.80 $14.45
-----------------------------------------------------------------------------------------
Net Investment
Income .......... .93 .92 .94 .85 .93 1.03 1.10 1.17 1.23 1.27
Net Realized &
Unrealized
Investment
Gain (Loss) ..... .31 (.19) .95 (1.76) .93 .73 1.08 (.41) .24 .46
-----------------------------------------------------------------------------------------
Total from
Investment
Operations ...... 1.24 .73 1.89 (.91) 1.86 1.76 2.18 .76 1.47 1.73
-----------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income .......... (.93) (.92) (.93) (.85) (.93) (1.03) (1.10) (1.17) (1.23) (1.27)
Distributions
from Net
Realized
Gains ........... -- -- -- -- (.18) -- -- -- -- (.05)
Distributions
from Capital .... -- -- -- -- -- -- -- -- -- (.06)
Distributions
in Excess of
Net Realized
Gains ........... -- -- -- (.38) -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Total
Distributions ... (.93) (.92) (.93) (1.23) (1.11) (1.03) (1.10) (1.17) (1.23) (1.38)
-----------------------------------------------------------------------------------------
Net Asset
Value at End
of Period ....... $16.13 $15.82 $16.01 $15.05 $17.19 $16.44 $15.71 $14.63 $15.04 $14.80
-----------------------------------------------------------------------------------------
Total Return %
(a) ............. 8.15 4.59 12.98 (5.55) 11.88 11.56 15.44 5.21 10.38 12.38
Net Assets End
of Period
($ millions) .... 455 512 533 568 604 384 201 151 129 123
Ratio of
Operating
Expenses to
Average Net
Assets % ........ .93 .91 .95 .95 1.01 1.13 1.17 1.14 1.16 1.17
Ratio of
Operating
Expenses
Before
Expense
Reductions
to Average
Net Assets % .... 5.84 .91 .95 .95 1.01 1.13 1.17 1.20 1.21 1.20
Ratio of Net
Investment
Income to
Average Net
Assets % ........ 5.84 5.76 6.13 5.31 5.64 6.40 7.26 7.86 8.33 8.55
Portfolio
Turnover
Rate % .......... 83.26 169.96 201.07 63.75 100.98 63.00 90.43 47.39 57.69 23.57
</TABLE>
* The Fund changed its name from AARP High Quality Bond Fund on February 1,
1998.
PROSPECTUS
13
<PAGE>
<TABLE>
<CAPTION>
AARP Insured Tax Free General Bond Fund For the Years Ended September 30
------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning of
Period ........... $17.90 $17.74 $16.93 $19.00 $17.88 $17.30 $16.12 $16.61 $16.02 $15.00
---------------------------------------------------------------------------------------
Net Investment
Income ........... .88 .87 .87 .86 .90 .93 1.00 1.04 1.08 1.08
Net Realized &
Unrealized
Investment Gain
(Loss) ........... .61 .16 .81 (1.67) 1.55 .75 1.18 (.24) .59 1.02
---------------------------------------------------------------------------------------
Total from
Investment
Operations ....... 1.49 1.03 1.68 (.81) 2.45 1.68 2.18 .80 1.67 2.10
---------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income ........... (.88) (.87) (.87) (.86) (.90) (.93) (1.00) (1.04) (1.08) (1.08)
Distributions of
Net Realized
Gains ............ (.09) -- -- (.34) (.43) (.17) -- (.25)
Distributions in
Excess of Net
Realized Gains.... -- -- -- (.06) --
---------------------------------------------------------------------------------------
Total
Distributions .... (.97) (.87) (.87) (1.26) (1.33) (1.10) (1.00) (1.29) (1.08) (1.08)
---------------------------------------------------------------------------------------
Net Asset Value
at End of Period.. $18.42 $17.90 $17.74 $16.93 $19.00 $17.88 $17.30 $16.12 $16.61 $16.02
---------------------------------------------------------------------------------------
Total Return % .... 8.57 5.88 10.21 (4.48) 14.31 10.01 13.85 4.89 10.66 14.39
Net Assets End
of Period
($ millions) ..... 1,712 1,755 1,807 1,914 2,087 1,487 1,068 771 527 312
Ratio of
Operating
Expenses to
Average Net
Assets % ......... .66 .66 .69 .68 .72 .74 .77 .80 .84 .92
Ratio of Net
Investment
Income to
Average Net
Assets % ......... 4.87 4.83 5.06 4.80 4.90 5.31 5.92 6.29 6.52 6.95
Portfolio
Turnover Rate %... 7.61 18.69 17.45 38.39 47.96 62.45 32.18 48.24 148.94 163.51
</TABLE>
Prospectus
14
<PAGE>
AARP Bond Fund For Income
-------------------------
For the period
February 1, 1997
(commencement
of
operations) to
September 30,1997
-----------------
Net Asset Value at Beginning of Period .............................. $15.00
------
Net Investment Income ............................................... .69
Net Realized & Unrealized Investment Gain (Loss) .................... .20
------
Total from Investment Operations .................................... .89
------
Distribution from Net Investment Income ............................. (.69)
------
Net Asset Value at End of Period .................................... $15.20
------
Total Return % (a) .................................................. 6.06 (b)
Net Assets End of Period ($ millions) ............................... 58
Ratio of Operating Expenses Net to Average Net Assets % ............. -- (c)
Ratio of Operating Expenses to Average Net Assets Before
Expense Reductions % ............................................... 1.53 (c)
Ratio of Net Investment Income to Average Net Assets % .............. 7.03 (c)
Portfolio Turnover Rate % ........................................... 13.69 (c)
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
<TABLE>
<CAPTION>
AARP Balanced Stock and Bond Fund For the Years Ended September 30
------------------------------------------------------------------
1997(a) 1996 1995 1994(b)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period ...... $17.63 $16.40 $14.64 $15.00
----------------------------------------------
Net Investment Income ....................... .72 .66 .61 .25
Net Realized & Unrealized Investment Gain
Loss) ...................................... 3.98 1.44 1.79 (.37)(c)
----------------------------------------------
Total from Investment Operations ............ 4.70 2.10 2.40 (.12)
----------------------------------------------
Distributions from Net Investment Income .... (.72) (.66) (.60) (.24)
Distributions from Net Realized Gains ....... (.21) (.21) (.04) --
Total Distributions ......................... (.93) (.87) (.64) (.24)
----------------------------------------------
Net Asset Value at End of Period ............ $21.40 $17.63 $16.40 $14.64
----------------------------------------------
Total Return % .............................. 27.34 13.08 16.80 (.78)(e)
Net Assets End of Period ($ millions) ....... 638 403 247 175
Ratio of Operating Expenses to Average Net
Assets % ................................... .91 .88 1.01 1.31(f)
Ratio of Net Investment Income to Average Net
Assets %
Portfolio Turnover Rate % ................... 26.79 35.22 63.77 49.32(f)
Average Commission Rate Paid (d) ............ $.0547 $.0549 -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period February 1, 1994, commencement of operations, through
September 30, 1994.
(c) 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.
(d) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
(e) Not annualized.
(f) Annualized.
Prospectus
15
<PAGE>
<TABLE>
<CAPTION>
AARP Growth and Income Fund For the Years Ended September 30
------------------------------------------------------------
1997(a) 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning of
Period .......... $43.94 $38.36 $34.13 $32.91 $28.67 $26.97 $22.30 $26.11 $20.94 $25.54
-------------------------------------------------------------------------------------------
Net
Investment
Income .......... 1.19 1.17 1.11 .94 .83 .97 1.11 1.11 1.01 1.04
Net Realized
& Unrealized
Investment
Gain (Loss) ..... 16.00 6.40 5.44 1.62 4.58 2.11 4.78 (3.69) 5.20 (3.93)
-------------------------------------------------------------------------------------------
Total from
Investment
Operations ...... 17.19 7.57 6.55 2.56 5.41 3.08 5.89 (2.58) 6.21 (2.89)
-------------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income .......... (1.19) (1.15) (1.09) (1.13) (.87) (.90) (1.17) (1.15) (1.04) (.94)
Distributions
from Net
Realized
Gains ........... (1.72) (.84) (1.23) (.21) (.30) (.48) (.05) (.08) -- (.77)
-------------------------------------------------------------------------------------------
Total
Distributions ... (2.91) (1.99) (2.32) (1.34) (1.17) (1.38) (1.22) (1.23) (1.04) (1.71)
-------------------------------------------------------------------------------------------
Net Asset
Value at End
of Period ....... $58.22 $43.94 $38.36 $34.13 $32.91 $28.67 $26.97 $22.30 $26.11 $20.94
-------------------------------------------------------------------------------------------
Total Return
% ............... 40.70 20.20 20.43 7.99 19.38 11.59 27.19 (10.19) 30.58 (10.75)
Net Assets
End of
Period
($ millions) .... 6,606 4,219 3,007 2,312 1,560 748 392 248 236 228
Ratio of
Operating
Expenses to
Average Net
Assets % ........ .71 .69 .72 .76 .84 .91 .96 1.03 1.04 1.06
Ratio of
Operating
Expense
Before
Expense
Reductions
to Average
Net
Assets % ........ .71 .69 .72 .76 .84 .91 .96 1.03 1.04 1.06
Ratio of Net
Investment
Income to
Average Net
Assets % ........ 2.38 2.94 3.28 3.00 3.08 3.84 4.61 4.76 4.19 4.52
Portfolio
Turnover
Rate % .......... 33.4 25.02 31.26 31.82 17.44 36.40 53.68 58.47 55.21 61.34
Average
Commission
Paid Rate (b) ... $.0619 $.0542 -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after September 1, 1995.
Prospectus
16
<PAGE>
AARP U.S. Stock Index Fund
--------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997(d)
---------------------
Net Asset Value at Beginning of Period ...................... $15.00
------
Net Investment Income ....................................... .20
Net Realized & Unrealized Investment Gain (Loss) ............ 2.97
----
Total from Investment Operations ............................ 3.17
----
Distributions from Net Investment Income .................... (.18)
-----
Net Asset Value at End of Period ............................ $17.99
------
Total Return % (a) .......................................... 21.22(b)
Net Assets End of Period ($ millions) ....................... 38
Ratio of Operating Expenses Net to Average Net Assets % ..... .50(c)
Ratio of Operating Expenses to Average Net Assets Before
Expense Reductions% ........................................ 2.38(c)
Ratio of Net Investment Income to Average Net Assets % ...... 1.94(c)
Portfolio Turnover Rate % ................................... 14.52(c)
Average Commission Rate Paid ................................ $.0288
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
(d) Based on monthly average shares outstanding during the period.
AARP International Growth and Income Fund*
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997
------------------
Net Asset Value at Beginning of Period ........................ $15.00
------
Net Investment Income ......................................... .23
Net Realized & Unrealized Investment Gain (Loss) .............. 2.13
----
Total from Investment Operations .............................. 2.36
----
Net Asset Value at End of Period .............................. $17.36
------
Total Return % (a) ............................................ 15.73(b)
Net Assets End of Period ($ millions) ......................... 20
Ratio of Operating Expenses Net to Average Net Assets % ....... 1.75(c)
Ratio of Operating Expenses to Average Net Assets Before
Expense Reductions % ......................................... 4.28(c)
Ratio of Net Investment Income to Average Net Assets % ........ 2.35(c)
Portfolio Turnover Rate % ..................................... 50.73(c)
Average Commission Rate Paid .................................. $.0309
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
* The Fund changed its name from AARP International Stock Fund on February
1, 1998.
Prospectus
17
<PAGE>
<TABLE>
<CAPTION>
AARP Capital Growth Fund For the Years Ended September 30
---------------------------------------------------------
1997(a) 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning of
Period .......... $43.47 $38.36 $31.74 $36.20 $30.30 $30.23 $23.32 $34.17 $23.88 $27.55
-------------------------------------------------------------------------------------------
Net
Investment
Income .......... .34 .42 .36 .00 .06 .15 .24 .54(c) .21 .10
Net Realized
& Unrealized
Investment
Gain (Loss) ..... 18.43 5.59 6.91 (1.51) 7.19 1.09 9.05 (9.27) 10.17 (1.97)
-------------------------------------------------------------------------------------------
Total from
Investment
Operations ...... 18.77 6.01 7.27 (1.51) 7.25 1.24 9.29 (8.73) 10.38 (1.87)
-------------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income .......... (.41) (.39) (.01) (.05) (.14) (.23) (.59) (.19) (.09) (.15)
Distributions
from Net
Realized
Gains ........... (3.99) (.51) (.64) (2.90) (1.21) (.94) (1.79) (1.93) -- (1.65)
-------------------------------------------------------------------------------------------
Total
Distributions ... (4.40) (.90) (.65) (2.95) (1.35) (1.17) (2.38) (2.12) (.09) (1.80)
-------------------------------------------------------------------------------------------
Net Asset
Value at End
of Period ....... $57.84 $43.47 $38.36 $31.74 $36.20 $30.30 $30.23 $23.32 $34.17 $23.88
-------------------------------------------------------------------------------------------
Total Return %
(d) ............. 46.72 15.97 23.47 (4.70) 24.53 3.94 42.81 (26.94) 43.62 (5.44)
Net Assets
End of
Period ($
millions) ....... 1,228 826 692 683 607 424 242 160 180 91
Ratio of
Operating
Expenses to
Average Net
Assets % ........ .92 .90 .95 .97 1.05 1.13 1.17 1.11 1.16 1.23
Ratio of
Operating
Expenses
Before
Expense
Reductions
to Average
Net Assets % .... .92 .90 .95 .97 1.05 1.13 1.17 1.14 1.16 1.40
Ratio of Net
Investment
Income to
Average Net
Assets % ........ .70 1.05 1.00 .02 .22 .61 .90 2.00 .89 .37
Portfolio
Turnover
Rate % .......... 39.04 64.84 98.44 79.65 100.63 89.20 99.62 83.28 63.51 45.37
Average
Commission
Rate Paid (b) ... $.0576 $.0614 -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after September 1, 1995.
(c) Net investment income per share includes a non-recurring dividend
amounting to $.18 per share.
(d) Total returns would have been lower had certain expenses not been reduced.
Prospectus
18
<PAGE>
AARP Small Company Stock Fund
-----------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997(d)
---------------------
Net Asset Value at Beginning of Period ........................ $15.00
------
Net Investment Income ......................................... .04
Net Realized & Unrealized Investment Gain (Loss) .............. 4.98
Total from Investment Operations .............................. 5.02
Net Asset Value at End of Period .............................. $20.02
------
Total Return % (a) ............................................ 33.53(b)
Net Assets End of Period ($ millions) ......................... 50
Ratio of Operating Expenses Net to Average Net Assets % ....... 1.75(c)
Ratio of Operating Expenses to Average Net Assets Before ...... 2.79(c)
Expense Reductions %
Ratio of Net Investment Income to Average Net Assets % ........ 0.40(c)
Portfolio Turnover Rate % ..................................... 5.01(c)
Average Commission Rate Paid .................................. $.0274
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
(d) Based on monthly average shares outstanding during the period.
<TABLE>
<CAPTION>
AARP Global Growth Fund
----------------------- For the period
February 1, 1996
Year Ended (commencement of
September 30, operations) to
1997 September 30, 1996
---- ------------------
<S> <C> <C>
Net Asset Value at Beginning of Period ............ $15.49 $15.00
------ ------
Net Investment Income ............................. .09 .06
Net Realized & Unrealized Investment Gain (Loss) .. 3.72 .43
---- ---
Total from Investment Operations .................. 3.81 .49
---- ---
Less distributions from Net Investment Income ..... (.06) --
---- ----
Net Asset Value at End of Period .................. $19.24 $15.49
------ ------
Total Return % (a) ................................ 24.67 3.27(b)
Net Assets End of Period ($ millions) ............. 148 78
Ratio of Operating Expenses Net to Average Net
Assets % ......................................... 1.75 1.75(c)
Ratio of Operating Expenses to Average Net
Assets Before Expense Reductions % ............... 1.82 2.31(c)
Ratio of Net Investment Income to Average Net
Assets % ......................................... 0.55 1.03(c)
Portfolio Turnover Rate % ......................... 31.34 12.56(c)
Average Commission Rate Paid ...................... $.0004 $.0150
</TABLE>
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
Prospectus
19
<PAGE>
AARP Diversified Income with Growth Portfolio*
----------------------------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997
---------------------
Net Asset Value at Beginning of Period ......................... $15.00
------
Net Investment Income .......................................... .43
Net Realized & Unrealized Investment Gain (Loss) ............... .96
------
Total from Investment Operations ............................... 1.39
------
Distributions from Net Investment Income ....................... (.43)
------
Net Asset Value at End of Period ............................... $15.96
------
Total Return % (a) ............................................. 9.35(b)
Net Assets End of Period ($ millions) .......................... 43
Ratio of Operating Expenses to Average Net Assets % ............ --(d)
Ratio of Net Investment Income to Average Net Assets % ......... 5.13(c)
Portfolio Turnover Rate % ...................................... 5.57(c)
a) If the Fund Manager had not maintained some of the underlying AARP Mutual
Funds' expenses, the total return for this Fund would have been lower.
(b) Not Annualized.
(c) Annualized.
(d) This Portfolio invests in other AARP Mutual Funds, and although the
Portfolio did not incur any direct expenses for the period, the Portfolio
did bear its share of the operating, administrative and advisory expenses
of the Underlying AARP Mutual Funds.
* The Fund changed its name from AARP Diversified Income Portfolio on
February 1, 1998.
AARP Diversified Growth Portfolio
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997(e)
---------------------
Net Asset Value at Beginning of Period ....................... $15.00
Net Investment Income ........................................ .34
Net Realized & Unrealized Investment Gain (Loss) ............. 2.06
Total from Investment Operations ............................. 2.40
Net Asset Value at End of Period ............................. $17.40
Total Return % (a) ........................................... 16.00(b)
Net Assets End of Period ($ millions) ........................ 62
Ratio of Operating Expenses to Average Net Assets % .......... --(d)
Ratio of Net Investment Income to Average Net Assets % ....... 3.52(c)
Portfolio Turnover Rate % .................................... 7.67(c)
(a) If the Fund Manager had not maintained some of the underlying AARP Mutual
Funds' expenses, the total return for this Fund would have been lower.
(b) Not Annualized.
(c) Annualized.
(d) This Portfolio invests in other AARP Mutual Funds, and although the
Portfolio did not incur any direct expenses for the period, the Portfolio
did bear its share of the operating, administrative and advisory expenses
of the Underlying AARP Mutual Funds.
(e) Based on monthly average shares outstanding during the period.
Prospectus
20
<PAGE>
A BRIEF OVERVIEW OF THE AARP INVESTMENT PROGRAM FROM SCUDDER
================================================================================
AARP is a nonprofit organization dedicated to addressing the needs and interests
of persons aged 50 and older. It seeks through education, advocacy, and service
to enhance the quality of life for all by promoting independence, dignity, and
purpose. In the early 1980s, research conducted by AARP indicated that many
members were not taking steps to invest adequately for their future. To
encourage members to plan for their retirement and beyond, AARP decided to make
available a family of mutual funds specially designed to provide members with
distinct investment choices and to be managed by an experienced investment
adviser. After comprehensive review of the capabilities of several investment
management firms, AARP selected Scudder, Stevens & Clark, Inc. (now Scudder
Kemper Investments, Inc., referred to throughout this Prospectus as "Scudder" or
"the Fund Manager") to develop and manage the Funds.
Who is Scudder Kemper Investments, Inc.?
Scudder Kemper Investments, Inc. is one of the largest and most experienced
worldwide investment management organizations. It was created following an
agreement in 1997 between Scudder, Stevens & Clark, Inc. and the Zurich Group, a
worldwide provider of financial services, to form an alliance. The firm manages
more than $210 billion in assets globally for mutual fund investors, retirement
and pension plans, institutional and corporate clients, insurance companies, and
private family and individual accounts. It is one of the largest mutual fund
sponsors in the U.S., offering no-load funds directly to investors and load
funds through various types of intermediaries.
Scudder Kemper Investments, Inc. has a rich heritage of innovation, integrity
and client-focused service, combining two long-established and accomplished
investment firms: Scudder, Stevens & Clark, Inc., founded in 1919 as one of the
nation's first investment counsel organizations, and Zurich Kemper Investments,
Inc. (referred to throughout this Prospectus as "Zurich Kemper"), with 50 years
of mutual fund and investment management experience. Headquartered in the U.S.,
Scudder Kemper Investments, Inc. offers a full range of investment counsel and
asset management capabilities, based on a combination of proprietary research
and disciplined, long-term investment strategies. With its global investment
resources and perspective, the firm seeks investment opportunities in markets
throughout the world to meet the needs of its clients.
Scudder Kemper Investments, Inc., the global asset management firm, represents
one of the four core businesses of the Zurich Group. The Zurich Group is an
internationally recognized leader in financial services, including
property/casualty insurance, life insurance, reinsurance, and asset management.
What impact does the alliance with the Zurich Group have on the AARP Investment
Program from Scudder?
The Program's longstanding commitment to risk-managed investment performance
offered through our no-load mutual funds remains. In fact, we
PROSPECTUS
21
<PAGE>
expect that this new alliance should offer benefits to investors over time,
resulting from the Program's access to more resources--human and capital--to
better help the Program meet the investment needs of aging Americans.
The roles of AARP and Scudder
The AARP Investment Program from Scudder is made available to investors in
accordance with specific criteria agreed to by AARP and Scudder. These criteria
include the following:
o The offer of a specially-designed family of no-load funds, generally each
of whose goals is to provide competitive returns but with less risk of
loss to its portfolio than that of the similar mutual funds, measured by
the frequency and amount total return fluctuates downward;
o Easy access to the Program for all AARP Mutual Funds' shareholders;
o The commitment to the highest quality of service in keeping with AARP's
standards; and
o The availability of a comprehensive selection of easy-to-understand
publications on the "how-to's" of investing and planning for retirement
and other important life events that affect the financial affairs of aging
Americans.
Scudder Kemper Investments, Inc. and its affiliates provide investment
management and other services for the AARP Mutual Funds, bringing more than 75
years of investment management experience to the Program. AARP brings a wealth
of experience and knowledge about the needs of aging Americans. Association
staff monitor investment performance, service quality and Program communications
in keeping with the rigorous standards that are applied to the delivery of all
of its member services. Members of AARP's leadership also serve as Trustees for
the AARP Mutual Funds.
SPECIAL FEATURES OF THE AARP INVESTMENT PROGRAM
================================================================================
The AARP Investment Program from Scudder was developed by Scudder and AARP to
help meet the investment needs of individual AARP members as they plan for and
live into their retirement years. A choice of 15 mutual funds is offered to
investors. An investor in the Program benefits from the following features:
o No Sales Fees or Commissions: All AARP Mutual Funds are pure no-load,
meaning that you won't pay any sales fees or commissions to purchase,
exchange or sell (redeem) shares. In addition, none of these Funds charge
a 12b-1 fee (a form of a sales charge that covers marketing and
distribution expenses). The net result is that 100% of your investment
goes to work for you.
o No Fees to Open and Maintain an AARP IRA or AARP Keogh Plan Account: There
are no separate fees to open or maintain a retirement plan account. This
way, all of your money goes to work for your retirement.
PROSPECTUS
22
<PAGE>
o Low Initial Investment: You can open an account with just $500 by
investing in the AARP GNMA and U.S. Treasury Fund, AARP Balanced Stock and
Bond Fund and the AARP Growth and Income Fund. The minimum initial
investment for the other AARP Mutual Funds is just $2,000. You can open an
AARP IRA or AARP UGMA/UTMA with an initial investment of just $250 per
fund account.
o Professional Investment Management by Scudder: Scudder brings over 75
years of investment management experience to the AARP Mutual Funds.
o Risk-Oriented Investment Management: The Program offers a choice of 15
AARP Mutual Funds, generally each of whose goal is to seek to provide
competitive returns but with less risk of loss to its portfolio than
similar mutual funds, as measured by the frequency and amount by which
total return fluctuates downward. Designed specially to meet the needs of
aging Americans, we know of no other family of funds that includes a
risk-oriented management mandate for all of its funds.
o High Quality, Personal Service from AARP Mutual Fund Representatives:
Helpful and knowledgeable service representatives are ready to answer your
questions, execute your transactions, or help you to decide whether
investing makes sense for you and which investments may be appropriate. To
reach an AARP Mutual Fund Representative, call 1-800-253-2277 toll-free,
Monday through Friday, from 8 a.m. to 8 p.m. eastern time.
o Convenient Access to Your Investments: You can access your investments
easily and for no charge by calling toll-free, or in writing. Your AARP
Mutual Fund investments are not "locked in."
o Informative Communications: The Program helps keep shareholders abreast of
important topics that can affect their financial situation. Newsletters
are published monthly and included with your account statement. They
provide information about recent developments in the markets, important
tax changes and other Program-specific information. Upon request, free
educational guides are available on a variety of topics, such as planning
for retirement, living in retirement, understanding IRA distributions, and
more.
o Help and Guidance at Important Times in Your Life: We are here to help you
when you need to make important financial decisions as they relate to your
savings and investments. For example, by taking advantage of the AARP Lump
Sum Service, you can work with a representative who is specially trained
to help you understand tax implications and your investment options. A
representative can also assist you in working through the "red tape" that
is sometimes involved with a lump sum distribution. Or you can simply call
us for our free Guide on Receiving a Lump Sum Distribution.
PROSPECTUS
23
<PAGE>
o Low Expenses: We strive to maintain expense ratios for the AARP Mutual
Funds that are lower than the industry averages of the applicable asset
categories.
You will also benefit from:
o Consolidated monthly statements or quarterly AARP IRA or AARP Keogh Plan
statements;
o Prompt transaction confirmations;
o Special services designed to make investing simple and convenient; and
o AARP's commitment to represent your interests.
Why do we emphasize risk-managed performance?
Individuals planning for and living into retirement have told us that while they
are interested in investments that provide competitive returns, they are as
interested in funds that will offer the potential of at least somewhat lower
risk--even if they are funds in higher risk categories, such as international
funds and small company funds.
We have therefore designed and manage all of the AARP Mutual Funds that have a
share price that fluctuates--including those in higher risk categories, such as
the AARP International Growth and Income Fund and the AARP Small Company Stock
Fund--to be managed with the potential for less risk of loss than similar funds
in their respective asset categories.
Why do we focus on the "downside risk" of loss to a fund's portfolio instead of
the volatility--up and down--of total return?
Most investors view risk as related to the chance of a loss and the likely size
of that loss. We therefore measure the extent to which each portfolio management
team has controlled risk by evaluating the frequency and amount by which each
fund's total return, which is capital change plus income, fluctuates
downward--absolutely and compared to similar funds.
Scudder has developed a proprietary performance measurement system by which the
portfolio managers and investors can evaluate the investment performance of the
AARP Mutual Funds compared to that of similar funds, not just as it relates to
total return but to the management of risk.
A Cautionary Note
While the AARP Mutual Funds are actively managed to reduce the potential for
"downside risk" to their portfolios, it is important to remember that your
principal can never be insured or guaranteed, and that the value of your
investment and your return will move up and down as market conditions change.
There is no assurance that Scudder will be successful in limiting downside risk
relative to comparable funds. For more complete details, read the "Objectives
and Policies" section.
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Points to keep in mind as you consider investing in the AARP Mutual Funds:
Information about each AARP Fund is included in this Prospectus and focuses on
how the AARP Mutual Funds differ from each other as this relates to their
potential return and to their level of risk. Before investing, you should
determine your investment objectives and time horizons. If you need help with
this aspect of the decision-making process don't hesitate to call our Mutual
Fund Representatives. They know what questions you should ask yourself and what
factors you need to consider to determine your investment objective and expected
time horizon. The length of time you are committed to investing will have a
bearing on the types of investments that are most appropriate for you. If, for
example, you are in a position to commit your investment dollars for five years
or more, then funds that offer the potential for higher returns but greater
volatility may be well suited to your needs. If your time horizon is
shorter--say two or three years--then it may be appropriate for you to consider
funds that offer the potential of lower returns but with less volatility.
The following is a brief summary of the investment needs the AARP Mutual Funds
seek to meet. Your investment time horizon will have a bearing on which funds
are appropriate for you.
If you are investing for stability of principal and income:
Consider the AARP High Quality Money Fund or the AARP High Quality Tax Free
Money Fund. Each provides opportunities to meet short-term needs (one year or
less) while providing money market rates of return. Both seek to provide
stability of principal through a constant $1.00 share price, although this may
not always be achieved. Both AARP Money Funds invest in short-term securities
whose yields tend to follow changes in short-term interest rates. If short-term
interest rates rise or fall dramatically, so could the yields of the AARP Money
Funds in relatively short periods of time. Keep in mind, the income paid by the
AARP High Quality Money Fund is taxable, whereas the income paid by the AARP
High Quality Tax Free Money Fund is normally free from federal income taxes.
If you are investing for the longer term and are interested in current income:
Consider the AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury
Fund, AARP Bond Fund for Income, AARP Insured Tax Free General Bond Fund or the
AARP Diversified Income With Growth Portfolio. Remember that both the value of
shares and yield will change daily, generally in reaction to shifting interest
rates. In most cases, as interest rates rise, the value of investments in these
Funds tends to fall. As interest rates fall, the value of investments in these
Funds tends to rise. Investing in these Funds offers the opportunity for current
income and potential appreciation in the value of shares. The AARP Diversified
Income With Growth Portfolio provides income on a quarterly basis; all of the
other funds listed above provide monthly income. While each of these Funds is
managed to seek competitive returns with less "downside risk" to its portfolio
compared to that of similar funds, the value of your investment can decline.
That's why you should be prepared to tolerate fluctuation in both the value of
your investment and the income you earn.
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You should also be in a position to invest for the longer term (three to five
years or more for the AARP Diversified Income With Growth Portfolio, which
normally invests in both AARP Stock and Bond Funds, and three years or more for
the other Funds listed above).
If you are investing for the long term and you are interested in growth:
Consider the AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund,
AARP U.S. Stock Index Fund, AARP Global Growth Fund, AARP Capital Growth Fund,
AARP International Growth and Income Fund, AARP Small Company Stock Fund, and
the AARP Diversified Growth Portfolio. Remember that investments in stock mutual
funds involve greater risk and that the value of your shares will fluctuate
daily. The share price of these AARP Mutual Funds will tend to rise when the
stock markets rise, and decline when the stock markets decline. Investing in
these Funds offers the opportunity for gain through potential appreciation in
the value of your investment and from any income that the investment earns.
While each of these Funds is managed to seek competitive returns with less
"downside risk" to its portfolio compared to that of similar mutual funds, the
value of your investment can decline. That's why you should consider your
investment as one that you can afford to let work for you over time--generally
for a period of three to five years or more for the AARP Balanced Stock and Bond
Fund and five years or more for the other equity funds listed above.
How will my investment be managed?
The AARP Mutual Funds are managed to seek competitive returns with less risk of
loss ("downside risk") to their portfolios than that of comparable mutual funds.
Each AARP Mutual Fund is managed by a team of Scudder investment professionals
(Bankers Trust acts as subadviser to the Scudder U.S. Stock Index Fund).
Experienced portfolio managers develop investment strategies and select
securities for each AARP Fund's portfolio. The Scudder portfolio managers are
supported by an experienced staff of economists, research analysts, traders, and
other investment specialists who work in offices across the United States and
abroad. Scudder also maintains a large staff of independent researchers to
assist portfolio managers in assessing economic and industry trends and security
valuations as they make investment decisions. Generally speaking, Scudder
portfolio managers do not take a short-term approach to investing. Instead, they
seek to add value over the long term, carefully selecting investments they
believe have superior potential for achieving each Fund's objectives. None of
the AARP Mutual Funds invest in securities issued by tobacco-producing
companies.
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OBJECTIVES AND POLICIES
================================================================================
The following pages provide detail on the objectives and policies of the AARP
Mutual Funds. Included for each Fund are:
o the Fund's objectives H examples of investment needs the Fund is designed
to meet
o a description of the types of securities in which the Fund can invest
o a discussion of the Fund's potential risks
o minimum investment requirements and the schedule of distributions; and
o a review of the Fund's portfolio management team.
As with any investment, there is no guarantee that the AARP Mutual Funds will
successfully meet their investment objectives. Be sure to read the section
entitled "Other Investment Policies and Risk Factors."
The Trustees can modify a Fund's objectives without the approval of a majority
of that Fund's shareholders. If there is a change in investment objective,
shareholders should consider whether the Fund is still an appropriate
investment.
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AARP MONEY MARKET FUNDS
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AARP HIGH QUALITY MONEY FUND
================================================================================
Fund objective:
To provide current income. In doing so, the Fund seeks to maintain stability and
safety of principal and a constant net asset value of $1.00 per share while
offering liquidity. There may be circumstances under which this goal cannot be
achieved. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP High Quality Money Fund is appropriate for investors with short-term
time horizons. It may also be appropriate for those who are not comfortable with
the risks of investing in stocks or bonds. Examples of types of investors for
whom the AARP High Quality Money Fund may be appropriate include:
o Investors creating a diversified portfolio who want a portion of their
assets in an investment designed to offer safety and stability.
o Investors seeking a short-term investment prior to making longer-term
investment choices.
o Investors seeking money market income to meet regular needs.
o Investors who need immediate access to their money through free
checkwriting. The Fund is also available for the AARP IRA and the other
retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer current income, while maintaining stability and
safety of principal. In addition, it provides a convenient way to easily access
your money through free checkwriting.
What does the Fund invest in?
The Fund invests in high-quality, short-term securities. These securities will
have remaining maturities of 397 calendar days or less, except for U.S.
Government securities, which may have maturities up to 762 calendar days. The
average dollar-weighted maturity of the Fund's investments is 90 days or less.
All of the securities purchased are U.S. dollar-denominated. The securities must
meet credit standards applied by the Fund Manager, following procedures
established by the Trustees. Amendments have been adopted to the federal rules
regulating quality, maturity and diversification requirements of money market
funds. Money market funds must comply with the revised rule by July 1, 1998. The
Fund intends to be in compliance with the amended requirements by that date.
The money market securities in which the Fund may invest include 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
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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 and other synthetic 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;
securities with guarantee features; and repurchase agreements.
All of the securities that the Fund purchases, or that underlie its repurchase
agreements, are considered to be high quality. Generally, the Fund may purchase
only securities rated, or issued by an entity with comparable securities rated,
within the two highest quality rating categories of one or more rating agencies
such as: Moody's Investors Service, Inc. (Moody's), Standard & Poor's
Corporation (S&P), and Fitch Investors Service, Inc. (Fitch). Securities rated
by only one agency may be purchased if the rating falls within the categories
above. Unrated securities may be purchased if the Fund Manager judges them to be
comparable in quality to securities described above. Generally, the Fund will
invest in securities rated in the highest quality rating by at least two of
these rating agencies. If a security ceases to be rated or is reduced below the
Fund's standards, it will be sold unless the Trustees determine that disposing
of the security would not be in the best interests of the Fund.
The Fund has certain non-fundamental policies designed to maintain
diversification. These policies may be changed without shareholder approval. The
amount of total assets of the Fund that may be invested in the securities of a
single issuer is limited in accordance with federal law.
What are the risks?
The risk to your principal is low, since the Fund seeks to maintain a stable
share price of $1.00. While the Fund has maintained a stable share price of
$1.00 since it began in June 1985, there may be situations under which this goal
cannot be achieved. The level of income you receive will be affected by
movements up and down in short-term interest rates. By investing generally in
highest-quality securities, the Fund may offer less income than a money market
fund investing in other high-quality money market securities. See "Other
Investment Policies and Risk Factors."
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500, if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Generally,
net realized capital gain or loss is included in the daily declaration of
income.
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Who at Scudder manages my investment?
Lead Portfolio Manager Frank J. Rachwalski, Jr. assumed responsibility for
setting the Fund's investment strategy and for overseeing the Fund's day-to-day
management in January, 1998. Frank joined Zurich Kemper's Fixed Income
Department in 1973 as its Money Market Specialist. He has been responsible for
the trading and portfolio management of Zurich Kemper's money market fund since
its initial offering in 1974. John W. Stuebe, Portfolio Manager, joined Zurich
Kemper in 1979 as a Fixed Income Trader for Money Market Securities. He is
currently a Specialist and Trader for the Fund Manager's taxable, non-government
money market funds.
AARP HIGH QUALITY TAX FREE MONEY FUND
Fund objective:
To provide current income free from federal income taxes. In doing so, the Fund
seeks to maintain stability and safety of principal and a constant net asset
value of $1.00 per share while offering liquidity. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions. For whom is the
Fund designed? The AARP High Quality Tax Free Money Fund may be appropriate for
investors in high tax brackets who have a short-term time horizon or who are not
comfortable with the risks of investing in stocks or bonds. These include:
o Investors creating a diversified portfolio who want a portion of their
assets in an investment designed to offer safety and stability
o Investors seeking a short-term investment prior to making longer-term
investment choices
o Investors seeking tax-free money market income to meet regular day-to-day
expenses; and
o Investors who need immediate access to their money through free
checkwriting This Fund is not available for the AARP IRA or the other
retirement plan accounts.
What does the Fund offer to investors?
The Fund is designed to offer current income free from federal income tax, while
providing stability and safety of principal. Depending on your tax bracket, the
after-tax income from the Fund may be higher than from a taxable investment of
comparable quality and risk. In addition, it provides a convenient way to easily
access your money through checkwriting.
What does the Fund invest in?
The Fund invests in high-quality, short-term municipal securities. These
securities will have remaining maturities of 397 calendar days or less. The
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average dollar-weighted maturity of its investments is 90 days or less. These
municipal securities may include obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia.
Interest from these securities is, in the opinion of the issuer's bond counsel,
exempt from federal income taxes. The Fund has no current intention to invest in
securities whose income is subject to federal income tax, including the
individual alternative minimum tax (AMT). Amendments have been adopted to the
federal rules regulating quality, maturity and diversification requirements of
money market funds. Money market funds must comply with the revised rule by July
1, 1998. The Fund intends to be in compliance with the amended requirements by
that date.
Municipal securities may include municipal notes such as tax anticipation notes,
revenue anticipation notes, bond anticipation notes and construction loan notes;
municipal bonds, which include general obligation bonds secured by the issuer's
pledge of its faith, credit and taxing power for payment of principal and
interest; and revenue bonds (including private activity bonds), which are
generally paid from the revenues of a particular facility, a specific excise
tax, or other source. The Fund's municipal investments may also include
participation interests in bank holdings of municipal securities, municipal
lease obligations, securities with variable or floating interest rates, demand
obligations, and tax-exempt commercial paper. The Fund may also purchase
securities on a "when-issued" or "forward delivery" basis, and may enter into
stand-by commitments, which are securities that may be sold back to the seller
at the Fund's option.
All of the securities that the Fund purchases, or that underlie its repurchase
agreements, are considered to be high quality. These securities are generally
rated or issued by an issuer rated within the two highest quality ratings of two
or more rating agencies such as: Moody's (Aaa and Aa, M1G1 and M1G2, and P1),
S&P (AAA and AA, SP1+ and SP1, A1+ and A1) and Fitch (AAA and AA, F1 and F2).
The Fund may purchase a security rated by only one rating agency if it meets the
above rating standards. An unrated security may be purchased if the Fund Manager
judges it to be of comparable quality to securities described above. Generally,
the Fund will invest in securities rated in the highest quality rating by at
least two of these rating agencies.
Ordinarily, the Fund expects that 100% of its portfolio securities will be in
federally tax-exempt securities.
As a fundamental policy, under normal circumstances, at least 80% of the Fund's
net assets will be invested in tax-exempt securities. Up to 20% of the Fund's
net assets may be invested in taxable securities. For defensive purposes, or if
unusual circumstances make it advisable, the Fund may purchase U.S. Government
securities and repurchase agreements collateralized by such securities. For
temporary defensive purposes, the Fund's investment in taxable securities may
exceed 20% when the Fund Manager deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such strategies may be utilized.
All of the securities purchased are U.S. dollar-denominated. The securities must
meet credit standards applied by the Fund Manager, following procedures
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established by the Trustees. If a security ceases to be rated, or its rating is
reduced below the Fund's standard, it will be sold unless the Trustees determine
that disposing of the security would not be in the best interests of the Fund.
As a matter of non-fundamental policy, which may be changed without a
shareholder vote, the Fund, with respect to 75% of its total assets, may not
invest more than 5% of its total assets in securities subject to puts from any
one issuer.
What are the risks?
The risk to your principal is low, since the Fund seeks to maintain a stable
share price of $1.00. While the Fund has maintained a stable share price of
$1.00 since it began operating as a tax-free money fund in August 1991, there
may be situations under which this goal cannot be achieved. The level of income
you receive will be affected by movements up and down in short-term interest
rates. By investing generally in highest-quality securities, the Fund may offer
less income than a money market fund investing in other high-quality money
market securities. See "Other Investment Policies and Risk Factors."
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP UGMA/UTMA with an initial investment of only $250.
Will I be subject to taxes on this Fund?
All income distributed by the Fund is expected to be exempt from federal income
taxes, but income may be subject to state and local income taxes. Each year you
will be provided with a breakdown of the Fund's investments by state so that you
can determine your state and local income tax liability. Your state or local
Department of Revenue or tax advisor can answer questions regarding taxability
of distributions. Should there be any income from taxable securities, it would
not be exempt from federal income taxes.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30
and is usually taxable.
Who at Scudder manages my investment?
Lead Portfolio Manager Frank J. Rachwalski, Jr. assumed responsibility for
setting the Fund's investment strategy and overseeing the Fund's day-to-day
management in January 1998. Frank joined Zurich Kemper's Fixed Income Department
in 1973 as its Money Market Specialist. He has been responsible for the trading
and portfolio management of Zurich Kemper's money market fund since its initial
offering in 1974. Jerri I. Cohen, Portfolio Manager, joined Zurich Kemper's
Investment Accounting Department in 1981. She has been responsible for investing
Zurich Kemper's tax-exempt money market funds since she joined the Fixed Income
Department in 1992.
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AARP INCOME FUNDS
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AARP HIGH QUALITY SHORT TERM BOND FUND
================================================================================
Fund objective:
To produce a high level of current income but with less risk of loss to the
Fund's portfolio than other short-term bond mutual funds, measured by the
frequency and amount by which total return fluctuates downward. The Fund pursues
this investment objective by investing primarily in high-quality, short-term
U.S. Government, corporate and other fixed-income securities. The Fund also has
an educational objective to help shareholders, especially individuals planning
for and living in retirement, make informed investment decisions.
The Fund changed its name from AARP High Quality Bond Fund and its investment
objective on February 1, 1998.
For whom is the Fund designed?
The AARP High Quality Short Term Bond Fund is suitable for investors who want
high current income from a portfolio comprised primarily of high-quality,
short-term debt securities. You should be prepared to invest for the
intermediate term (at least three years) and be comfortable with some
fluctuation in the value of your principal. The Fund is also available for the
AARP IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer a high level of current income from a portfolio
comprised primarily of high-quality short-term debt securities. The Fund should
typically provide a higher and more stable level of income than available from
the AARP High Quality Money Fund. However, the Fund's share price is expected to
fluctuate moderately. In addition, the Fund seeks to offer less share price
volatility than other short-term bond funds.
What does the Fund invest in?
Under normal circumstances, the Fund will invest substantially all, and no less
than 65%, of its assets in high-quality short-term U.S. Government, corporate
and other fixed-income securities. All the Fund's securities will be rated or
judged by the Fund Manager to be equivalent to those rated investment-grade or
higher by Moody's (Aaa, Aa, A, and Baa), or S&P (AAA, AA, A and BBB), and at
least 65% of the Fund's assets must be in securities rated in the two highest
rating categories by Moody's or S&P. Securities rated Baa by Moody's or BBB by
S&P are neither highly protected nor poorly secured. These securities normally
pay higher yields and are regarded as having adequate capacity to repay
principal and pay interest, but involve potentially greater price variability
than higher-quality securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics.
The Fund does not purchase securities rated below investment-grade, commonly
known as "junk" bonds.
Subject to the Fund's duration policy, the Fund may invest in any investment
eligible for the AARP GNMA and U.S. Treasury Fund. It may also purchase
corporate notes and bonds, including convertible issues, and obligations of
federal agencies that are not backed by the full faith and credit of the U.S.
Government. Additionally, the Fund may purchase obligations of international
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agencies, U.S. dollar-denominated foreign debt securities, trust preferred
securities, mortgage-backed and other asset-backed securities, and money market
instruments such as commercial paper, bankers' acceptances, privately placed
obligations, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Fund may invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar, but no more
than 5% of the Fund's total assets will be represented by a given foreign
currency. The Fund may also purchase when-issued securities and invest in
repurchase agreements.
The types of securities held by the Fund will vary with current market
conditions. The weighted average effective duration of the Fund's portfolio,
however, may not exceed three years. Within this limitation, the Fund may
purchase individual securities with remaining stated durations greater than
three years. The non-governmental investments of the Fund will be spread among a
variety of companies and will not be concentrated in any one industry. See
"Other Investment Policies" section.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares will
fluctuate up and down with changes in interest rates and other market
conditions. By focusing on shorter-term debt securities, the Fund will normally
have less share price volatility than the AARP GNMA and U.S. Treasury Fund and
the AARP Bond Fund for Income, but also will offer less monthly income and less
long-term return potential than these two other AARP Bond Funds.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by
emphasizing high-quality investments, diversifying widely among bond issuers and
market sectors, and limiting average portfolio duration through active portfolio
management. The extent to which the portfolio management team is controlling for
"downside risk" to the Fund's portfolio is measured by tracking the frequency
and amount by which total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500, if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Stephen A. Wohler, Lead Portfolio Manager, is responsible for implementing the
Fund's portfolio strategy including duration management, asset allocation,
security selection and trading and timing. He has been involved with the Fund
Manager since 1979, managing a variety of institutional bond portfolios
including pension, foundation, insurance and mutual fund assets. Robert Cessine,
Portfolio Manager, joined Zurich Kemper in January 1993, and is
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responsible for the Fund's investment strategy, including duration management,
asset allocation, security selection and trading.
AARP GNMA AND U.S. TREASURY FUND
================================================================================
Fund objective:
To produce a high level of current income but with less risk of loss to the
Fund's portfolio than other GNMA mutual funds, measured by the frequency and
amount by which total return fluctuates downward. The Fund pursues current
income by investing primarily in high-quality Government National Mortgage
Association (GNMA) securities and U.S. Treasury bills, notes and bonds issued or
backed by the full faith and credit of the U.S. Government. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP GNMA and U.S. Treasury Fund is suitable for conservative investors who
want high current income from a portfolio comprised primarily of GNMA and U.S.
Treasury Securities. You should be prepared to invest for the longer term (three
years or more) and be comfortable with fluctuation in the value of your
principal. The Fund is also available for the AARP IRA or the other retirement
plans.
What does the Fund offer to investors?
The Fund is designed to offer current income from a portfolio of high-quality
securities. The level of income should generally be higher than that available
from fixed-price money market mutual funds, government-insured bank accounts and
fixed-rate, government-insured CDs. By including short-term U.S. Treasury
securities in its portfolio, the Fund seeks to offer less risk of loss to its
portfolio than other GNMA mutual funds, although its yield may be lower.
What does the Fund invest in?
The Fund invests principally in U.S. Treasury bills, notes, bonds, and dollar
rolls and other securities issued or backed by the full faith and credit of the
U.S. Government. These include Government National Mortgage Association (GNMA)
securities. GNMA securities represent part ownership of a pool of U.S.
Government-guaranteed mortgage loans each of which is insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. Each pool
of mortgages is also guaranteed by GNMA as to the timely payment of principal
and interest (regardless of whether the mortgagors actually make their
payments). This guarantee by GNMA represents the full faith and credit of the
U.S. Government. However, this guarantee is not related to the Fund's yield or
the value of shareholders' investments, which will fluctuate daily.
The maturities and types of securities held by the Fund may vary with current
market conditions. At any time, the Fund may invest a substantial portion of its
assets in securities of a particular maturity. With GNMA securities, principal
is paid back to the Fund over the life of the bond, rather than at maturity. The
Fund
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will receive monthly scheduled payments of principal and interest and may
receive unscheduled principal payments resulting from prepayments of the
underlying mortgages. The Fund may realize a gain or loss upon receiving
principal payments. The Fund typically reinvests all payments and prepayments of
principal in additional GNMA securities or other U.S. Government-guaranteed
securities. The Fund may also purchase "when-issued" securities and invest in
repurchase agreements.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares will
fluctuate up and down with changes in interest rates and other market
conditions. The level of income you receive will also be affected by movements
up or down in interest rates. Like bonds, the value of mortgage-backed
securities decreases when interest rates rise. However, when interest rates
fall, their value may not rise as much as does the value of bonds because of the
anticipation of prepayment of the underlying mortgages. This prepayment may
expose the Fund to a lower rate of return upon reinvestment. Thus, the
prepayment rate may also tend to limit any increase in net asset value. See
"Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by investing
in a combination of short-, intermediate-, and long-term securities. The Fund
may also, on occasion, use portfolio management techniques to seek to reduce
risk. These techniques, which are subject to applicable regulatory guidelines,
may include limited transactions in financial futures contracts and related
option transactions which are unrated (see "Other Investment Policies and Risk
Factors"). The Fund may write (sell) covered call options to enhance investment
returns. These techniques will be entered into to reduce risk, but such
techniques involve risks themselves and could reduce current income. The extent
to which the portfolio management team is controlling for "downside risk" to the
Fund's portfolio is measured by tracking the frequency and amount by which total
return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $500. You can open an AARP IRA or an AARP
UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Richard L. Vandenberg, Lead Portfolio Manager, is responsible for overall fund
strategy including duration and convexity management and sector allocation. He
has 25 years experience in all aspects of fixed income investing, including
various derivatives. Portfolio Manager Scott E. Dolan joined Scudder in 1989 as
a Compliance Analyst. He is responsible for individual security selection and
sector allocation and has been a portfolio manager since 1993.
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AARP INSURED TAX FREE GENERAL BOND FUND
================================================================================
Fund objective:
To produce a high level of current income free from federal income taxes but
with less risk of loss to its portfolio than other insured tax-free bond mutual
funds, measured by the frequency and amount by which total return fluctuates
downward. The Fund pursues high level of current income by investing primarily
in high-quality, federally tax-exempt municipal securities that are insured to
protect against default by the municipality. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Insured Tax Free General Bond Fund is suitable for investors in higher
tax brackets who want high income free from federal income taxes. You should
invest for the longer term (at least three years or more) and be comfortable
with fluctuation in the value of your principal. The Fund is not available for
the AARP IRA or the other retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer high income free from federal tax. Depending on an
investor's tax bracket, the after-tax income from the Fund may be higher than
that from a taxable investment of comparable quality and risk. The Fund will
typically pay higher income than the AARP High Quality Tax Free Money Fund,
although yield and principal value will fluctuate up and down with market
conditions. By including short- and medium-term bonds in its portfolio, the Fund
seeks to reduce the risk of loss to its portfolio compared to other long-term
municipal bond funds, although its yield may be lower.
The Fund is one of a distinct group of tax-free mutual funds with insurance on
the majority of its investments. Insurance on its securities protects the Fund
against loss from default by the municipal issuer. However, it does not protect
the investor from fluctuation in yield or share price.
What does the Fund invest in?
The Fund invests primarily in a mix of short-, intermediate-, and long-term
municipal securities that are insured against default by private insurers. The
municipal securities purchased by the Fund will be only high-grade securities or
repurchase agreements on such securities. These may include obligations issued
by or on behalf of states, territories and possessions of the U.S. and the
District of Columbia to raise money for public purposes. Interest from these
securities is, in the opinion of the issuer's bond counsel, exempt from federal
income taxes. The Fund has no current intention of investing in securities whose
income is subject to federal income tax, including the individual alternative
minimum tax (AMT). However, under unusual circumstances, the Fund may invest in
taxable securities for defensive purposes or to benefit from disparities in the
financial markets.
Municipal securities may include municipal notes, municipal bonds, municipal
lease obligations, participation interests in bank holdings of municipal
securities, securities with variable or floating interest rates, demand
obligations, and tax-exempt commercial paper. The Fund may purchase securities
on a
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"when-issued" or "forward delivery" basis, and may enter into stand-by
commitments in which securities may be sold back to the seller at the Fund's
option. Also, the Fund may use approved portfolio techniques, if appropriate,
such as limited use of financial futures contracts and related options
transactions. See "Other Investment Policies and Risk Factors."
What portion of the securities is insured?
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.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares will
move up and down as interest rates and other market conditions change. The level
of income you receive will be affected by movements up and down in interest
rates. Income from the high-quality securities that the Fund purchases may be
lower than the income from lower-quality securities. See "Other Investment
Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by investing
in securities of varying maturities. The Fund may also use approved portfolio
management techniques.
Insurance on the securities held by the Fund protects the Fund in case of
default by the municipal issuer. It does not protect an investor from
fluctuation in the Fund's yield or value per share, which change daily.
Insurance also involves a cost to the Fund which will reduce yield.
Historically, the yields on insured securities have been attractive in
comparison to the yields on uninsured securities of comparable quality. There
can be no assurance, however, that this relationship will continue. Moreover, to
the extent the Fund must purchase insurance on U.S. Government securities, this
will involve a cost to the Fund while not increasing the quality rating since
U.S. Government-guaranteed or backed securities are already high quality.
Although the financial condition of each insurer of its securities is
periodically reviewed by the Fund, there can be no guarantee that insurers can
honor their obligations under all circumstances. See "Other Investment Policies
and Risk Factors."
The extent to which the portfolio management team is controlling "downside risk"
to the Fund's portfolio is measured by tracking the frequency and amount by
which total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
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investment of at least $100 until your account reaches $2,000. You can open an
AARP UGMA/UTMA with an initial investment of only $250.
Will I be subject to taxes on this Fund?
All income distributed by the Fund is expected to be exempt from federal income
taxes, but income may be subject to state and local income taxes. Ordinarily,
the Fund expects that 100% of its portfolio securities will be in federally
tax-exempt securities. As a fundamental policy, under normal circumstances, at
least 80% of the Fund's net assets will be invested in federally tax-exempt
securities. Up to 20% of the Fund's net assets may be invested in federally
taxable securities. For defensive purposes, or if unusual circumstances make it
advisable, the Fund may purchase U.S. Government securities and repurchase
agreements collateralized by such securities. For temporary defensive purposes,
the Fund's investment in federally taxable securities may exceed 20%. It is
impossible to predict accurately how long such alternate strategies may be
utilized. Each year you will be provided with a breakdown of the Fund's
investments by state so that you can determine your state and local income tax
liability. Your state or local Department of Revenue or tax advisor can answer
questions regarding the taxability of distributions.
In the event there is income from taxable securities, it would not be exempt
from federal income taxes. In addition, any capital gains earned by the Fund are
usually taxable.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30
and is usually taxable.
Who at Scudder manages my investment?
Lead Portfolio Manager Philip G. Condon, who is responsible for investment
strategy and overseeing the Fund's day-to-day management, joined Scudder in 1983
and has more than 21 years of investment experience. Mr. Condon's
responsibilities include management of the Scudder's Tax Free Mutual Fund
department. Portfolio Manager M. Ashton Patton joined Scudder in 1986 as a
research assistant; her responsibilities include managing and trading for the
tax-free funds.
AARP BOND FUND FOR INCOME
================================================================================
Fund objective:
To produce a high level of current income but with less risk of loss to its
portfolio than other long-term bond mutual funds, measured by the frequency and
amount the total return fluctuates downward. The Fund pursues current income by
investing primarily in short-, medium- and long-term investment-grade debt
securities. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
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For whom is the Fund designed?
The AARP Bond Fund for Income is suitable for investors who want high current
income, but are willing to accept interest rate, credit, and other risks
associated with a portfolio of investment-grade and, to a lesser extent, below
investment-grade bonds (up to 35% of total assets). You should be prepared to
invest for the longer term (at least three years or more) and be comfortable
with fluctuation in the value of your principal. The Fund is also available for
the AARP IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer investors a convenient way to enjoy high monthly
income through a professionally managed, diversified portfolio of largely
investment-grade bonds. The Fund should offer higher income than any other AARP
Income Fund, although its share price volatility will normally be higher. The
Fund also can help add balance to a portfolio holding stocks or stock mutual
funds.
By including short- and medium-term bonds in its portfolio, the Fund seeks to
reduce the size and frequency of loss to its portfolio compared to other
long-term bond mutual funds, although its yield may be lower.
What does the Fund invest in?
In pursuit of its investment objectives, under normal market conditions, the
Fund invests at least 65% of its assets in investment-grade debt securities.
Investment-grade securities are securities that are rated Aaa, Aa, A, or Baa by
Moody's or AAA, AA, A, or BBB by S&P, or, if unrated, are of equivalent quality
as determined by the Fund Manager. In addition, the Fund may invest up to 35% of
its assets in securities rated Ba or B by Moody's or BB or B by S&P. No more
than 10% of the Fund's assets may be invested in securities rated B by Moody's
or S&P. These two grades of securities are considered to be below investment
grade. Below investment-grade securities are considered predominantly
speculative with respect to their capacity to pay interest and repay principal.
They generally involve a greater risk of default and, at times, can have more
price volatility than higher rated securities. See "Other Investment Policies
and Risk Factors."
The Fund may invest in U.S. Treasury and Agency securities, corporate bonds and
notes, dollar rolls, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies or
investment-grade foreign institutions, 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 may invest up to 20% of
total assets in foreign debt securities denominated in currencies other than the
U.S. dollar, but no more than 5% of the Fund's total assets will be represented
by a given foreign currency. The Fund may also invest in "when-issued"
securities and repurchase agreements.
For temporary defensive purposes, the Fund may invest without limit in money
market and short-term instruments or invest all or a substantial portion of its
assets in high-quality domestic debt securities when the Fund Manager deems such
a position advisable in light of economic or market conditions. It is
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impossible to predict accurately how long such alternate strategies may be
utilized.
What are the risks?
While the Fund is designed to provide monthly income, it is not a fixed price
money market fund. The value of its shares and the level of income provided will
fluctuate up and down with changes in interest rates and other market
conditions. Due to the greater overall interest rate and credit risk of the
securities in which it invests, the Fund should offer higher income but have a
more variable share price over time than the AARP GNMA and U.S. Treasury Fund or
the AARP High Quality Short Term Bond Fund. See "Other Investment Policies and
Risk Factors."
The Fund can invest a limited portion of its assets in below investment-grade
securities, sometimes referred to as "junk" bonds. Investing in high yielding,
lower-quality bonds involves various types of risks, including the risk that
issuers of bonds held in the portfolio will not make timely payment of either
interest or principal, or may default entirely. This risk of default can
increase with changes in the financial condition of a company or with changes in
the U.S. economy, such as a recession. Compared to investing in higher quality
issues, investors may be rewarded for the additional risk of high yield bonds
through higher interest payments and the opportunity for greater capital
appreciation.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio through
active portfolio management and diversification. The Fund Manager will invest in
a broad number of securities with varying maturities, quality and industry
representation. Also, the Fund may use approved portfolio management techniques,
if appropriate, such as limited transactions in financial futures contracts and
related option transactions which are unrated (see "Other Investment Policies
and Risk Factors"). The Fund may write (sell) covered call options to enhance
investment returns. These techniques will be entered into to reduce risk, but
such techniques involve risks themselves and may reduce current income. The
extent to which the portfolio management team is controlling "downside risk" to
the Fund's portfolio is measured by the frequency and amount by which the total
return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Stephen A. Wohler, Lead Portfolio Manager, is responsible for implementing the
Fund's portfolio strategy including duration management, asset allocation,
security selection and trading and timing. He has been involved with the Fund
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Manager since 1979, managing a variety of institutional bond portfolios
including pension, foundation, insurance and mutual fund assets. Kelly D.
Babson, Portfolio Manager, joined the Scudder in 1994 as a portfolio manager and
has 16 years of experience in the fixed income field including 13 years of
high-yield management. Robert Cessine, Portfolio Manager, joined Zurich Kemper
in January 1993, and is responsible for the Fund's investment strategy;
including duration management, asset allocation, security selection and trading.
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AARP GROWTH AND INCOME FUNDS
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AARP BALANCED STOCK AND BOND FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than other balanced mutual funds, measured by the frequency and amount
by which total return fluctuates downward. The Fund pursues capital growth and
income by investing primarily in a diversified mix of stocks with above-average
dividend yields, high-quality bonds, and cash reserves. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Balanced Stock and Bond Fund is suitable for investors who are seeking
long-term growth of their assets, but want less risk than an investment solely
in stocks. You should be prepared to invest for the longer term (at least three
to five years or more) and be comfortable with the value of your principal
fluctuating up and down. The Fund is also available for the AARP IRA and the
other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal through a
single investment combining stocks, bonds, and cash reserves. Growth will come
from possible appreciation in the value of common stocks and other equity
investments. Bonds and other fixed-income investments provide current income and
may help reduce risk of loss to the Fund's portfolio. Through a broadly
diversified portfolio consisting primarily of stocks with above average dividend
yields and investment-grade bonds, the Fund seeks to offer less risk of loss to
its portfolio than that of other balanced mutual funds. The Fund should
typically have less risk and a lower return than that of the other AARP Growth
Funds.
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. On occasion, the Fund will
adjust its investment mix. The Fund Manager will do so after analyzing factors
such as the level and direction of interest rates, capital flows, inflationary
expectations, and the financial climate worldwide.
What does the Fund invest in?
The Fund seeks to manage risk of loss to its portfolio by investing in a broadly
diversified mix of equity securities, bonds, and cash reserves. The Fund may
invest up to 70% of its assets in equity securities (stocks). At least 30% of
the Fund will be in investment-grade fixed-income securities and cash reserves.
For temporary defensive purposes, the Fund may invest without limit in money
market and short-term instruments when the Fund Manager deems such a position
advisable in light of economic or market conditions. These instruments include
commercial paper, bankers' acceptances, certificates of deposit issued by
domestic and foreign branches of U.S. banks, and repurchase agreements.
Equity securities consist of common stocks, securities convertible into common
stocks, and preferred stocks. A research-oriented approach to investing is used
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by the Fund, taking advantage of Scudder's large research department. The Fund
emphasizes securities of companies that offer the opportunity for capital growth
and growth of earnings while providing dividends. The Fund will generally invest
in companies domiciled in the U.S., but may invest in foreign securities without
limit.
All of the Fund's debt securities will be investment-grade, i.e., rated at the
time of purchase, Baa or higher by Moody's or BBB or higher by S&P, or deemed of
comparable quality by the Fund's Manager. At least 75% of these will be
securities rated within the three highest quality ratings of Moody's (Aaa, Aa
and A) or S&P (AAA, AA, and A) or those the Fund Manager judges are of
equivalent quality (high-grade). Securities rated BBB by S&P or Baa by Moody's
are neither highly protected nor poorly secured. These securities normally pay
higher yields but involve potentially greater price variability than
higher-quality securities and are regarded as having adequate capacity to repay
principal and pay interest. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. If the rating
agencies downgrade a security, the Fund Manager will determine whether to keep
it or eliminate it based on the best interests of the Fund. The Fund does not
purchase securities rated below investment-grade, commonly known as "junk"
bonds.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, preferred and convertible preferred securities and trust preferred
securities. The Fund may also invest in U.S. Government securities, obligations
of federal agencies, and instruments not backed by the full faith and credit of
the U.S. Government. The latter include obligations of the Federal Home Loan
Banks, Farm Credit Banks, and the Federal Home Loan Mortgage Corporation. The
Fund may invest in obligations of international agencies, U.S. and non-U.S.
dollar denominated foreign debt securities, mortgage-backed and other
asset-backed securities, municipal obligations, zero-coupon securities, and
restricted securities issued in private placements.
The Fund may make limited use of financial futures contracts and related options
and may also invest in forward foreign currency exchange contracts. The Fund may
write (sell) covered call options to enhance investment returns and may purchase
and sell options on stock indices for hedging purposes. It may also invest in
securities on a "when-issued" or forward delivery basis.
What are the risks?
The risk to principal is consistent with an investment primarily in stocks and
bonds. The value of shares will fluctuate up and down with changes in interest
rates and other market conditions. Investors should focus on the longer term and
be comfortable with fluctuation in the value of their principal.
The level of income will be affected by movements up and down in interest rates
and by dividends paid on the stocks held by the Fund. See "Other Investment
Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio through
active portfolio management and diversification of both its equity and bond
components. The Fund seeks to manage risk in the equity portion of the portfolio
by investing in a diverse selection of relatively high dividend-paying stocks.
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Stocks with above-market yields tend to sell at attractive market valuations,
and the higher dividends offered by these stocks often provide a "cushion" to
returns in periods of increased market volatility. In order to manage the risk
associated with investing in bonds, the Fund invests in a broad array of debt
securities with varying maturities, quality and industry representation. The
extent to which the portfolio management team is controlling "downside risk" to
the Fund's portfolio is measured by tracking the frequency and amount by which
total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $500. You can open an AARP IRA or AARP
UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain typically
will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman is responsible for managing the stock
portion of the Fund. Mr. Hoffman, who joined Scudder in 1990, has 12 years of
experience in the investment industry as a portfolio manager. Stephen A. Wohler,
Portfolio Manager, is responsible for the bond portion of the Fund. Mr. Wohler
joined Scudder in 1979. Mr. Hoffman has been a portfolio manager for the Fund
since it commenced operations on February 1, 1994. Lori J. Ensinger, Portfolio
Manager, has worked as a portfolio manager since 1983 and joined Scudder in
1993. Mr. Ensinger is responsible for stock selection and equity strategy.
AARP GROWTH AND INCOME FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than other growth and income mutual funds, measured by the frequency
and amount by which total return fluctuates downward. The Fund pursues long-term
capital growth and income by investing primarily in common stocks with
above-average dividend yields and fixed-income securities convertible into
common stocks. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP Growth and Income Fund is suitable for investors who are seeking
long-term growth of their assets to keep ahead of inflation. Investors should
invest for the longer term (at least five years or more) and be comfortable with
fluctuation of their principal, which is associated with investing in stocks.
The Fund is also available for the AARP IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal with some
income. This growth will come from possible appreciation in the value of shares,
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as well as quarterly dividend distributions if they are reinvested in additional
shares of the Fund. Dividends can also produce current income for investors.
Through a broadly diversified portfolio consisting primarily of stocks with
above average dividend yields, the Fund seeks to offer less risk of loss to its
portfolio than other growth and income funds. The Fund should offer a greater
opportunity for share price appreciation, with greater share price fluctuation
than the AARP Balanced Stock and Bond Fund.
What does the Fund invest in?
The Fund invests primarily in common stocks and securities convertible into
common stocks. The Fund may also invest in preferred stocks and financial
futures contracts. The Fund emphasizes securities of companies that offer the
opportunity for capital growth and growth of earnings while providing dividends.
A research-oriented approach to investing is used by the Fund, taking advantage
of the Fund Manager's large research department.
The Fund will invest in a variety of industries and companies. Generally, the
Fund will invest in companies domiciled in the U.S., but it may invest in
foreign securities without limit. Also, the Fund may write (sell) covered call
options to enhance investment return, and may purchase and sell options on stock
indices for hedging purposes. See "Other Investment Policies and Risk Factors."
The Fund's policy is to remain substantially invested in stocks and securities
convertible into stocks. However, for temporary defensive purposes, the Fund may
invest without limit in high-quality money market securities when the Fund
Manager deems such a position advisable in light of economic or market
conditions. These securities include U.S. Treasury bills, commercial paper,
certificates of deposit issued by domestic and foreign branches of U.S. banks,
bankers' acceptances, and repurchase agreements.
What are the risks?
The risk to principal is consistent with an investment in stocks. The stock
market doesn't go up every year, and can rise and fall--sometimes quite
dramatically--over a short period of time. Investors should focus on the longer
term (at least five years or more) and be comfortable with fluctuation in the
value of their principal. See "Other Investment Policies and Risk Factors."
The level of income you receive will be affected by dividends paid on the
securities held by the Fund.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by investing
in a diverse selection of relatively high dividend-paying stocks. Stocks with
above-average dividend yields tend to trade at attractive market valuations
(e.g., price-to-earnings and price-to-book ratios), which can help lessen
"downside risk" to the Fund's portfolio. In addition, the higher dividends
offered by these stocks may provide a "cushion" when the stock market is
volatile. The extent to which the portfolio management team is controlling
"downside risk" to the Fund's portfolio is measured by tracking the frequency
and amount by which total return fluctuates downward compared to similar funds.
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What is the minimum initial investment?
The minimum initial investment is $500. You can open an AARP IRA or an AARP
UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain typically
will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman has had responsibility for setting
investment strategy and overseeing the Fund's day-to-day management since 1991.
Mr. Hoffman, who joined Scudder in 1990, has 12 years of experience in the
investment industry. Benjamin W. Thorndike, Portfolio Manager, is the Fund's
chief analyst and strategist for convertible securities. Mr. Thorndike, who has
more than 16 years of investment experience, joined the Fund Manager and the
Fund in 1986. Kathleen T. Millard, Portfolio Manager, focuses on stock investing
strategy and stock selection. Ms. Millard has worked in the investment industry
since 1983 as a portfolio manager of value portfolios and at Scudder since 1991.
Lori Ensinger, Portfolio Manager, joined the Fund in 1996 and focuses on stock
selection and investment strategy. Ms. Ensinger has worked in the investment
industry since 1983 as a portfolio manager focusing on mid-large cap stocks and
at Scudder since 1993.
AARP U.S. STOCK INDEX FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than an S&P 500 Index mutual fund, measured by the frequency and
amount by which total return fluctuates downward. The Fund pursues this
investment objective by emphasizing common stocks with above-average dividend
yields, while maintaining investment characteristics otherwise similar to the
S&P 500 Index. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP U.S. Stock Index Fund is suitable for investors seeking a "passive"
investment approach to stock market investing. The Fund may be appropriate for
more conservative investors who are seeking higher dividend income and somewhat
lower average volatility than an S&P 500 Index mutual fund. You should be
prepared to invest for the longer term (at least five years or more) and be
comfortable with the value of your principal fluctuating up and down with
changing U.S. stock market conditions. The Fund is also available for the AARP
IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund offers the potential for long-term growth of principal and current
income. Through a broadly-diversified portfolio consisting of common stocks of
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S&P 500 companies, the Fund's performance is expected to track the overall
performance of the U.S. stock market, as characterized by the S&P 500 Composite
Stock Price Index. The Fund, however, is designed to have less risk of loss to
its portfolio due to its focus on companies in the S&P 500 Index that pay higher
dividends.
What does the Fund invest in?
The Fund attempts to remain fully invested in common stocks of S&P 500
companies. Under normal circumstances, the Fund will invest at least 95% of its
assets in common stocks and futures contracts and options, primarily on the S&P
500 Index. The Fund, using a proprietary computer model, selects common stocks
of S&P 500 companies that are expected to, on average, pay higher dividends than
S&P 500 companies in the aggregate. In managing the Fund this way, the Fund
Manager expects performance will be somewhat less volatile than that of the S&P
500 over time, and the total return will generally track the S&P 500 within 1%,
before expenses, on an annualized basis. (A tracking error of 0% would indicate
returns identical to the Index.) After the Fund's start-up phase, the portfolio
will typically consist of common stocks of between 400 and 470 of the S&P 500
companies. The Fund expects to come close to the capitalization weights of the
S&P 500. Nonetheless, to enhance the yield and liquidity characteristics of the
Fund and reduce transaction costs, the Fund will not exactly replicate the
portfolio weights of the S&P 500 and will not hold all 500 stocks within that
Index. The investment approach is "passive" in that after the dividend screening
described above, there is no additional financial analysis regarding the
securities held in the Fund.
Under normal circumstances, the Fund may invest up to 5% of its assets in
certain short-term fixed income securities including high-quality money market
securities such as U.S. Treasury bills, repurchase agreements, commercial paper,
certificates of deposit issued by domestic and foreign branches of U.S. banks
and bankers' acceptances, although cash or cash equivalents are normally
expected to represent less than 1% of the Fund's assets. The Fund may invest up
to 20% of its assets in stock futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to minimize trading costs. The Fund may also invest in Standard
& Poor's Depository Receipts ("SPDRs"). SPDRs typically trade like a share of
common stock and provide investment results that generally correspond to the
price and yield performance of the component common stocks of the S&P 500 Index.
See "Other Investment Policies and Risk Factors." Like most index funds, the
Fund will not invest in cash reserves, futures contracts or options as part of a
temporary defensive strategy, such as lowering the Fund's investment in common
stocks to protect against potential stock market declines. Thus, the Fund will
not take specific steps to minimize losses that reflect a decline in the S&P
500. In the event that the Fund does not track the Index, before expenses,
within an annualized 1% total return of the S&P 500 for an extended period, the
Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
PROSPECTUS
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What are the risks?
The risk to principal is consistent with the Fund's investment approach, which
should result in a performance pattern similar to the U.S. stock market as
measured by the S&P 500 Index. The stock market doesn't go up every year, and
can rise and fall--sometimes quite dramatically over a short period of time. The
U.S. stock market tends to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline. Investors should focus on the
longer term (at least five years or more) and be comfortable with fluctuation in
the value of their principal.
See "Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund is designed to track the overall U.S. stock market as characterized by
the S&P 500 Index, and therefore will be subject to market risk. However, to a
certain extent the Fund will attempt to manage this risk and provide somewhat
higher dividend income. The Fund's Subadviser uses a proprietary computer model
to select 400 or more stocks in the S&P 500 Index that are expected to, on
average, pay higher dividends than S&P 500 companies overall. This investment
approach may result in performance that is somewhat less volatile than that of
the S&P 500 Index over time. The extent to which the portfolio management team
is controlling "downside risk" to the Fund's portfolio is measured by tracking
the frequency and amount by which total return fluctuates downward compared to
similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain typically
will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Philip S. Fortuna joined the Adviser in 1986 as a manager
of institutional equity accounts, served as director of quantitative services
from 1987 to 1993 and director of investment operations from 1993 to 1995. From
1995 to 1997 he was involved in global planning and new product development in
addition to his portfolio management responsibilities. Mr. Fortuna is currently
director of Scudder's quantitative group.
James M. Eysenbach, Portfolio Manager, joined the Adviser in 1991 as a senior
quantitative analyst, served as director of quantitative services from 1993 to
1997 and has been co-manager of quantitative equity products at Scudder since
1995. He is currently managing portfolios full-time. Mr. Eysenbach has more than
10 years' investment management experience, specializing in quantitative
research, analysis and portfolio management.
The Fund Manager has retained Bankers Trust Company as Subadviser to the Fund.
The Subadviser will handle day-to-day investment and trading functions.
PROSPECTUS
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The Portfolio Managers will be in regular contact with the Subadviser to monitor
returns and relative risk.
Bankers Trust has a long and successful history of equity index management
dating back to 1977, and is currently one of the largest managers of passive
investments in the U.S.
PROSPECTUS
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AARP GROWTH FUNDS
PROSPECTUS
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AARP CAPITAL GROWTH FUND
================================================================================
Fund objective:
To provide long-term capital growth but with less risk of loss to its portfolio
than other growth funds, measured by the frequency and amount by which total
return fluctuates downward. The Fund pursues this investment objective by
investing primarily in a diversified mix of common stocks and fixed-income
securities convertible into common stocks of established medium- and large-sized
companies. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP Capital Growth Fund is suitable for investors seeking high long-term
growth of their principal. You should be prepared to invest for the longer term
(at least five years or more) and be comfortable with the value of your
principal fluctuating up and down. The Fund is also available for the AARP IRA
and the other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal. This growth
will come primarily from possible appreciation in the value of shares. The Fund
is not expected to provide regular income.
In pursuing long-term growth, the Fund will typically have more share price
fluctuation than the AARP Balanced Stock and Bond Fund, AARP Growth and Income
Fund, AARP U.S. Stock Index Fund and AARP Global Growth Fund, but less share
price fluctuation than AARP International Growth and Income Fund and AARP Small
Company Stock Fund.
By diversifying among securities of high quality, medium- to large-sized
companies with strong competitive positions in their industries, the Fund seeks
to have less risk of loss to its portfolio than other growth funds.
What does the Fund invest in?
The Fund invests primarily in common stocks and securities convertible into
common stocks. The Fund may also invest in preferred stocks and financial
futures contracts. The Fund's policy is to remain substantially invested in
these securities.
In seeking capital growth, the Fund will invest in stocks which will offer
above-average potential for long-term growth of market value as represented by
the Standard & Poor's 500 Composite Stock Price Index. A research-oriented
approach to investing is used by the Fund, taking advantage of Scudder's large
research department. The Fund will invest in a variety of industries and
companies. Generally, the Fund will invest in companies domiciled in the U.S.,
but it may invest in foreign securities without limit. Also, the Fund may write
(sell) covered call options to enhance investment return, and may purchase and
sell options on stock indices for hedging purposes. See "Other Investment
Policies and Risk Factors."
For temporary defensive purposes, the Fund may invest without limit in
high-quality money market securities, including U.S. Treasury bills, repurchase
PROSPECTUS
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agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. Government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions. It is impossible to predict accurately how long such alternate
strategies may be utilized.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term growth. The Fund generally has greater share price fluctuation and
potential for return than the AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, AARP U.S. Stock Index Fund, and AARP Global Growth Fund. The stock
market doesn't go up every year, and can rise and fall--sometimes quite
dramatically--over a short period of time. Some of the securities selected may
have above-average stock market risk. Investors should focus on the longer term
(at least five years or more) and be comfortable with fluctuation to the value
of their principal. See "Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average stock market risk, it does attempt to
manage the risk of loss to its portfolio by focusing on high-quality
medium-to-large sized companies with reasonable stock market valuations. The
Fund Manager invests in established companies with promising characteristics: a
history of consistent earnings growth, competitive strength and the potential
for continued growth. The Fund is broadly diversified among industries and
companies. The extent to which the portfolio management team is controlling
"downside risk" to the Fund's portfolio is measured by tracking the frequency
and amount by which total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager William F. Gadsden has set the Fund's overall investment
strategy since 1994 and has been part of the Fund's day-to-day management since
1989. He has 16 years of investment industry experience and joined Scudder in
1983. Bruce F. Beaty, Portfolio Manager, focuses on securities selection and
assists with the creation and implementation of investment strategy for the
Fund. He has 17 years of investment industry experience and joined Scudder in
1991 as a Portfolio Manager.
PROSPECTUS
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AARP SMALL COMPANY STOCK FUND
================================================================================
Fund objective:
To provide long-term capital growth but with less risk of loss to its portfolio
than other small company stock mutual funds, measured by the frequency and
magnitude with which total return fluctuates downward. The Fund pursues this
investment objective by investing primarily in a broadly diversified portfolio
of common stocks of small U.S. companies. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Small Company Stock Fund is suitable for investors seeking high
long-term growth of their principal. You should be prepared to invest for the
longer term (at least five years or more) and be comfortable with the value of
your principal fluctuating up and down. The Fund is also available for the AARP
IRA and the other retirement plans.
What does the Fund offer to investors?
AARP Small Company Stock Fund combines the long-term capital appreciation
potential of small company stocks with the conservative nature of a
value-oriented, growth and income approach to investing. The Fund focuses
primarily on U.S. small capitalization stocks and seeks to maintain a higher
average dividend yield than the small capitalization stock segment of the market
as a whole. These securities may be out of favor or not closely followed by
investors, yet, in the opinion of the Fund Manager, may reward investors with
substantial returns over time. U.S. small capitalization stocks have
outperformed large capitalization stocks over time, although with greater
volatility in returns. Since the Fund involves both above-average performance
opportunity and risk, it is suitable for those individuals who are investing for
a long-term goal, such as accumulating assets for retirement. The Fund should be
considered as part of a diversified portfolio, since it is not, by itself, a
complete investment program. Nonetheless, it can help round out an investment
portfolio already holding other types of stock and fixed-income investments.
The Fund offers low-cost, convenient access to a part of the U.S. stock market
in which investors might otherwise find it difficult to participate. On their
own, individual investors might find it a challenge to obtain and analyze
complete, up-to-date financial information on numerous small companies, and buy
and sell securities at favorable prices. The Fund's management team assumes
these responsibilities for investors.
What does the Fund invest in?
In pursuing its objective of long-term capital growth, the Fund normally remains
substantially invested in the common stocks of small U.S. companies. Using a
quantitative investment approach developed by the Fund Manager, the Fund focuses
on equity securities of companies with market capitalizations generally below $1
billion that, as a group, have a dividend yield higher than the average of those
in the Russell 2000 Index(R) and that the Fund Manager believes are undervalued
relative to the stocks in the Russell 2000 Index(R). The Russell 2000 Index(R)
is a widely used measure of small stock performance. The Fund
PROSPECTUS
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will sell securities of companies that have grown in market capitalization above
this level as necessary to keep the Fund focused on smaller companies.
The Fund takes a diversified approach to investing in small capitalization
stocks, typically holding more than one hundred small companies, representing a
variety of U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase other
types of equity securities including preferred stocks (either convertible or
non-convertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes or as a temporary investment to accommodate cash
flows. See "Other Investment Policies and Risk Factors."
For temporary defensive purposes, the Fund may invest without limit in
high-quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions. It is impossible to predict accurately how long such alternate
strategies may be utilized.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term capital growth through investing in small company stocks. Investors
should focus on the longer term (at least five years or more) and be comfortable
with fluctuation in the value of their principal which may be considerable at
times. See "Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average stock market risk, the Fund is actively
managed to reduce the risk of loss to its portfolio relative to other small
company stock funds. It does this by using a highly systematic value-oriented
investment style that focuses on small capitalization issues which, grouped
together, normally provide higher-than-average dividend income. These stocks
typically have lower risk. Risk is further managed by diversifying among a large
number of stocks, and by using specialized portfolio management techniques to
monitor the Fund's risk exposure. The extent to which the portfolio management
team is controlling "downside risk" to the Fund's portfolio is measured by
tracking the frequency and amount by which total return fluctuates downward
compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
PROSPECTUS
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When are distributions paid?
Any dividends typically will be distributed in December. Any net realized gain
typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Co-lead Portfolio Managers Philip S. Fortuna and James M. Eysenbach have
responsibility for the Fund's day-to-day management and investment strategies.
Mr. Fortuna joined the Adviser in 1986 as a manager of institutional equity
accounts, served as director of quantitative services from 1987 to 1993 and
director of investment operations from 1993 to 1995. From 1995 to 1997 he was
involved in global planning and new product development in addition to his
portfolio management responsibilities. Mr. Fortuna is currently director of the
Adviser's quantitative group.
Mr. Eysenbach joined the Adviser in 1991 as a senior quantitative analyst,
served as director of quantitative services from 1993 to 1997 and has been
co-manager of quantitative equity products at the Adviser since 1995. He is
currently managing portfolios full-time. Mr. Eysenbach has more than 10 years'
investment management experience, specializing in quantitative research,
analysis and portfolio management.
PROSPECTUS
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<PAGE>
AARP INTERNATIONAL FUNDS
<PAGE>
AARP GLOBAL GROWTH FUND
================================================================================
Fund objective:
To provide long-term capital growth but with less risk of loss to its portfolio
than other global growth mutual funds, measured by the frequency and amount by
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in common stocks of established corporations in
a wide variety of developed countries, including the U.S. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Global Growth Fund is suitable for investors who want to
add both U.S. and foreign equity opportunities to their portfolio through a
single investment. The Fund is designed for investors seeking long-term growth
of their principal. You should be prepared to invest for the longer term (at
least five years or more) and be comfortable with the value of your principal
fluctuating up and down. The Fund is also available for the AARP IRA and the
other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal from a
professionally managed portfolio of securities selected from the U.S. and
foreign equity markets. It also offers the opportunity for investors to further
diversify their portfolios which could help to lower their overall risk.
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. The Fund affords investors access to opportunities wherever
they arise, without being constrained by the location of a company's
headquarters or the trading market for its shares.
Because the Fund's portfolio invests globally, it provides the potential to
augment returns available from the U.S. stock market. In addition, since U.S.
and foreign markets do not always move in step with each other, a global
portfolio provides more diversification than one invested solely in U.S.
securities.
Investing directly in foreign securities is usually impractical for most
investors because it presents complications and extra costs. Investors often
find it difficult to arrange purchases and sales, to obtain current information,
to hold securities in safekeeping and to convert the value of their investments
from foreign currencies into dollars. The Fund manages these problems for the
investor. With a single investment, the investor has a diversified worldwide
investment portfolio which is managed actively by experienced professionals.
Scudder has had many years of experience investing globally and dealing with
trading, custody and currency transactions around the world. Scudder has the
benefit of information it receives from worldwide research and believes the Fund
affords investors an efficient and cost-effective method of investing worldwide.
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Through a broadly diversified portfolio consisting primarily of stocks of
established companies which are incorporated in the U.S. or in foreign
countries, and applying a strategy of relatively low portfolio turnover, the
Fund seeks to offer less risk of loss to its portfolio than other global growth
funds. However, in pursuing long-term growth, the Fund typically will have more
share price fluctuation than other AARP Mutual Funds, except the AARP Capital
Growth Fund, the AARP International Growth and Income Fund and the AARP Small
Company Stock Fund. See "What are the risks?" below. Growth will come primarily
from possible appreciation in the value of shares. The Fund is not expected to
provide regular income.
What does the Fund invest in?
The Fund will invest in securities of companies that the Fund Manager believes
will benefit from global economic trends, promising technologies or products,
and 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.
However, the Fund may be invested 100% in non-U.S. issues, and for temporary
defensive purposes may be invested 100% in U.S. issues. For temporary defensive
purposes, the Fund may invest without limit in high-quality money market
securities, including U.S. Treasury bills, repurchase agreements, commercial
paper, certificates of deposit issued by domestic and foreign branches of U.S.
banks, bankers' acceptances and other debt securities, such as U.S. Government
obligations and corporate debt instruments when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund generally invests in equity securities of established companies listed
on U.S. or foreign securities exchanges, but also may invest in securities
traded over-the-counter. It also may invest in debt securities convertible into
common stock, and convertible and non-convertible preferred stocks. Fixed-income
securities of governments, government agencies, supranational agencies and
companies may also be used when the Fund Manager believes the potential for
appreciation for these investments will equal or exceed that available from
investments in equity securities. These debt and fixed-income securities will be
exclusively investment-grade securities, that is, those rated Aaa, Aa, A or Baa
by Moody's or AAA, AA, A or BBB by S&P or those of equivalent quality as
determined by Scudder. Securities rated BBB by S&P or Baa by Moody's are neither
highly protected nor poorly secured. Moody's considers bonds it rates Baa to
have speculative elements as well as investment-grade characteristics.
The Fund may invest in zero coupon securities and closed-end investment
companies holding foreign securities. The Fund may make limited use of financial
futures contracts and related options and may also invest in forward foreign
currency exchange contracts. The Fund may write (sell) covered call options to
enhance investment return, and may purchase and sell options on stock indices
for hedging purposes. See "Other Investment Policies and Risk Factors."
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What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term growth through global investing. Global investing involves economic
and political considerations not typically found in investments restricted
solely to U.S. markets.
Investments in foreign securities involve special considerations, due to more
limited information, higher brokerage costs and different accounting standards.
They may also entail certain risks, such as possible imposition of dividend or
interest withholding or confiscatory taxes, possible currency blockages or
transfer restrictions, expropriation, nationalization or other adverse political
or economic developments and the difficulty of enforcing obligations in other
countries. Foreign securities may be less liquid and more volatile than
comparable domestic securities, and there is generally less government
regulation of stock exchanges, brokers, listed companies and banks than in the
U.S. Purchases of foreign securities are usually made in foreign currencies and,
as a result, the Fund may incur currency conversion costs and may be affected
favorably or unfavorably by changes in the value of foreign currencies against
the U.S. dollar.
The Fund is designed for long-term investors who can accept international
investment risk. Since the Fund normally will be invested in both U.S. and
foreign securities markets, changes in the Fund's share price may have a low
correlation with movements in the U.S. markets. The Fund's share price will
reflect the movements of the different markets in which it is invested and the
currencies in which the investments are denominated. The strength or weakness of
the U.S. dollar against foreign currencies may account for part of the Fund's
investment performance. Investors should focus on the longer term (at least five
years or more) and be comfortable with fluctuation in the value of their
principal. Because of the Fund's global investment policies and the investment
considerations discussed above, investment in shares of the Fund should be
considered as part of a broadly diversified portfolio. See "Other Investment
Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average equity risk, it is designed to actively
reduce risk of loss as compared to other global stock mutual funds. It does this
by diversifying widely among stocks issued in developed markets worldwide. The
extent to which the portfolio management team is controlling "downside risk" to
the Fund's portfolio is measured by tracking the frequency and amount by which
total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500, if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30.
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Who at Scudder manages my investment?
William E. Holzer is the Lead Portfolio Manager for the Fund. Mr. Holzer has
day-to-day responsibility for setting the Fund's worldwide strategy and
investment themes. Mr. Holzer has over 21 years' experience in global investing
and joined Scudder as a portfolio manager in 1980. Nicholas Bratt, Portfolio
Manager, directs Scudder's overall global equity investment strategies. Mr.
Bratt joined Scudder in 1976. Diego Espinosa, Portfolio Manager, joined Scudder
in 1996 and is responsible for development of the Fund's strategy and management
of the portfolio on a daily basis. He has six years' industry experience as an
analyst.
AARP INTERNATIONAL GROWTH AND INCOME FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than other international mutual funds, measured by the frequency and
amount the total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in a diversified portfolio of foreign common
stocks with above-average dividend yields and foreign fixed-income securities
convertible into common stocks. The Fund also has an educational objective to
help shareholders, especially individuals planning for and living in retirement,
make informed investment decisions. The Fund changed its name from AARP
International Stock Fund on February 1, 1998.
For whom is the Fund designed?
The AARP International Growth and Income Fund is suitable for investors who want
to add international stock market opportunities to their portfolio in a
convenient, low-cost way. The Fund is designed for investors seeking long-term
growth of their principal. You should be prepared to invest for the longer term
(at least five years or more) and be comfortable with the value of your
principal fluctuating up and down. The Fund is also available for the AARP IRA
and the other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal from a
professionally managed portfolio of securities selected from developed foreign
stock markets. It also offers the opportunity for investors to further diversify
their investment portfolios, which could help to lower their overall risk.
Unlike the AARP Global Growth Fund, which invests in both U.S. and foreign
markets, the AARP International Growth and Income Fund will invest solely in
foreign markets.
One reason that some investors may wish to invest overseas is that certain
foreign economies may grow more rapidly than the U.S. economy and may offer
opportunities for achieving investment returns superior to those available from
investing in a fund which invests primarily in domestic equity securities.
Another reason is that foreign markets do not always move in step with each
other or with
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the U.S. market. A portfolio invested in a number of markets worldwide will be
better diversified than a portfolio that is restricted to a single market.
Another benefit of the Fund is that it eliminates the complications and extra
costs associated with direct investment in individual foreign securities.
Individuals investing directly in foreign stocks may find it difficult to make
purchases and sales, to obtain current information, to hold securities in
safekeeping, and to convert the value of their investments from foreign
currencies into U.S. dollars. The Fund manages these tasks for the investor.
With a single investment, the investor has a diversified international
investment portfolio, which is actively managed by experienced professionals.
The Fund Manager has had long experience in dealing in foreign markets and with
brokers and custodian banks around the world. The Fund Manager also has the
benefit of an established information network and believes the Fund affords a
convenient and cost-effective method of investing internationally.
In pursuing long-term growth, the Fund typically will have more share price
fluctuation than most other AARP Mutual Funds. See "What are the risks?" below.
Growth will come primarily from possible appreciation in the value of shares.
What does the Fund invest in?
The Fund generally invests in equity securities of established dividend-paying
companies listed on foreign exchanges within developed foreign markets. The Fund
does not invest in emerging markets, but instead, focuses its investments on the
developed foreign countries included in the Morgan Stanley Capital International
World ex-US Index. The Fund will normally invest at least 65% of its total
assets in securities of at least three different countries.
When the Fund Manager believes that it is appropriate, the Fund may invest up to
20% of its total assets in investment-grade foreign debt securities. Such debt
securities include debt of foreign governments, supranational organizations and
private issuers, including bonds denominated in the European Currency Unit
(ECU). Debt investments will be selected on the basis of yield, credit quality,
and the outlooks for currency and interest rates in different parts of the
globe, taking into account the ability to hedge a degree of currency or local
bond price risk. The Fund may purchase investment-grade bonds, which are those
rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if unrated,
judged by the Fund Manager to be of equivalent quality. Securities rated Baa by
Moody's or BBB by S&P are neither highly protected nor poorly secured. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics.
For temporary defensive purposes, the Fund may invest without limit in
high-quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as Canadian or U.S. government obligations or currencies, corporate debt
instruments, and securities of companies incorporated in and having their
principal activities in Canada or the U.S. when the Fund Manager deems such a
position advisable in light of economic or market conditions. It is
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impossible to predict accurately how long such alternate strategies may be
utilized.
The Fund may make limited use of financial futures contracts and related options
and may also invest in foreign currency exchange contracts. The Fund may write
(sell) covered call options to enhance investment return, and may purchase and
sell options on stock indices for hedging purposes. See "Other Investment
Policies and Risk Factors."
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term capital growth through international investing. International
investing involves economic and political considerations not typically found in
U.S. financial markets. Investments in foreign securities involve special
considerations, due to more limited information, higher brokerage costs and
different accounting standards. They may also entail certain risks, such as
possible imposition of dividend or interest withholding or confiscatory taxes,
possible currency blockages or transfer restrictions, expropriation,
nationalization or other adverse political or economic developments and the
difficulty of enforcing obligations in other countries. Foreign securities may
be less liquid and more volatile than comparable domestic securities, and there
is generally less government regulation of stock exchanges, brokers, listed
companies and banks than in the U.S. Purchases of foreign securities are usually
made in foreign currencies and, as a result, the Fund may incur currency
conversion costs and may be affected favorably or unfavorably by changes in the
value of foreign currencies against the U.S. dollar.
The Fund is designed for long-term investors who can accept international
investment risk. Since the Fund normally will be invested in foreign stocks,
changes in the Fund's share value may be quite different than movements in the
U.S. stock markets. The Fund's share price will reflect the movements of the
different markets in which it is invested and the currencies in which the
investments are denominated. The strength or weakness of the U.S. dollar against
foreign currencies may account for part of the Fund's investment performance.
Investors should focus on the longer term (at least five years or more) and be
comfortable with fluctuation in the value of their principal. Because of the
Fund's international approach and its associated risks, investment in shares of
the Fund should be considered as part of a broadly-diversified portfolio. See
"Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average equity risk, it is designed to actively
reduce the risk of loss to the Fund's portfolio relative to other international
stock funds. It normally does this by diversifying widely among relatively high
dividend-paying stocks issued in developed foreign markets. The extent to which
the portfolio management team is controlling "downside risk" to the Fund's
portfolio is measured by tracking the frequency and amount by which total return
fluctuates downward compared to similar funds.
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What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan with a monthly investment
of at least $100 until your account reaches $2,000. You can open an AARP IRA or
an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Sheridan Reilly joined the Fund Manager in 1995. He has
worked in the Fund Manager's Global Equity Group and has over eleven years of
investment industry experience as an economic, fixed-income and equity analyst.
Portfolio Manager Irene Cheng joined the Fund Manager in 1993. Ms. Cheng has 14
years of global and equity investing experience, and has worked on Scudder's
institutional international equity accounts. Portfolio Manager Marc Joseph
managed international portfolios prior to joining Scudder in 1997 and is a
member of the Fund Manager's Global Equity Group where he focuses on managing
international equity portfolios. Mr. Joseph has over ten years of industry
experience. Deborah A. Chaplin, Portfolio Manager, joined the Fund Manager in
1996 and has over five years of experience as a securities analyst and portfolio
manager.
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AARP MANAGED INVESTMENT PORTFOLIOS
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AARP MANAGED INVESTMENT PORTFOLIOS:
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
================================================================================
The AARP Managed Investment Portfolios are two professionally managed,
diversified portfolios of the AARP Managed Investment Portfolios Trust (the
"Trust"). In pursuit of its investment objective, each Portfolio invests in a
select mix of the AARP Mutual Funds ("underlying AARP Mutual Funds"). Each
portfolio is designed to serve as a complete investment program or as a core
part of a larger portfolio, with a goal to seek competitive returns but with
less risk of loss to the Fund's portfolio than a comparable mix of stock and
bond funds, measured by the amount and frequency by which total return
fluctuates downward. Each AARP Mutual Fund is managed to reduce the risk of loss
to its portfolio compared to similar mutual funds. Each Portfolio also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
Portfolio Objectives:
o The AARP Diversified Income with Growth Portfolio seeks current income
with modest long-term appreciation. This investment objective is pursued
by diversifying among a mix of AARP Bond Mutual Funds, and to a lesser
degree in AARP Stock Mutual Funds. The Fund changed its name from AARP
Diversified Income Portfolio on February 1, 1998.
o The AARP Diversified Growth Portfolio seeks to provide long-term growth of
capital. This investment objective is pursued by diversifying among a mix
of AARP Stock Mutual Funds, and to a lesser degree in AARP Bond Mutual
Funds.
For whom are the Portfolios designed?
The AARP Managed Investment Portfolios are designed for individuals who prefer
to have asset allocation decisions made by professional money managers and who
appreciate the advantages of broad diversification through a single investment.
o The Diversified Income With Growth Portfolio may be appropriate for
conservative investors nearing retirement or investors enjoying
retirement, who are looking for quarterly income with some appreciation
potential. Investors should be prepared to invest for three to five years
or more.
o The Diversified Growth Portfolio may be appropriate for long-term
investors planning for retirement or more aggressive retired investors
with an investment time horizon of at least five years or more.
What do the Portfolios offer to investors?
Both Portfolios offer investors a simple means to allocate their assets to
pursue a certain goal. Each Portfolio can serve as a complete investment
program, or as a core part of a larger portfolio.
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o The Diversified Income With Growth Portfolio offers investors the
opportunity for income and some share price appreciation by investing in a
diversified portfolio consisting primarily of AARP Bond Mutual Funds, and
secondarily, AARP Stock Mutual Funds and AARP Money Market Mutual Funds.
o The Diversified Growth Portfolio offers investors the opportunity for
long-term growth of principal by investing in a diversified portfolio
comprised primarily of AARP Stock Mutual Funds, and secondarily, AARP Bond
Mutual Funds and AARP Money Market Mutual Funds.
o Both portfolios offer shareholders an investment choice that is broadly
diversified.
o Both portfolios are managed by investment professionals at Scudder. H No
additional management fees or expenses are charged for allocation among
the AARP Mutual Funds.
What does each Portfolio invest in?
Each Portfolio may invest in any of the AARP Mutual Funds, except for those
designed to provide tax-free income. Both Portfolios will avoid taking extreme
investment positions in an effort to "time the market." Rather, shifts among
AARP Stock and Bond Mutual Funds are expected to occur only periodically and in
generally small increments.
Under normal market conditions, each of the AARP Managed Investment Portfolios
will invest within the investment ranges described below:
o The Diversified Income With Growth Portfolio will normally invest 60-80%
of total assets in AARP Bond Mutual Funds; and 20-40% of total assets in
AARP Stock Mutual Funds; and 0-20% of total assets in cash or cash
equivalents.
o The Diversified Growth Portfolio will normally invest 60-80% of total
assets in AARP Stock Mutual Funds; 20-40% of total assets in AARP Bond
Mutual Funds; and 0-20% of total assets in cash or cash equivalents.
If, as a result of appreciation or depreciation, the percentage of the
Portfolios' assets invested in the above categories exceeds or is less than the
applicable range, the Fund Manager will consider whether to reallocate the
assets of the Portfolio to comply with the stated ranges.
Each Portfolio will purchase or sell shares of underlying AARP Mutual Funds to:
(a) accommodate purchases and sales of each Portfolio's shares, (b) change the
percentages of each Portfolio's assets invested in each of the underlying AARP
Mutual Funds in response to changing market conditions, and (c) maintain or
modify the allocation of each Portfolio's assets in accordance with the
investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including AARP Money Market Funds, repurchase agreements,
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
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What are the risks?
Each Portfolio's risks are determined by the nature of the securities held by
the underlying AARP Mutual Funds as well as the proportion of investment in each
underlying AARP Mutual Fund which, in turn, reflects the portfolio management
strategies used by the Fund Manager. The following are descriptions of certain
risks related to investments in each Portfolio.
o As the investments in each Portfolio are represented by a group of
underlying AARP Mutual Funds, the performance of a Portfolio is directly
related to the investment performance of these underlying AARP Mutual
Funds. The ability of a Portfolio to meet its investment objective is
directly related to the ability of the underlying AARP Mutual Funds to
meet their objectives as well as the allocation among those underlying
AARP Mutual Funds by the portfolio management team.
o Each Portfolio's share price and yield will fluctuate in response to
various market and economic factors related to both the stock and bond
markets. Certain of the underlying AARP Mutual Funds invest in debt
securities making them subject to credit risk, interest rate risk and
pre-payment risk. Other underlying AARP Mutual Funds invest in equity
securities, which will fluctuate in value with changing stock market
conditions and related factors. Also, each Portfolio can invest in
underlying AARP Mutual Funds, which are, in turn, invested in
international securities and thus are subject to additional risks of these
investments including changes in foreign currency exchange rates and
political risk.
For information about the investment techniques and the risks involved in the
underlying AARP Mutual Funds, please refer to each underlying Fund's description
elsewhere in this Prospectus and "Other Investment Policies and Risk Factors."
How do the Portfolios seek to manage risk?
The Portfolios seek to manage risk through active portfolio management and
diversification. Each Portfolio will invest in at least five underlying AARP
Mutual Funds, all of which are managed to reduce the risk of loss to the Fund's
portfolio compared to similar Funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends on the Diversified Income With Growth Portfolio will be distributed
quarterly in March, June, September and December to investors. Any dividends on
the Diversified Growth Portfolio will be distributed in December. Any net
realized capital gain for the Portfolios typically will be distributed after
September 30. See "Additional Information about Distribution and Taxes" for more
information.
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<PAGE>
Who at Scudder manages my investment?
Lead Portfolio Manager Philip S. Fortuna joined Scudder in 1986 as manager of
institutional equity accounts. He became director of quantitative research in
1987 and served as director of investment operations from 1993 to 1994.
Portfolio Manager Salvatore J. Bruno joined Scudder in 1991 and serves as a
quantitative analyst in the Scudder's Quantitative Services Group. Mr. Bruno has
over six years of investment experience as a quantitative services analyst and
is responsible for the strategic decision making and periodic reallocation of
the Funds. Shahram Tajbakhsh, Portfolio Manager, joined Scudder in 1996 and is
also responsible for the strategic decision making and allocation of the Funds.
Mr. Tajbakhsh has over six years of industry experience as a project leader and
consultant and this includes work in developing analytical investment tools.
Karla D. Grant, Portfolio Manager, joined Scudder in 1997 and has seven years of
industry experience as a tactical asset allocation researcher and consultant.
Ms. Grant is responsible for inputs to the asset allocation process.
Description of the Underlying AARP Mutual Funds
Details on the objectives and policies of the underlying AARP Mutual Funds are
included in this Prospectus. As with any investment, there is no guarantee that
the AARP Managed Investment Portfolios or the underlying AARP Mutual Funds will
successfully meet their investment objectives.
The Portfolios may invest in the following AARP Money Market Mutual Fund which
is designed to provide stability of principal and income:
AARP High Quality Money Fund
The Portfolios may invest in the following AARP Mutual Funds which are designed
to provide current income:
AARP High Quality Short Term Bond Fund
AARP GNMA and U.S. Treasury Fund
AARP Bond Fund for Income
The Portfolios may invest in the following AARP Mutual Funds designed to provide
long-term growth of capital:
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund
AARP Global Growth Fund
AARP Capital Growth Fund
AARP International Growth and Income Fund
AARP Small Company Stock Fund
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OTHER INVESTMENT POLICIES AND RISK FACTORS
================================================================================
Below are some detailed descriptions of several types of securities and
investment techniques referred to in this Prospectus.
Maintaining $1.00 constant share price in money funds
The AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund
attempt to maintain a constant net asset value per share. To do so, they operate
in accordance with a rule of the Securities and Exchange Commission (SEC) that
requires all assets to be cash, cash items, and high-quality U.S.
dollar-denominated investments having a remaining maturity of generally not more
than 397 calendar days from the date of purchase. The AARP High Quality Money
Fund, however, may invest in U.S. Government securities having maturities of up
to 762 calendar days. The SEC also requires that the average dollar-weighted
maturity of these Funds not exceed 90 days.
When-issued securities
All AARP Mutual Funds, except the AARP Growth and Income Fund, the AARP U.S.
Stock Index Fund, the AARP Global Growth Fund, the AARP Capital Growth Fund, the
AARP International Growth and Income Fund, and the AARP Small Company Stock
Fund, may purchase securities on a when-issued or forward delivery basis. That
means payment and delivery of the security will be at a later date. The price
and yield are generally fixed on the date of commitment to purchase. The Fund
does not earn interest before delivery of the security. At the time of
settlement, the market value of the security may be more or less than the
purchase price.
Repurchase agreements
This is an agreement under which a Fund may buy one or more U.S. Government
obligations which the seller simultaneously agrees to repurchase at a specified
time and price. The Fund can earn income for periods as short as overnight. Such
an agreement may enhance liquidity since it is normally a short-term commitment.
If the seller under a repurchase agreement becomes insolvent, the Fund's right
to sell the securities may be restricted. Also, the value of such securities may
decline before the Fund can sell them. The Fund might also incur transaction
costs by selling the securities. Each of the AARP Mutual Funds may enter into
repurchase agreements only with Federal Reserve member banks or broker-dealers
recognized as reporting government securities dealers. Each Fund may also enter
into reverse repurchase agreements in which the Fund agrees to repurchase
securities at an agreed time and price.
Mortgage- and other asset-backed securities
The AARP GNMA and U.S. Treasury Fund, the AARP High Quality Short Term Bond
Fund, the AARP Bond Fund for Income, and the AARP Balanced Stock and Bond Fund
may invest in mortgage-backed securities, which are securities representing
interests in pools of mortgage loans. These securities provide shareholders with
payments consisting of both interest and principal as the mortgages in the
underlying mortgage pools are paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association
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<PAGE>
(GNMA) is backed by GNMA and the full faith and credit of the U.S. Government.
These guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of a Fund's shares. When interest
rates rise, mortgage prepayment rates decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares. Also, GNMA and other
mortgage-backed securities may be purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs. In addition, the AARP High Quality Short Term Bond Fund, the
AARP Balanced Stock and Bond Fund and the AARP Bond Fund for Income may invest
in mortgage-backed securities issued by other issuers, such as the Federal
National Mortgage Association (FNMA), which are not guaranteed by the U.S.
Government. Moreover, the Funds may invest in debt securities which are secured
with collateral consisting of mortgage-backed securities and in other types of
mortgage-related securities.
The AARP High Quality Short Term Bond Fund, the AARP Bond Fund for Income, and
the AARP Balanced Stock and Bond Fund may also invest in securities representing
interests in pools of certain other consumer loans, such as automobile loans or
credit card receivables. In some cases, principal and interest payments are
partially guaranteed by a letter of credit from a financial institution.
Dollar roll transactions
Each of the Funds in the AARP Income Trust, namely AARP GNMA and U.S. Treasury
Fund, AARP High Quality Short Term Bond Fund, and AARP Bond Fund for Income, may
enter into dollar roll transactions with selected banks and broker/dealers.
Dollar roll transactions are treated as reverse repurchase agreements for
purposes of the Funds' borrowing restrictions and consist of the sale by the
Funds of mortgage-backed securities, together with a commitment to purchase
similar, but not identical, securities at a future date at the same price. In
addition, the Funds are paid a fee as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed after cash settlement and
initially involve only a firm commitment agreement by the Funds to buy a
security.
If the broker/dealer to whom the Fund sells the securities underlying a dollar
roll transaction becomes insolvent, the Fund's right to purchase or repurchase
the securities may be restricted; the value of the securities may change
adversely over the term of the dollar roll; the securities that the Fund is
required to repurchase may be worth less than the securities that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
Zero coupon securities
The AARP Balanced Stock and Bond Fund, AARP Bond Fund for Income and the AARP
Global Growth Fund may invest in zero coupon securities which pay no cash income
and are issued at substantial discounts from their value at maturity. Zero
coupon securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities that make current
cash distributions of interest.
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<PAGE>
High yield/high risk securities
AARP Bond Fund for Income may invest a limited amount of assets in debt
securities which are rated below investment-grade (hereinafter referred to as
"lower rated securities") or which are unrated, but deemed equivalent to those
rated below investment-grade by the Fund Manager. The lower the ratings of such
debt securities, the greater their risks. These debt instruments generally offer
a higher current yield than that available from higher grade issues, but
typically involve greater risk. The yields on high yield/high risk bonds will
fluctuate over time. In general, prices of all bonds rise when interest rates
fall and fall when interest rates rise. While less sensitive to changing
interest rates than investment-grade debt, lower rated securities are especially
subject to adverse changes in general economic conditions and to changes in the
financial condition of their issuers. During periods of economic downturn or
rising interest rates, issuers of these instruments may experience financial
stress that could adversely affect their ability to make payments of principal
and interest and increase the possibility of default.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of these securities
especially in a market characterized by only a small amount of trading and with
relatively few participants. These factors can also limit the Fund's ability to
obtain accurate market quotations for these securities, making it more difficult
to determine the Funds' net asset value.
In cases where market quotations are not available, lower rated securities are
valued using guidelines established by the Funds' Board of Trustees. Perceived
credit quality in this market can change suddenly and unexpectedly, and may not
fully reflect the actual risk posed by a particular lower rated or unrated
security.
Foreign securities
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Short Term
Bond Fund and the AARP Bond Fund for Income may invest in foreign securities.
Investments in foreign securities may benefit a Fund by providing access to
different markets and opportunities. It may also help to reduce risk by
increasing diversification. However, foreign securities involve special
considerations. Brokerage costs are higher. Information about foreign securities
is more limited. Foreign companies or securities often have different and less
stringent government regulations, different accounting standards, slower
settlement of transactions, and more limited and volatile trading markets.
Investments in foreign securities may also involve other risks. These include
possible imposition of withholding, confiscatory and other taxes; possible
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; and the difficulty of
enforcing obligations in other countries. A Fund may incur currency conversion
costs of purchases made in foreign currencies. There may also be favorable or
unfavorable consequences from the changes in the value of foreign currencies
against the U.S. dollar.
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<PAGE>
Illiquid securities
The Fund may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Fund may not be able to dispose of them at an advantageous time or
price.
Real estate investment trusts
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Short Term
Bond Fund and the AARP Bond Fund for Income may purchase real estate investment
trusts (REITs) and corporate debt issued REITs, which pool investors' funds for
investment primarily in income-producing real estate or real estate-related
loans or interests. REITs can generally be classified as equity REITs, mortgage
REITs or hybrid REITs. Equity REITs, which invest the majority of their assets
directly in real property, derive their income primarily from rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs, which invest the majority of their assets in real
estate mortgages, derive their income primarily from interest payments on real
estate mortgages in which they are invested. Hybrid REITs combine the
characteristics of both equity REITs and mortgage REITs.
Derivatives
The following descriptions of Forward Foreign Currency Exchange Contracts,
Options Transactions, Futures Contracts and Related Options discuss the types of
derivatives in which certain of the AARP Mutual Funds may invest.
Forward foreign currency exchange contracts
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Short Term
Bond Fund and the AARP Bond Fund for Income may enter into forward foreign
currency exchange contracts. These contracts, which involve costs, permit the
Funds to purchase or sell a specific amount of a particular currency at a
specified price on a specified future date. They may be used by a Fund only to
hedge against possible variations in exchange rates of currencies in countries
in which it may invest.
A Fund will realize a benefit only to the extent that the relevant currencies
move as anticipated. If the currencies do not move as anticipated, the use of
these contracts may result in losses greater than if they had not been used.
Options transactions
In an attempt to enhance investment returns, Funds in the AARP Growth Trust and
the AARP Income Trust may each write covered call options. These are agreements
to sell a particular security in the Fund's portfolio at a specified price on or
before the expiration date of the option. Covered call options may be written on
portfolio securities worth up to 25% of the Fund's net assets.
There are risks associated with writing covered options. These risks include the
possible inability to make closing transactions at favorable prices or because
an exercise notice has been received. The Funds also risk giving up appreciation
on the underlying security in excess of the exercise price.
Each of the Funds in the AARP Growth Trust may purchase and sell exchange-traded
options on stock indices. In addition, these Funds may engage in
over-the-counter options transactions with broker-dealers who make
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<PAGE>
markets in these options. Over-the-counter options may be more difficult to
terminate than exchange-traded options. They are frequently illiquid, and
involve counterparty credit risk. The AARP International Growth and Income Fund
may purchase and sell options on currencies which can result in the Fund
incurring losses as a result of a number of factor's including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The Fund Manager will engage in option
transactions to hedge against unfavorable price movements which can adversely
affect the value of the Fund's securities or securities the Fund intends to buy.
These transactions involve risk, including the risk that market prices may move
in unanticipated directions or will not correlate well with a Fund's portfolio,
causing a Fund to lose the value of the option premium and to fail to realize
any benefit from the transaction. Further, a closing transaction may not be
available when a Fund wishes to close out an option.
Futures contracts and related options
To a limited extent, the Funds in the AARP Income Trust, the AARP Insured Tax
Free General Bond Fund, and the Funds in the AARP Growth Trust may enter into
financial futures contracts including futures contracts on securities indices,
may purchase and write related put and call options, and may engage in related
closing transactions. These techniques may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to manage the effective maturity or duration of
fixed-income securities in a Fund's portfolio, or to establish a position in the
derivatives market as a temporary substitute for purchasing or selling
particular securities. These techniques will not be used to create leveraged
exposure in the Funds.
The margin deposits for futures contracts and premiums paid for related options
may not be more than 5% of a Fund's total assets. These transactions require a
Fund to segregate assets (such as liquid securities and cash) to cover contracts
that would require it to purchase securities. These transactions also result in
brokerage costs.
These techniques involve some risk. A Fund may be precluded from realizing a
benefit from favorable price movements in the related portfolio position of the
Fund and could lose the expected benefit of the transactions if securities
markets, interest rates or currency changes move in an unanticipated manner. To
the extent that the Fund Manager's view of market movements is incorrect, the
use of such instruments may result in losses greater than if they had not been
used. Further, while a Fund buys a futures contract only if there appears to be
a liquid secondary market for such contracts, there can be no assurance that a
Fund will be able to close out any particular futures contract. In addition, if
the AARP Insured Tax Free General Bond Fund purchases futures contracts on
taxable securities or indices of such securities, their value may not fluctuate
in proportion to the value of the Fund's securities. This would limit that
Fund's ability to hedge effectively against interest rate risk.
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<PAGE>
Segregated accounts
Each Fund may be required to segregate assets (such as cash and other liquid
securities) or otherwise provide coverage consistent with applicable regulatory
policies. This would be in respect of the Fund's permissible obligations under
the call and put options it writes, the forward foreign currency exchange
contracts it enters into and the futures contracts it enters into.
Convertible securities
Each Fund in the AARP Growth Trust, AARP High Quality Short Term Bond Fund, and
AARP Bond Fund for Income may invest in 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.
Demand obligations
Each of the AARP Mutual Funds may purchase demand obligations. Demand
obligations permit the holder to demand payment of a specified amount prior to
maturity. The holder's right to payment depends upon the issuer's ability to pay
principal and interest on demand. A Fund will purchase demand notes only to
enhance liquidity. The Fund Manager will continuously monitor the
creditworthiness of issuers of such obligations.
Stand-by commitments
The AARP Tax Free Funds may enter into stand-by commitments (also known as puts)
to facilitate liquidity. Stand-by commitments permit a Fund to resell municipal
securities to the original seller at a specified price and generally involve no
cost. Costs, in any event, are limited to 0.5% of a Fund's total assets. To
minimize the risk that the seller may not be able to repurchase the security,
the Fund Manager will monitor the creditworthiness of the seller.
"Put" bonds
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. This
allows the Funds to tender (or "put") bonds to the institution at specified
intervals and receive the face value of them. For the AARP High Quality Tax Free
Money Fund, an interval can not exceed 397 calendar days. These third-party puts
are available in several different forms. They may be custodial receipts or
trust certificates, and may be combined with other features such as interest
rate swaps.
Tax-exempt participation interests
The AARP Tax Free Funds may purchase tax-exempt participation interests from a
bank representing a fully-insured portion of the bank's holdings of municipal
securities. The Fund will obtain an irrevocable letter of credit or guarantee
from the bank and will have, under certain circumstances, the right to resell
the participation to the bank on seven days' notice. To the extent any
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<PAGE>
participation interest is illiquid, it is subject to the Fund's limit on
illiquid securities.
Tax-exempt custodial receipts
The AARP Tax Free Funds may purchase tax-exempt custodial receipts (the
"Receipts") which evidence ownership in an underlying bond that is deposited
with a custodian for safekeeping. Holders of the Receipts receive all payments
of principal and interest when paid on the bonds. Receipts can be purchased in
an offering or from a financial counterparty (typically an investment banker).
To the extent that any Receipt is illiquid, it is subject to the Fund's limit on
illiquid securities.
Municipal lease obligations
The AARP Tax Free Funds may also invest in municipal lease obligations generally
as a participation interest in a municipal obligation from a bank or other
financial intermediary. Municipal lease obligations are issued by state and
local governments to acquire land, equipment or facilities. Unlike general
obligation or revenue bonds, these contracts are not secured by the issuer's
credit, and if the issuing state or local government does not appropriate
payments, the lease may terminate, leaving the funds with property that may
prove costly to dispose of. In deciding which contracts to invest in, the Fund
Manager evaluates the likelihood of the governmental issuer discontinuing
appropriation for the leased property.
Portfolio turnover
Each of the AARP Mutual Funds may buy and sell securities to take advantage of
investment opportunities. The Fund Manager will do so to improve overall
investment return consistent with that Fund's objectives. These transactions
involve transaction costs in the form of spreads or brokerage commissions. A
higher rate involves greater transaction costs to the Fund and may result in the
realization of net capital gains, which would be taxable to shareholders when
distributed.
INVESTMENT RESTRICTIONS
================================================================================
To help reduce investment risk, each of the AARP Mutual Funds has adopted
certain investment policies. Only the shareholders can approve changes to the
fundamental policies. The Board of Trustees can approve changes to
nonfundamental policies.
o As a fundamental policy, a Fund may not make loans. (A purchase of a debt
security is not a loan for this purpose.) However, the Fund may lend its
portfolio securities and enter into repurchase agreements. As a
nonfundamental policy, a Fund may not lend more than 5% of its total
assets.
o As a fundamental policy, a Fund may not borrow money, except as permitted
under federal law. As a nonfundamental policy, a Fund may not
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borrow money in an amount greater than 5% except for temporary or
emergency purposes, but may engage up to 5% of its total assets in reverse
repurchase agreements or dollar rolls.
A complete description of these and other policies and restrictions is contained
in the Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES
================================================================================
Are taxes withheld?
Generally, taxes are not withheld on purchases, redemptions, or distributions.
However, federal tax law requires the AARP Mutual Funds to withhold 31% of
taxable dividends, capital gain distributions and redemption or exchange
proceeds for accounts without a correct, certified Social Security or tax
identification number, or other certified information. To avoid this
withholding, make sure you complete and sign the Signature and Investor
Information Section of your Enrollment Form. AARP IRA, AARP SEP-IRA and AARP
Keogh Plan accounts are exempt from withholding regulations.
The AARP Mutual Funds reserve the right to reject Enrollment Forms or close
accounts without a correct, certified Social Security or tax identification
number. In such cases, Enrollment Forms received without this information will
be returned to the investor with a check for the amount invested.
What else should I know about distributions and taxes?
You can receive your dividend and capital gain distributions in one of three
ways:
1. You can have a check sent to your address or to your bank;
2. You can reinvest them in additional shares of an AARP Mutual Fund; or
3. You can invest them in shares of another AARP Mutual Fund.
If your investment is in the form of an AARP IRA, AARP SEP-IRA or AARP Keogh
Plan account, all distributions are automatically reinvested.
If you reinvest your dividends and capital gains, you will be purchasing shares
at the current share price.
All taxable dividends from net investment income are taxable to you as ordinary
income. This is so whether you receive dividends as cash or additional shares.
Capital gains distributions are also currently taxable, whether received in cash
or reinvested.
Distributions of short-term capital gains by all the AARP Mutual Funds are
taxable as ordinary income.
Distributions of long-term capital gains are taxable for federal income tax
purposes at a maximum 20% or 28% capital gains rate (depending on the Fund's
holding period for the assets giving rise to the gain), regardless of the length
of time you have owned shares. Any capital gain distributed by the AARP
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Tax Free Funds are generally taxable in the same manner as distributions by
other Funds.
The AARP Tax Free Funds are managed to pay you dividends free from federal
income taxes, including the Alternative Minimum Tax (AMT). However, these
dividends may be subject to state and local income taxes. Also, these dividends
are taken into account in determining whether your income is large enough to
subject a portion of your Social Security benefits and certain Railroad
Retirement benefits, if any, to federal income taxes.
If you are a shareholder in the AARP Global Growth Fund or the AARP
International Growth and Income Fund, you may be able to claim a credit or
deduction on your income tax return for your pro rata portion of qualified taxes
paid by the Fund to foreign countries.
Each AARP Mutual Fund annually sends you detailed tax information about the
amount and type of its distributions.
A redemption involves a sale of shares and may result in a capital gain or loss
for federal income tax purposes. Exchanges are treated as redemptions for
federal income tax purposes. Exchanges occur when you sell shares in one AARP
Mutual Fund and purchase shares in another AARP Mutual Fund.
The AARP Mutual Funds reserve the right to make extra distributions for tax
purposes.
FUND ORGANIZATION
================================================================================
The AARP investment program trusts
The 15 mutual fund portfolios described in this Prospectus are organized as five
Massachusetts business trusts--AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust and AARP Managed Investment
Portfolios Trust. Each trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940. The AARP Cash
Investment Funds was organized in January 1983, and the AARP Income Trust, the
AARP Tax Free Income Trust and the AARP Growth Trust were organized in June
1984. The AARP Tax Free Income Trust (formerly the AARP Insured Tax Free Income
Trust) was renamed effective August 1, 1991. The AARP Managed Investment
Portfolios Trust was organized in October 1996.
General management
The Trustees have overall responsibility for the management of the Trusts under
Massachusetts law. Under their direction, the Fund Manager--Scudder Kemper
Investments, Inc.--provides general investment management of the AARP Mutual
Funds. The Trustees supervise each Trust's activities. The shareholders elect
the Trustees and may remove them. Shareholders have one vote per share held on
matters on which they are entitled to vote.
The Trusts are not required to hold annual shareholder meetings and have no
current intention to do so. There may be special meetings for purposes such as
electing or removing Trustees, changing fundamental policies or approving an
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investment advisory contract. The Fund Manager will help shareholders to
communicate with other shareholders in connection with removing a Trustee as if
Section 16(c) of the Investment Company Act of 1940 applied.
Since the Trusts use a combined Prospectus, it is possible that one Trust or
AARP Mutual Fund might become liable for a misstatement in this Prospectus
regarding another Trust or AARP Mutual Fund. The Trustees of each Trust
considered this risk when approving the use of a combined Prospectus.
The right of the Trusts and AARP Mutual Funds to use the AARP name will end upon
termination of the member services agreement with the Fund Manager unless AARP
otherwise agrees to let the AARP Mutual Funds continue to use the AARP name.
Management fees
Each AARP Mutual Fund, except for the AARP Managed Investment Portfolios, pays
the Fund Manager a fee for management and administrative services. 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 Mutual Funds. Each AARP Mutual Fund, except for the AARP Managed
Investment Portfolios, 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
Mutual Funds. The table below shows the annual Base Fee Rate at specified levels
of Program assets:
Annual Base Fee Rate Program Assets
---------------------------------------------------
0.350% First $2 billion
0.330% Next $2 billion
0.300% Next $2 billion
0.280% Next $2 billion
0.260% Next $3 billion
0.250% Next $3 billion
0.240% Thereafter
In addition to the Base Fee Rate, each AARP Mutual Fund, except for the AARP
U.S. Stock Index Fund and the AARP Managed Investment Portfolios, pays a flat
Individual Fund Fee based on the net assets of that Fund. This fee rate is not
linked to the total assets of the Program. The Individual Fee Rate recognizes
the different characteristics of each AARP Mutual Fund, the varying levels of
complexity of investment research and securities trading required to manage each
Fund, as well as the relative value that can be, and has been, added by the Fund
Manager. The table below shows the Individual Fund Fee Rate for each of the AARP
Mutual Funds:
Fund Individual Fee Rate
- --------------------------------------------------------------------------------
AARP High Quality Money Fund 0.10%
AARP High Quality Tax Free Money Fund 0.10%
AARP GNMA and U.S. Treasury Fund 0.12%
AARP High Quality Short Term Bond Fund 0.19%
AARP Bond Fund for Income 0.28%
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AARP Insured Tax Free General Bond Fund 0.19%
AARP Balanced Stock and Bond Fund 0.19%
AARP Growth and Income Fund 0.19%
AARP U.S. Stock Index Fund 0.00%
AARP Global Growth Fund 0.55%
AARP Capital Growth Fund 0.32%
AARP International Growth and Income Fund 0.60%
AARP Small Company Stock Fund 0.55%
Under this fee structure, the combined Base Fee and the Individual Fund Fee,
called the "Effective Management Fee Rate," would be reduced if total Program
assets increase to certain levels, regardless of whether an individual AARP
Mutual Fund's assets increase or decrease. The converse is also true--if assets
decrease to certain levels, the Effective Management Fee Rate increases,
regardless of any increase or decrease in assets of an individual AARP Fund. For
the fiscal year ended September 30, 1997, fees paid to the Fund Manager totaled
0.39 of 1% of the average daily net assets of the AARP High Quality Money Fund,
0.39 of 1% of the AARP High Quality Tax Free Money Fund, 0.41 of 1% of the AARP
GNMA and U.S. Treasury Fund, 0.61 of 1% of the AARP Capital Growth Fund, 0.48 of
1% of the AARP High Quality Short Term Bond Fund, 0.48 of 1% of the AARP Insured
Tax Free General Bond Fund and AARP Growth and Income Fund, 0.48 of 1% of the
AARP Balanced Stock and Bond Fund, 0.84 of 1% of the AARP Global Growth Fund.
The Fund Manager pays a portion of the management fee to AARP Financial Services
Corporation (AFSC). AFSC provides the Fund Manager with advice and other
services relating to AARP Fund investment by AARP members.
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 0.07 of 1%
for the first $6 billion, 0.06 of 1% for the next $10 billion and 0.05 of 1%
thereafter.
The fee paid to the Subadviser is calculated on a quarterly basis and depends on
the level of total assets in the AARP U.S. Stock Index Fund. The fee rate
decreases as the level of total assets for the Fund increases. The fee rate for
each level of assets is: 0.07% of the first $100 million of average daily net
assets, 0.03% of the next $100 million, and 0.01% of such assets in excess of
$200 million, with a minimum annual fee of $75,000.
Under the Investment Management Agreements with the Fund Manager, the Funds are
responsible for all of their expenses, including fees and expenses incurred in
connection with membership in investment company organizations; brokers'
commissions; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the expenses of and the fees
for registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and executive employees of the Trusts who are not affiliated
with the Fund Manager; the cost of printing and distributing reports and notices
to shareholders; and the fees and disbursements of custodians.
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Special servicing agreement for the AARP Managed Investment Portfolios
All the expenses of the AARP Managed Investment Portfolios will be paid for in
accordance with a Special Servicing Agreement (Agreement) entered into by the
Fund Manager, the underlying AARP Mutual Funds, Scudder Service Corporation,
Scudder Fund Accounting Corporation, Scudder Investor Services, Inc. and each
Portfolio. Under each Agreement, the Fund Manager will arrange for all services
pertaining to each operation of each Portfolio including the services of Scudder
Service Corporation and Scudder Fund Accounting Corporation as the Shareholder
Servicing Agent and the Accounting Agent, respectively, for the Portfolio. If
the Trustees determine that the aggregate expenses of a Portfolio are less than
the estimated savings to the underlying AARP Mutual Fund from the operation of
the Portfolio, the underlying AARP Mutual Fund will bear those expenses in
proportion to the average daily value of its shares owned by the Portfolio.
Consequently, no underlying AARP Fund will be expected to carry expenses that
are in excess of the estimate of savings to it. The estimated savings are
expected to result from the reduction of shareholder servicing costs due to the
elimination of separate shareholder accounts which either currently are or have
potential to be invested in the underlying AARP Mutual Funds. The estimated
savings produced by the operation of a Portfolio will most likely suffice to
offset most, if not all, of the expenses incurred by the Portfolio.
In the event that the aggregate financial benefits to the underlying AARP Mutual
Funds do not exceed the costs of a Portfolio, the Fund Manager will pay, on
behalf of the Portfolio, that portion of costs determined to be greater than the
benefits.
All expenses of each Portfolio, excluding certain non-recurring and
extraordinary expenses, will be paid for in accordance with the Agreement,
including fees and expenses incurred in connection with membership in investment
company organizations; fees and expenses of the Portfolio's accounting agent;
brokers' commissions; legal, auditing and accounting expenses; taxes and
governmental fees; the fees and expenses of the transfer agent; the expenses of
and the fees for registering or qualifying securities for sale; the fees and
expenses of Trustees, officers and employees of the Portfolio who are not
affiliated with the Fund Manager; the cost of printing and distributing reports
and notices to shareholders; and the fees and disbursements of custodians.
UNDERSTANDING FUND PERFORMANCE
================================================================================
You are likely to see performance figures for AARP Mutual Funds in
advertisements, sales literature or shareholder reports. The important factors
you want to look at are Yield, Total Return and Cumulative Total Return. These
measurements are based on historical earnings, are not an indication of future
performance, and will vary based on changes in market conditions, interest rates
and the level of the individual fund's expenses. You can also use these
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measurements to compare the performance of similar types of mutual funds using
standard industry formulas.
What is yield?
Yield refers to the net investment income generated over a specific period of
time. Since yield is always calculated using a standard industry formula, it is
a useful way for you to compare the income produced by different mutual funds.
For the AARP High Quality Money Fund, the AARP Income Funds and AARP Tax Free
Funds, yield is a measure of income.
For non-money market funds, the "SEC yield" is an annualized expression of net
investment income generated by the investments in the fund over a specified
30-day period. This income is then annualized and then expressed as a
percentage. This yield is calculated according to methods required by the SEC,
and may not equate to the level of income paid to shareholders.
For money market funds, yield refers to the net investment income generated by
the fund over a specified seven-day period. This income is then annualized and
expressed as a percentage. For the money market funds, effective yield is
expressed similarly but, when annualized, the income earned by an investment in
the fund is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
For GNMA securities, net investment income includes realized gains or losses
based on historic cost for principal repayments received. For other securities,
net investment income includes the amortization of market premium or market
discount.
What is a dividend?
A dividend represents a distribution of a portion of net income and short-term
capital gains from a mutual fund, and is distributed on a regular basis as
declared by the Trustees of a mutual fund. For example, many bond funds
distribute dividends on a monthly basis, while stock funds tend to distribute
any net income and short-term capital gains (dividends) at the end of the year -
at the same time the fund distributes any long-term capital gains. Other funds
may distribute dividends on a semi-annual or quarterly basis, depending on the
objectives of the specific fund.
What is a capital gain?
A capital gain, as it applies to a mutual fund shareholder, is a payment
representing a portion of the net realized gains when securities in the fund's
portfolio are sold. A "net realized gain" is determined by subtracting any
losses from the profits made on the sale of securities.
The term "capital gain" is also used to describe the gain or loss calculated
when a shareholder sells mutual fund shares. This gain or loss is the difference
between the purchase price of a mutual fund's shares and the price at which the
shares are sold. When the difference is positive, meaning that the shares have
gained value, the investor has realized a capital gain.
What is total return?
Total return measures dividends, capital gains distributions and changes up and
down in the share price of a particular fund. Total return assumes that shares
were bought on the first day of the period shown, and redeemed (sold) on the
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last day. It also assumes that all earnings were reinvested back into the fund.
It follows that if you bought or redeemed shares on different days or took some
of your earnings as cash, your actual return would be different from the figures
that are shown.
What is cumulative total return?
Cumulative total return of a mutual fund represents the cumulative change in
value of an investment in a fund for various periods. It assumes that all
dividends and capital gain distributions during the period were reinvested in
shares of the fund.
What is tax-equivalent yield?
To determine if tax-free investing is right for you, a good indicator is to
convert a yield from a tax-exempt mutual fund to its equivalent taxable yield.
The tax-equivalent yields of the AARP Tax Free Funds let you determine the yield
you would have to receive from a fully taxable investment to produce an aftertax
yield equivalent to that of a tax-free fund. The calculation is as follows:
Tax-Free Yield
-------------------- = Tax-Equivalent Yield
100% - your tax rate
Example: If a tax-free mutual fund has a 30-day average annualized yield of
5.30% and you are in the 31% tax bracket, the calculation would be:
5.30%
---------------- = 7.68%
100%-31%
You would need to earn 7.68% with a taxable investment to equal the 5.30% yield
of a tax-free fund. The tax-equivalent yield will vary depending upon your
income tax bracket.
UNDERSTANDING SHARE PRICE
================================================================================
How is a fund's share price determined?
A share is a unit of ownership in a mutual fund. The share price is based on a
fund's net assets. It is calculated by dividing the current market value
(amortized cost in the case of the AARP High Quality Tax Free Money Fund) of
total fund assets, less all liabilities, by the total number of shares
outstanding. Scudder Fund Accounting Corporation, a subsidiary of the Fund
Manager, determines net asset value per share of each Fund as of the close of
regular trading on the New York Stock Exchange (Exchange), normally 4:00 p.m.
eastern time on each day the Exchange is open for trading. For AARP High Quality
Money Fund and AARP High Quality Tax Free Money Fund, Scudder Fund Accounting
Corporation also determines net asset value per share as of noon eastern time on
each day the Exchange is open for trading. The Trusts reserve the right to
suspend the sale of Fund shares after appropriate notice to shareholders if the
Trustees determine that it is in the best interest of shareholders.
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OPENING AN AARP MUTUAL FUND ACCOUNT
================================================================================
The minimum initial investment for the AARP GNMA and U.S. Treasury Fund,
Balanced Stock and Bond Fund, and Growth and Income Fund is $500. All other AARP
Mutual Funds have a minimum initial investment of $2,000. (The minimum initial
investment for a retirement account is just $250.)
1. Before you invest or send money, please read the Prospectus carefully.
2. Detach and complete the enclosed Enrollment Form.
3. Return your completed Enrollment Form along with a check in the postage-paid
envelope provided.
4. To open an AARP IRA or Keogh account, please call 1-800-253-2277 for a
special information kit containing the appropriate Enrollment Form.
5. If you have questions or need assistance, call an AARP Mutual Fund
Representative at 1-800-253-2277. (TDD Service: 1-800-634-9454)
What will happen next?
Your Enrollment Form and check will be processed and an account number will be
assigned to you. You will also receive a confirmation that your Enrollment Form
and check have been received--along with instructions on how to add to your AARP
Mutual Fund investment.
WIRE TRANSFERS
================================================================================
To open an account, mail your completed Enrollment Form and then call an AARP
Mutual Fund Representative to obtain your account number. (Please note, AARP IRA
and AARP Keogh Plan accounts cannot be opened by wire.)
To add to your account, simply contact your bank with the following information:
o the name(s) on your account;
o your AARP Fund account number;
o the name of the AARP Fund(s) you want to invest in;
o the following name and address: State Street Bank and Trust Company,
Boston, MA 02101;
o the routing numbers ABA Number 011000028 and AC-99035420.
A $5.00 fee will be charged for each wire to your bank.
ADDING TO YOUR INVESTMENT
================================================================================
There are five ways you can make additions to your existing AARP Mutual Fund
investment:
o Call toll-free--1-800-631-4636--24 hours a day, seven days a week to
exchange from an existing fund
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o Mail in your instructions--Send your check with personalized investment
slip, or a short instructional note that includes your account number and
the name of your AARP Fund(s). AARP Investment Program from Scudder, P.O.
Box 2540, Boston, MA 02208-2540.
o Wire your purchase--(Please see the "Wire Transfers" instructions above.)
o Exchanging from one AARP Fund to another--(Please see "Exchanges and
Redemptions" instructions below.)
o Invest automatically--Please see "Systematic Plans" for complete
information.
EXCHANGES AND REDEMPTIONS
You may exchange all or part of your shares in one AARP Mutual Fund for shares
in another--by mail, by fax, or by phone. You can also redeem (sell) fund shares
the same way. (AARP IRA redemptions can be done by phone; Keogh shares can only
be redeemed in writing.)
o By mail--Send your instructions to P.O. Box 2540, Boston, MA, 02208-2540
o By fax--Send your instructions to: 1-800-821-6234
o By phone--Call 1-800-631-4636--24 hours a day, seven days a week
o Sell automatically--(Please see "Investor Services -- Systematic Plans"
for complete information.)
SIGNATURE GUARANTEES
================================================================================
A signature guarantee is simply a certification of your signature, which is
required for your protection and to guard against fraudulent redemptions. It
guarantees that you, and you alone, are authorized to make certain requests
regarding your AARP Mutual Fund investment. A signature guarantee is required
for redemptions of more than $100,000 to the address of record.
Or when redemption proceeds are to be paid to someone other than yourself, or
when they are to be sent to an address other than yours, or if your account
address has changed during the last 15 days. If bank information is provided on
the Enrollment Form, any amount can be sent to the bank without a signature
guarantee.
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STATEMENTS AND REPORTS
================================================================================
You will receive a prompt confirmation statement for your transaction. You will
also receive a consolidated monthly statement that details your current account
status and notes any and all transactions. (AARP IRA and Keogh customers receive
consolidated statements on a quarterly basis.) You will also receive a mid-year
report and an annual report.
To reduce the volume of mail, we will only send one copy of most reports to a
household (same surname, same address). Please contact us if you wish to receive
additional reports.
OTHER MAILINGS
================================================================================
Each year you will receive a current Prospectus.
INVESTOR SERVICES
================================================================================
There are three important toll-free phone numbers to remember:
1-800-631-4636--the number to call if
o you want to make an exchange between AARP Mutual Funds
o you want to open a new AARP Mutual Fund by exchange from an existing
fund
o you want to redeem money to your registered address
o you want to get current performance information
o you want to get current account balance information
o you want to confirm your last transaction.
1-800-253-2277--the number to call if
o you want to add to an AARP Mutual Fund by transfer from your bank
checking or NOW account.
o you want to redeem and send proceeds to your checking or NOW
account.
1-800-821-6234--the number to call if
o you want to exchange or redeem by fax.
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Free Checkwriting
Free checkwriting privileges are available to shareholders in the AARP High
Quality Money and High Quality Tax Free Money Funds. There is no charge to
shareholders for this service, but the AARP Mutual Funds reserve the right to
impose a charge in the future. If shares were purchased by your personal check,
you may only write checks against your purchase 7 business days from the day
that the purchase took place. Keep in mind that you cannot close your account by
writing a check. This service may be suspended or terminated at any time upon
notice to shareholders.
Direct Distributions
You may elect to have dividend and capital gains distributions automatically
deposited into your bank checking or NOW account. For information on this
service, please call 1-800-253-2277.
Systematic Plans
o Automatic Investment Plan will make regular investments into your
AARP Mutual Fund through scheduled, automatic deductions from your
bank checking account. This service 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.
o Payroll Deduction or Direct Deposit allows you to have all or a
portion of your Social Security, U.S. Government or any regular
income check (pension, dividend, interest or payroll) deposited
automatically into your AARP Mutual Fund account.
o Automatic Withdrawal Plan will automatically send a monthly
redemption of $50 or more directly to you, provided that you have at
least $10,000 or more in an AARP Mutual Fund.
o Direct Payment of Fixed Bills: With $10,000 or more in an AARP
Mutual Fund, you can arrange for us to automatically pay regular
bills of a fixed amount. Pay your rent, mortgage or other payments
of $50 or more.
o Systematic Retirement Withdrawal Plan lets you receive periodic
distributions from your AARP IRA or Keogh plan account.
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SOME COMMONLY ASKED QUESTIONS
================================================================================
What if my investment falls below the minimum balance?
If you do not increase your account balance within 60 days of notification, the
Fund reserves the right to redeem and return the proceeds to you. However, if
your account falls below the minimum balance due to market activity, your
account will not be closed.
When purchasing shares, what is the normal check processing time?
Checks received in the mail (and wire transfers) are normally processed on the
same business day as they are received.
How soon will I start earning income on my purchase?
For AARP Mutual Funds paying daily dividends, income begins to accrue on the
business day following the actual execution of the order. For AARP Money Funds,
purchases made by wire and received before noon on any business day are executed
at noon and begin earning income the same day.
What about third-party transactions?
Purchases and redemptions made through a member of the National Association of
Securities Dealers, Inc. at the investor's request may incur a fee for services
rendered.
Can I add another AARP Mutual Fund to my existing account?
Yes, you may open another AARP Mutual Fund at any time. Your new fund will have
the same account number and registration as your existing fund(s).
When are redemptions processed?
Redemption requests received in good order before the regular close of trading
on the Exchange (normally 4:00 p.m. Eastern time) will be processed on the same
day at that night's closing share price. Requests received after 4:00 will be
processed on the next business day.
When can I expect to receive my money?
If you purchase shares by check or by phone and then redeem them by letter
within seven business days of the purchase, the redemption proceeds may be held
until the purchase check has cleared, but then your redemption proceeds will be
mailed to you promptly. We will not accept redemption requests by phone or
checkwriting prior to the expiration of the seven business day period.
Are there any purchase restrictions?
AARP Mutual Funds do not permit a pattern of frequent purchases and sales in
response to short-term changes in share price. (This restriction does not apply
to AARP Money Funds. AARP Mutual Funds and Scudder Investor Services, Inc.
reserve the right to reject purchases or exchanges for any reason.)
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SERVICE PROVIDERS OF THE AARP MUTUAL FUNDS
================================================================================
Legal Counsel
Dechert Price & Rhoads
Independent Accountants
Price Waterhouse LLP, Boston, MA
Underwriter
Scudder Investor Services, Inc., Two International Place, Boston, MA (a
subsidiary of the Fund Manager) is principal underwriter of the AARP Mutual
Funds.
Scudder Investor Services, Inc. offers for sale and confirms as agent all
purchases of shares of the AARP Mutual Funds.
Custodians
Brown Brothers Harriman & Co., Boston, MA
State Street Bank and Trust Company, Boston, MA
Fund Accounting Agent
Scudder Fund Accounting Corporation, Two International Place, Boston, MA (a
subsidiary of the Fund Manager) is responsible for determining the daily net
asset value per share and maintaining the general accounting records of the AARP
Mutual Funds.
Transfer and Dividend-Disbursing Agent
Scudder Service Corporation, P.O. Box 2540, Boston, MA 02208-2540 (a subsidiary
of the Fund Manager)
Investment Adviser
Scudder Kemper Investments, Inc., Two International Place, Boston, MA is
investment adviser for the AARP Mutual Funds.
Subadviser
Bankers Trust Company, One Bankers Trust Plaza, New York, NY, is Subadviser for
the AARP U.S. Stock Index Fund.
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TRUSTEES AND OFFICERS
================================================================================
CAROLE LEWIS ANDERSON, Trustee; President, MASDUN Capital Advisors; Principal,
Suburban Capital Markets, Inc.; Director, VICORP Restaurants, Inc.; Trustee,
Hasbro Children's Foundation and Mary Baldwin College; Member of the Board,
Association for Corporate Growth of Washington, D.C. (1993-1996).
ADELAIDE ATTARD, Trustee; Consultant, Gerontology Commissioner, County of
Nassau, New York, Department of Senior Citizen Affairs (1971-1991), Member, NYC
Department of Aging Advisory Council; Chairperson, Federal Council on Aging
(1981-1986).
ROBERT N. BUTLER, M.D., Trustee; 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.
ESTHER CANJA, Trustee; Vice President, American Association of Retired Persons;
Trustee and Chair, AARP's Group Health Insurance Plan; Board Liaison Member,
National Volunteer Leadership Network Advisory Committee; Chair, Board
Operations Committee; AARP State Director of Florida (1990-1992). (AARP Managed
Investment Portfolios Trust and AARP Income Trust only.)
LINDA C. COUGHLIN*, Chairperson and Trustee; Managing Director, Scudder Kemper
Investments, Inc., Director and Senior Vice President, Scudder Investor
Services, Inc.
HORACE B. DEETS, Vice Chairman of each Trust and Trustee of AARP Cash Investment
Funds and AARP Tax Free Income Trust only; Executive Director, American
Association of Retired Persons.
EDGAR R. FIEDLER, Trustee; Senior Fellow and Economic Counselor, The Conference
Board, Inc.
EUGENE P. FORRESTER, Trustee; Lt. General (Retired) U.S. Army; International
Trade Counselor; Consultant.
GEORGE L. MADDOX, JR., Trustee; Professor Emeritus and Director, Long Term Care
Resources Program, Duke University Medical Center; Professor Emeritus of
Sociology, Departments of Sociology and Psychiatry, Duke University.
ROBERT J. MYERS, Trustee; Actuarial Consultant; Formerly Executive Director,
National Commission on Social Security Reform; Formerly Chairman, Commission on
Railroad Retirement Reform.
JAMES H. SCHULZ, Trustee; Professor of Economics and Kirstein Professor of Aging
Policy, Policy Center on Aging, Florence Heller School, Brandeis University.
GORDON SHILLINGLAW, Trustee; Professor Emeritus of Accounting, Columbia
University Graduate School of Business.
JEAN GLEASON STROMBERG, Trustee; Consultant; Director, Financial Institutions
Issues, U.S. General Accounting Office (11/96 - 9/97); Partner, Fulbright &
Jaworski - law firm (1978 - 1996).
Prospectus
93
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WILLIAM GLAVIN*, Vice President
JOHN HEBBLE*, Assistant Treasurer
THOMAS W. JOSEPH*, Vice President
THOMAS F. McDONOUGH*, Vice President and Assistant Secretary
JAMES W. PASMAN*, Vice President
KATHRYN L. QUIRK*, Vice President, Treasurer and Secretary
HOWARD SCHNEIDER*, Vice President
CORNELIA M. SMALL*, President
*Scudder Kemper Investments, Inc.
Prospectus
94
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[BLANK PAGE]
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[BLANK PAGE]
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NOTES
-----
Prospectus
95
<PAGE>
NOTES
-----
Prospectus
96
<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
AARP Cash Investment Funds:
AARP HIGH QUALITY MONEY FUND
AARP Income Trust:
AARP HIGH QUALITY SHORT TERM BOND FUND
AARP GNMA and U.S. TREASURY FUND
AARP BOND FUND FOR INCOME
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 U.S. STOCK INDEX FUND
AARP GLOBAL GROWTH FUND
AARP CAPITAL GROWTH FUND
AARP INTERNATIONAL GROWTH AND INCOME FUND
AARP SMALL COMPANY STOCK FUND
AARP Managed Investment Portfolios Trust:
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1998
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the combined Prospectus for all fifteen of the above
Funds, dated February 1, 1998, 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.
<PAGE>
TABLE OF CONTENTS
Page
AARP INVESTMENT PROGRAM FROM SCUDDER...........................................1
Summary of Advantages and Benefits.......................................1
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES..................................3
AARP Money Fund..........................................................3
AARP Income Funds........................................................5
AARP Tax Free Income Funds...............................................8
AARP Growth Funds.......................................................13
AARP Managed Investment Portfolios......................................18
Special Investment Policies of the AARP Funds...........................19
General Investment Policies of the AARP Funds...........................35
Investment Restrictions.................................................35
PURCHASES.....................................................................41
General Information.....................................................41
Checks..................................................................41
Share Price.............................................................41
Share Certificates......................................................42
Direct Deposit Program..................................................42
Wire Transfers..........................................................42
Holidays................................................................42
Other Information.......................................................42
REDEMPTIONS...................................................................43
General Information.....................................................43
Redemption by Telephone.................................................43
Redemption by Mail or Fax...............................................44
Redemption by Checkwriting..............................................45
Redemption-in-Kind......................................................45
Other Information.......................................................45
EXCHANGES.....................................................................45
TRANSACT BY PHONE.............................................................46
Purchasing Shares by Transact by Phone..................................47
Redeeming Shares by Transact by Phone...................................47
FEATURES AND SERVICES OFFERED BY THE FUNDS....................................47
Automatic Dividend Reinvestment.........................................47
Distributions Direct....................................................47
Reports to Shareholders.................................................47
Consolidated Statements.................................................48
RETIREMENT PLANS..............................................................48
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")...........48
AARP Keogh Plan.........................................................49
OTHER PLANS...................................................................50
Automatic Investment....................................................50
Automatic Withdrawal Plan...............................................50
Direct Payment of Regular Fixed Bills...................................50
DIVIDENDS AND YIELD...........................................................51
Performance Information: Computation of Yields and Total Return.........52
Taking a Global Approach................................................59
TRUST ORGANIZATION............................................................59
<PAGE>
TABLE OF CONTENTS (continued)
Page
MANAGEMENT OF THE FUNDS.......................................................61
Personal Investments by Employees of Scudder............................67
TRUSTEES AND OFFICERS.........................................................67
REMUNERATION..................................................................72
DISTRIBUTOR...................................................................74
TAXES.........................................................................75
BROKERAGE AND PORTFOLIO TURNOVER..............................................79
Brokerage Commissions...................................................79
Portfolio Turnover......................................................81
NET ASSET VALUE...............................................................82
AARP Money Funds........................................................82
AARP Non-Money Market Funds.............................................82
ADDITIONAL INFORMATION........................................................83
Experts.................................................................83
Shareholder Indemnification.............................................83
Ratings of Corporate Bonds..............................................84
Ratings of Commercial Paper.............................................84
Ratings of Municipal Bonds..............................................84
Other Information.......................................................85
Tax-Exempt Income vs. Taxable Income....................................88
FINANCIAL STATEMENTS..........................................................89
ii
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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 are 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 five trusts -AARP Cash Investment
Funds, AARP Income Trust, AARP Tax Free Income Trust, AARP Growth Trust, and
AARP Managed Investment Portfolios Trust (the "Trusts"), dated February 1, 1998
(the "Prospectus"). AARP endorses this program which was developed with the
assistance of Scudder Kemper InvestmentsScudder, Stevens & Clark, Inc., now
Scudder Kemper Investments, Inc., ("the Fund Manager" or "Scudder"), a firm with
over 75 years of investment counseling and management experience. Scudder 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.")
Each of the Trusts is an open-end, diversified management investment
company authorized to issue its shares of beneficial interest in separate series
("the Funds"). A total of 15 Funds are currently offered by the five Trusts. The
differing investment objectives of the 15 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 and the AARP Managed Investment Portfolios provide diversification of
investment by investing in a select mix of AARP Funds.
Scudder Kemper Investments, Inc. (the "Fund Manager"), an investment
counsel firm, acts as investment adviser to the Fund. This organization, the
predecessor of which is Scudder Kemper Investments, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Fund Manager introduced Scudder
International Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder Kemper Investments, Inc. ("Scudder") entered
into an agreement with Zurich Insurance Company ("Zurich") pursuant to which
Scudder and Zurich agreed to form an alliance. On December 31, 1997, Zurich
acquired a majority interest in Scudder, and Zurich Kemper Investments, Inc., a
Zurich subsidiary, became part of Scudder. Scudder's name has been changed to
Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
Master/feeder structure
The Board of Trustees has the discretion to retain the current distribution
arrangement for the Fund while investing in a master fund in a master/feeder
structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
<PAGE>
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss. Master/feeder
structure. Each Trust's Board of Trustees approved a proposal which gives the
respective Board of Trustees the discretion to retain the current distribution
arrangement for the Funds while investing in a master fund in a master/feeder
fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Summary of Advantages and Benefits
o Experienced Professional Management: Scudder Kemper Investments, Inc.,
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 may benefit from investing in one or more large
portfolios of carefully selected securities.
o $2000 Minimum Starting Investment for 12 of the Funds ($500 Minimum
Starting Investment for AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund and AARP GNMA and U.S. Treasury Fund): you may make additional
investments in any amount at any time.
o No Sales Commissions: the AARP Funds are pure no-loadT, so you pay no sales
charges to purchase, transfer or redeem shares, nor do you pay Rule 12b-1
(i.e., distribution) fees.
o Investment Flexibility and Exchange: you may exchange among the 15 AARP
Funds in the Program at any time, without charge.
o Dividends: the AARP Money Funds, the AARP Income Funds, the AARP Insured
Tax Free Income Fund and the AARP Diversified Income With Growth Portfolio
all pay dividends monthly, the AARP Balanced Stock and Bond Fund, the AARP
Growth and Income Fund and the AARP U.S. Stock Index Fund are expected to
pay dividends quarterly and the AARP U.S. Stock Index Fund, the AARP Global
Growth Fund, the AARP Capital Growth Fund, the AARP International Growth
and Income Fund, the AARP Small Company Stock Fund, the AARP Diversified
Income with Growth Portfolio and the AARP Diversified Growth Portfolio 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.
2
<PAGE>
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.
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
AARP Money Fund
(See "AARP High Quality 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 Fund is designed to provide current
income. In doing so, the Fund seeks to maintain stability and safety of
principal and a constant net asset value of $1.00 per share while offering
liquidity. There may be circumstances under which this goal cannot be achieved.
The Fund also has an educational objective to help shareholders, especially
individuals planning for and living in retirement, make informed investment
decisions. 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 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:
3
<PAGE>
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
Corporation ("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. Amendments have been adopted
proposed to the federal rules regulating quality, maturity and diversification
requirements of money market funds, like the Fund. Money market funds must
comply with the revised rule by July 1, 1998. The Fund intends to be in
compliance with the amended requirements by that date. If the amendments are
adopted the Fund intends to comply with such new requirements.
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;
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
4
<PAGE>
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 Income Funds
("AARP High Quality Short Term Bond Fund," See "AARP GNMA and U.S.
Treasury Fund," "AARP Bond Fund for Income," "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 High Quality Short Term Bond Fund. The Fund is designed to produce a
high level of current income but with less risk of loss to the Fund's portfolio
than other short-term bond mutual funds, measured by the frequency and amount by
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in high-quality, short-term U.S. Government,
corporate and other fixed-income securities. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions. 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.
Under normal circumstances the Fund will invest substantially all, and no
less than 65%, of its assets invested in high quality U.S. government, corporate
and other fixed-income securities. It may purchase any investments eligible for
the AARP GNMA and U.S. Treasury Fund corporate notes and bonds, and 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), foreign
government bonds denominated in foreign currencies, trust preferred securities,
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.
Except for limitations in the Fund's investment restrictions and
percentage limitations on investments on securities denominated in foreign
currencies set forth in the prospectus, there is no limit 20% limit on foreign
currency-denominated investments, 5% foreign currency 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.)
Portfolio Quality. The policies of AARP High Quality Short Term Bond Fund
are designed to provide a portfolio that combines primarily high quality
securities with investments that attempt to reduce its market price risk. 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
5
<PAGE>
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 investment-grade or higher by
Moody's (Aaa, Aa, A, and Baa) or S&P (AAA, AA, A, and BBB) or, if not rated,
will be judged to be of comparable quality by the Fund Manager. At least 65% of
the Fund's assets must be in securities rated in the two highest rating
categories by Moody's or S&P. The Fund may invest up to 20% of its assets in
bonds rated Baa by Moody's or rated BBB by S&P. Securities rated Baa by Moody's
or BBB by S&P are neither highly protected nor poorly secured. These securities
normally pay higher yields and are regarded as having adequate capacity to repay
principal and pay interest but involve potentially greater price variability
than higher-quality securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. The Fund does
not purchase securities rated below investment-grade, commonly known as "junk"
bonds. (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 Short Term 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 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. The Fund may invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar, but no more
than 5% of the Fund's total assets will be represented by a given foreign
currency.
AARP GNMA and U.S. Treasury Fund. The Fund is designed to produce a high level
of current primarily income but with less risk of loss to the Fund's portfolio
than other GNMA mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing in high-quality Government National Mortgage Association (GNMA)
securities and U.S. Treasury bills, notes and bonds issued or backed by the full
faith and credit of the U.S. Government. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions. 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 three funds in the AARP Income Trust, the AARP GNMA and U.S. Treasury Fund
is the most 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 GNMAs. 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.
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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
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. When interest rates rise, mortgage
prepayment rates tend to decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares.
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 Bond Fund for Income. The Fund is designed to produce a high level of
current income but with less risk of loss to its portfolio than other long-term
bond mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing
primarily in short-, medium- and long-term investment-grade debt securities. The
Fund also has an educational objective to help shareholders, especially
individuals planning for and living in retirement, make informed investment
decisions.
In pursuit of its investment objectives, under normal market conditions,
the Fund invests at least 65% of its assets in investment-grade debt securities.
Investment-grade securities are rated Aaa, Aa, A, or Baa by Moody's or AAA, AA,
A, or BBB by S&P, or, if unrated, are of equivalent quality as determined by the
Fund Manager. The Fund may invest up to 35% of its assets in securities rated Ba
or B by Moody's or BB or B by S&P, but no more than 10% of the Fund's assets may
be invested in securities rated B by Moody's or S&P. These two grades of
securities are considered to be below investment grade. Below investment-grade
securities are considered predominantly speculative with respect to their
capacity to pay interest and repay principal. They generally involve a greater
risk of default and have more price volatility than securities in higher rating
categories.
The Fund may invest in U.S. Treasury and Agency securities, corporate
bonds and notes, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies or
investment-grade foreign institutions, 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 may invest up to 20% of
total assets in foreign debt securities denominated in currencies other than the
U.S. dollar, but no more than 5% of the fund's total assets will be represented
by a given foreign currency. The Fund may also purchase "when-issued" securities
and invest in repurchase agreements.
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For temporary defensive purposes, the Fund may invest without limit in
money market and short-term instruments or invest all or a substantial portion
of its assets in high quality domestic debt securities when the Fund Manager
deems such a position advisable in light of economic or market conditions.
Risks. The Fund can invest a limited portion of assets in below
investment-grade securities, sometimes referred to as "junk" bonds. Investing in
high yielding, lower-quality bonds involves various types of risks including the
risk that issuers of bonds held in the portfolio will not make timely payment of
either interest or principal or may default entirely. This risk of default can
increase with changes in the financial condition of a company or with changes in
the U.S. economy, such as a recession. Compared to investing in higher quality
issues, high yield bond investors may be rewarded for the additional risk of
high yield bonds through higher interest payments and the opportunity for
greater capital appreciation.
AARP Tax Free Income Funds
(See "AARP High Quality Tax Free Money Fund," "AARP Insured Tax Free
General Bond Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT
POLICIES AND RISK FACTORS" in the Prospectus.)
AARP High Quality Tax Free Money Fund. The Fund is designed to provide
current income free from federal income taxes. In doing so, the Fund seeks to
maintain stability and safety of principal and a constant net asset value of
$1.00 per share while offering liquidity. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions. 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.
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)
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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
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 Insured Tax Free General Bond Fund. The Fund is designed to produce a
high level of current income free from federal income taxes but with less risk
of loss to its portfolio than other insured tax-free bond mutual funds, measured
by the frequency and amount by which total return fluctuates downward. The Fund
pursues this investment objective by investing primarily in high-quality,
federally tax-exempt municipal securities that are insured to protect against
default by the municipality. The Fund also has an educational objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions. The AARP Insured Tax Free General Bond Fund is a
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separate series of AARP Tax Free Income Trust. 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
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.
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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
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
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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 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 or taxable ordinary income 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 U.S. Stock Index Fund," "AARP Global Growth Fund," "AARP Capital Growth
Fund," "AARP International Growth and Income Fund," "AARP Small Company Stock
Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND
RISK FACTORS" in the Prospectus.)
AARP Balanced Stock and Bond Fund. The Fund is designed to provide
long-term capital growth and income but with less risk of loss to its portfolio
than other balanced mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing primarily in a diversified mix of stocks with above-average dividend
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yields, high-quality bonds, and cash reserves. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
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.
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), trust preferred securities, mortgage-backed and
other asset-backed securities, municipal obligations, zero coupon securities,
and restricted securities issued in private placements.
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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. The Fund is designed to provide long-term
capital growth and income but with less risk of loss to its portfolio than other
growth and income mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing primarily in common stocks with above-average dividend yields and
fixed-income securities convertible into common stocks. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
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 U.S. Stock Index Fund. The Fund is designed to provide long-term
capital growth and income but with less risk of loss to its portfolio than an
S&P 500 Index mutual fund, measured by the frequency and amount by which total
return fluctuates downward. The Fund pursues this investment objective by
emphasizing common stocks with above-average dividend yields, while maintaining
investment characteristics otherwise similar to the S&P 500 Index. The Fund also
has an educational objective to help shareholders, especially individuals
planning for and living in retirement, make informed investment decisions.
The Fund attempts to remain fully invested in common stocks of S&P 500
companies. Under normal circumstances, the Fund will invest at least 95% of its
assets in common stocks, futures contracts and options, primarily on the S&P 500
Index. The Fund, using a proprietary computer model, selects common stocks of
S&P 500 companies that are expected to, on average, pay higher dividends than
S&P 500 companies in the aggregate. In managing the Fund this way, the Fund
Manager expects performance will be somewhat less volatile than that of the S&P
500 over time, and the total return will generally track the S&P 500 within 1%
on an annualized basis. A tracking error of 0% would indicate perfect
correlation to the Index. After the Fund's start-up phase, the portfolio will
typically consist of the common stocks of between 400 to 470 of the S&P 500
companies. The Fund expects to come close to the capitalization weights of the
S&P 500. Nonetheless, to enhance the yield and liquidity characteristics of the
Fund and reduce transaction costs, the Fund will not exactly replicate the
portfolio weights of the S&P 500 and will not hold all 500 stocks within that
Index. The investment approach is "passive" in that after the dividend screening
described above, there is no additional financial analysis regarding the
securities held in the Fund. Under normal circumstances, the Fund may invest up
to 5% of its assets in certain short-term fixed income securities including high
quality money market securities such as U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks and bankers' acceptances, although cash or cash
equivalents are normally expected to represent less than 1% of the Fund's
assets. The Fund may invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading costs. The Fund may also
invest in Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs typically trade
like a share of common stock and provide investment results that generally
correspond to the price and yield performance of the component common stocks of
the S&P 500 Index. There can be no assurance that this can be accomplished as it
may not be possible for the trust to replicate and maintain exactly the
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composition and relative weightings of the S&P 500 Index securities. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks other than those associated with an investment in a broadly based
portfolio of common stocks in that the selection of the stocks included in the
trust may affect trading in SPDRs, as compared with trading in a broadly based
portfolio of common stocks. The Fund will not invest in cash reserves, futures
contracts or options as part of a temporary defensive strategy, such as lowering
the Fund's investment in common stocks to protect against potential stock market
declines. Thus the Fund will not take specific steps to minimize losses that
reflect a decline in the S&P 500. In the event that the Fund does not track
within an annualized 1% total return of the S&P 500 for an extended period, the
Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's
Corporation.
AARP Global Growth Fund. The Fund is designed to provide long-term capital
growth but with less risk of loss to its portfolio than other global growth
mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing
primarily in common stocks of established corporations in a wide variety of
developed countries, including the U.S. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
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.
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. The Fund is designed to provide long-term
capital growth but with less risk of loss to its portfolio than other growth
funds, measured by the frequency and amount by which total return fluctuates
downward. The Fund pursues this investment objective by investing primarily in a
diversified mix of common stocks and fixed-income securities convertible into
common stocks of established medium- and large-sized companies. The Fund also
has an educational objective to help shareholders, especially individuals
planning for and living in retirement, make informed investment decisions.
Through a broadly diversified portfolio consisting primarily of high quality,
medium- to large-sized companies with strong competitive positions in their
industries and reasonable stock market valuation 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
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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.
AARP International Growth and Income Fund. The Fund is designed to provide
long-term capital growth and income but with less risk of loss to its portfolio
than other international mutual funds, measured by the frequency and amount by
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in a diversified portfolio of foreign common
stocks with above-average dividend yields and foreign fixed-income securities
convertible into common stocks. The Fund also has an educational objective to
help shareholders, especially individuals planning for and living in retirement,
make informed investment decisions. The Fund seeks to offer long-term capital
growth from a diversified portfolio of foreign equity securities, and to keep
the value of its shares more stable than other international equity funds.
The Fund generally invests in equity securities of established
dividend-paying companies listed on foreign exchanges within developed foreign
markets. The Fund does not invest in emerging markets, but instead focuses its
investments on the 21 developed foreign countries included in the Morgan Stanley
Capital International World ex USA Index. The Fund will normally invest at least
65% of its total assets in securities of at least three different countries.
When the Fund Manager believes that it is appropriate, the Fund may invest
up to 20% of its total assets in investment-grade foreign debt securities. Such
debt securities include debt securities of foreign governments, supranational
organizations and private issuers, including bonds denominated in the European
Currency Unit (ECU). Debt investments will be selected on yield, credit quality,
and the outlooks for currency and interest rates trends in different parts of
the globe, taking into account the ability to hedge a degree of currency or
local bond price risk. The Fund may purchase "investment-grade" bonds, which are
those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if
unrated, judged by the Fund Manager to be of equivalent quality. Securities
rated Baa by Moody's or BBB by S&P are neither highly protected nor poorly
secured. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as Canadian or U.S. government obligations or currencies, corporate debt
instruments, and securities of companies incorporated in and having their
principal activities in Canada or the U.S. when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund may make limited use of financial futures contracts and related
options and may also invest in foreign currency exchange contracts. The Fund may
write (sell) covered call options to enhance investment return, and may purchase
and sell options on stock indices for hedging purposes.
AARP Small Company Stock Fund. The Fund is designed to provide long-term
capital growth but with less risk of loss to its portfolio compared to other
small company stock mutual funds, measured by the frequency and magnitude with
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in a broadly diversified portfolio of common
stocks of small U.S. companies. The Fund also has an educational objective to
help shareholders, especially individuals planning for and living in retirement,
make informed investment decisions.
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Under normal circumstances, the Fund may invest up to 5% of its assets in
certain short-term fixed income securities including high-quality money market
securities such as U.S. Treasury bills, repurchase agreements, commercial paper,
certificates of deposit issued by domestic and foreign branches of U.S. banks
and bankers' acceptances, although cash or cash equivalents are normally
expected to represent less than 1% of the Fund's assets. The Fund may invest up
to 20% of its assets in stock futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to minimize trading costs. The Fund may also invest in Standard
& Poor's Depository Receipts ("SPDRs"). SPDRs typically trade like a share of
common stock and provide investment results that generally correspond to the
price and yield performance of the component common stocks of the S&P 500 Index.
Like most index funds, the Fund will not invest in cash reserves, futures
contracts or options as part of a temporary defensive strategy, such as lowering
the Fund's investment in common stocks to protect against potential stock market
declines. Thus, the Fund will not take specific steps to minimize losses that
reflect a decline in the S&P 500. In the event that the Fund does not track the
Index, before expenses, within an annualized 1% total return of the S&P 500 for
an extended period, the Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
In pursuing its objective of long-term capital growth, the Fund normally
remains substantially invested in the common stocks of small U.S. companies.
Using a quantitative investment approach developed by the Fund Manager, the Fund
focuses on equity securities of companies with market capitalization below $1
billion that, as a group, have a dividend yield higher than the average of those
in the Russell 2000 Indexr and that the Fund Manager believes are undervalued
relative to the stocks in Russell 2000 Indexr. The Russell 2000 Indexr is a
widely used measure of small stock performance. The Fund will sell securities of
companies that have grown in market capitalization above this level as necessary
to keep the Fund focused on small companies.
The Fund takes a diversified approach to investing in small capitalization
stocks which overall have dividend yields above the average yield of the Russell
2000 Indexr. After the Fund's start-up phase, it will not be unusual for it to
hold stocks of more than one hundred small companies, representing a variety of
U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (either convertible
or nonconvertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes as a temporary investment to accommodate cash
flows.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
AARP Managed Investment Portfolios
The AARP Managed Investment Portfolios are two professionally managed,
diversified portfolios of the AARP Managed Investment Portfolios Trust (the
"Trust"). In pursuit of its investment objective, each Portfolio invests in a
select mix of the AARP Mutual Funds ("Underlying AARP Mutual Funds"). Each
portfolio is designed to serve as a complete investment program or as a core
part of a larger portfolio, with a goal to seek competitive returns but with
less risk of loss to the Fund's portfolio than a comparable mix of stock and
bond funds, measured by the amount and frequency by which total return
fluctuates downward.
AARP Diversified Income With Growth Portfolio. The Diversified Income
with Growth Portfolio seeks to provide quarterly current income with modest
long-term appreciation. This investment objective is pursued by diversifying
among a mix of AARP bond mutual funds, and to a lesser degree in AARP stock
mutual funds. EachThe AARP Mutual Fund iss are managed to reduce the risk of
loss to its portfolio compared to similar mutual funds.
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AARP Diversified Growth Portfolio. The AARP Diversified Growth Portfolio
seeks to provide long-term growth of capital. This investment objective is
pursued by diversifying among a mix of AARP Stock Mutual Funds, and to a lesser
degree in AARP Bond Mutual Funds.
The Funds also have an educational objective to help shareholders,
especially individuals planning for and living in retirement make informed
investment decisions.
Each Portfolio may invest in any of the AARP Mutual Funds, except for
those designed to provide tax-free income.
Under normal market conditions, each of the AARP Investment Portfolios
will invest within the investment ranges as described below:
o The Diversified Income With Growth Portfolio will normally invest 60-80% of
total assets in AARP bond mutual funds; and 20-40% of total assets in AARP
stock mutual funds; and 0-20% of total assets in cash or cash equivalents.
o The Diversified Growth Portfolio will normally invest 60-80% of total
assets in AARP stock mutual funds; and 20-40% of total assets in AARP bond
mutual funds and 0-20% of total assets in cash or cash equivalents.
If, as a result of appreciation or depreciation, the percentage of each
Portfolio's assets invested in the above categories exceeds or is less than the
applicable range, the Fund Manager will consider, in its discretion, whether to
reallocate the assets of each Portfolio to comply with the stated ranges.
Each Portfolio will purchase or sell shares of underlying AARP mutual funds
to: (a) accommodate purchases and sales of each Portfolio's shares, (b) change
the percentages of each Portfolio's assets invested in each of the underlying
AARP mutual funds in response to changing market conditions, and (c) maintain or
modify the allocation of each Portfolio's assets in accordance with the
investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including AARP money market funds, repurchase agreements,
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
For information about the investment objectives of each of the underlying
AARP mutual funds, please refer to the description of each underlying AARP
mutual fund contained in the sections preceding this section.
Special Investment Policies of the AARP Funds
(See "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the
Prospectus.)
Dollar Roll Transactions. Each of the Funds in the AARP Income Trust, namely
AARP GNMA and U.S. Treasury Fund, AARP High Quality Short Term Bond Fund and
AARP Bond Fund for Income, may enter into "dollar roll" transactions, which
consist of the sale by the Funds to a bank or broker/dealers (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Funds receive a fee from the counterparty
as consideration for entering into the commitment to purchase. Dollar rolls may
be renewed over a period of several months with a different purchase and
repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Funds agree to buy a security on
a future date.
The Funds will not use such transactions for leveraging purposes and,
accordingly, will segregate cash, U.S. Government securities or other liquid
assets high grade debt obligations in an amount sufficient to meet their
purchase obligations under the transactions. Each Fund will also maintain asset
coverage of at least 300% for all outstanding firm commitments, dollar rolls and
other borrowings.
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Dollar rolls are treated for purposes of the 1940 Act as borrowings of the
Funds because they involve the sale of a security coupled with an agreement to
repurchase. Like all borrowings, a dollar roll involves costs to the Funds. For
example, while the Funds receive a fee as consideration for agreeing to
repurchase the security, the Funds forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Funds, thereby effectively
charging the Funds interest on their borrowing. Further, although the Funds can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of each Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Funds' right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Funds are able to purchase them.
Similarly, the Funds may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Funds, the security that the Funds
are required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Funds' use of the cash
that they receive from a dollar roll will provide a return that exceeds
borrowing costs.
The Trustees of the Funds have adopted guidelines to ensure that those
securities received are substantially identical to those sold. To reduce the
risk of default, the Funds will engage in such transactions only with
counterparties selected pursuant to such guidelines.
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
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
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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.
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.
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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.
Trust Preferred Securities. AARP Balanced Stock and Bond Fund, AARP High
Quality Short Term Bond Fund and AARP Bond Fund for Income may invest in Trust
Preferred Securities, which are hybrid instruments issued by a special purpose
trust (the "Special Trust"), the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Funds of Trust Preferred
Securities are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by the
Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Funds, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
(regardless of whether the Funds receive any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Funds, to sell their holdings.
Tax-exempt custodial receipts. The AARP Tax Free Funds may purchase
tax-exempt custodial receipts (the "Receipts") which evidence ownership in an
underlying bond that is deposited with a custodian for safekeeping. Holders of
the Receipts receive all payments of principal and interest when paid on the
bonds. Receipts can be purchased in an offering or from a financial counterparty
(typically an investment banker). To the extent that any Receipt is illiquid, it
is subject to the Fund's limit on illiquid securities.
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
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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
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
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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.
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.
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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.
Real Estate Investment Trusts. Each of the Funds in the AARP Growth Trust,
as well as the AARP High Quality Short Term Bond Fund and the AARP Bond Fund for
Income, may invest in REITs. REITs are sometimes informally characterized as
equity REITs, mortgage REITs and hybrid REITs. Investment in REITs may subject
the Fund to risks associated with the direct ownership of real estate, such as
decreases in real estate values, overbuilding, increased competition and other
risks related to local or general economic conditions, increases in operating
costs and property taxes, changes in zoning laws, casualty or condemnation
losses, possible environmental liabilities, regulatory limitations on rent and
fluctuations in rental income. Equity REITs generally experience these risks
directly through fee or leasehold interests, whereas mortgage REITs generally
experience these risks indirectly through mortgage interests, unless the
mortgage REIT forecloses on the underlying real estate. Changes in interest
rates may also affect the value of the Fund's investment in REITs. For instance,
during periods of declining interest rates, certain mortgage REITs may hold
mortgages that the mortgagors elect to prepay, which prepayment may diminish the
yield on securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended and to maintain exemption from the 1940 Act. By investing in REITs
indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs. In addition, REITs depend generally on their ability to
generate cash flow to make distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. The AARP
GNMA and U.S. Treasury Fund and the AARP High Quality Short Term Bond Fund, the
AARP Bond Fund for Income, the AARP Balanced Stock and Bond Fund and the AARP
Growth and Income 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 Short Term Bond Fund, the AARP Bond Fund for Income, 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.
When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of a mortgage-related security and increasing the price
volatility of that security, affecting the price volatility of the Fund's
shares.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying property, refinancing or foreclosure, net of fees or
costs which may be incurred. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association) are
described as "modified pass-through." These securities entitle the holder to
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receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market value or yield
of mortgage-backed securities or to the value of Fund shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance 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 ("CMOs"). The AARP High Quality Short Term
Bond Fund, the AARP Bond Fund for Income, 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. The prices of certain CMOs,
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depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
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 Short Term Bond Fund's, the
AARP Bond Fund for Income'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 ("CARSSM"). CARSSM
represent undivided fractional interests in a trust ("Trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities may
contain elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional or separate fees for credit support. The 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.
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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 and AARP Bond Fund for Income 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" (TIGRST) and Certificate of Accrual on Treasuries
(CATST). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Funds, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Funds understand 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 Funds intend 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 Funds are
"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).
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High Yield/High Risk Securities. AARP Bond Fund for Income may invest a
limited amount of assets in debt securities which are rated below
investment-grade, rated lower than Baa by Moody's or lower than BBB by S&P
(hereinafter referred to as "lower rated securities") or which are unrated, but
deemed equivalent to those rated below investment-grade by the Fund Manager
(commonly referred to as "junk bonds"). The lower the ratings of such debt
securities, the greater their risks. These debt instruments generally offer a
higher current yield than that available from higher grade issues, but typically
involve greater risk. The yields on high yield/high risk bonds will fluctuate
over time. In general, prices of all bonds rise when interest rates fall and
fall when interest rates rise. While less sensitive to changing interest rates
than investment-grade debt, lower-rated securities are especially subject to
adverse changes in general economic conditions and to changes in the financial
condition of their issuers. During periods of economic downturn or rising
interest rates, issuers of these instruments may experience financial stress
that could adversely affect their ability to make payments of principal and
interest and increase the possibility of default.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of these
securities especially in a market characterized by only a small amount of
trading and with relatively few participants. These factors can also limit the
Fund's ability to obtain accurate market quotations for these securities, making
it more difficult to determine the Fund's NAV.
In cases where market quotations are not available, lower rated securities
are valued using guidelines established by the Fund's Board of Trustees.
Perceived credit quality in this market can change suddenly and unexpectedly,
and may not fully reflect the actual risk posed by a particular lower rated or
unrated security.
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 securities. 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 liquid assets 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.
Futures Contracts. The AARP Income Funds, the AARP Insured Tax Free
General Bond Fund, the AARP Balanced Stock and Bond Fund, the AARP Global Growth
Fund, the AARP International Growth and Income Fund, the AARP U.S. Stock Index
Fund and the AARP Small Company Stock 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
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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 liquid assets 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 liquid
assetshigh 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.
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
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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 Fund Manager 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, the AARP Global Growth Fund, the AARP International Growth and Income
Fund, and the AARP Small Company Stock 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. The AARP U.S. Stock Index Fund invests its assets in
futures contracts in order to invest uncommitted cash balances, to maintain
liquidity or to minimize trading costs.
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.
AARP Income Trust and AARP Tax Free Income Trust have 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
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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 with the exception of
the AARP U.S. Stock Index Fund 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 AARP U.S. Stock Index Fund invests its
assets in covered call options in order to invest uncommitted cash balances, to
maintain liquidity or to minimize trading costs. The writing of covered call
options by each Fund is subject to limitations imposed by certain state
securities authorities.
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 with
the exception of the AARP U.S. Stock Index Fund may purchase put options on
stock indices. The AARP U.S. Stock Index Fund invests its assets in options on
stock indices in order to invest uncommitted cash balances, to maintain
liquidity or to minimize trading costs. 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 15% 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
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.
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The Fund may make limited use of financial futures contracts and related
options and may also invest in foreign currency exchange contracts. The Fund may
write (sell) covered call options to enhance investment return, and may purchase
and sell options on stock indices for hedging purposes.
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. Each Fund in the AARP Growth Trust, AARP High
Quality Short Term Bond Fund and AARP Bond Fund for Income may invest in
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 Short Term Bond Fund
may invest without limit in U.S. dollar denominated foreign securities and may
invest up to 20% of its assets in foreign bonds denominated in foreign
currencies although no more than 5% of the Fund's total assets will be
represented by a given foreign currency. The AARP Bond Fund for Income may
invest without limit in U.S. dollar denominated investment-grade foreign
securities and may invest up to 20% of its assets in foreign bonds denominated
in foreign currencies. 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
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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 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
and the AARP High Quality Short Term Bond Fund and the AARP Bond Fund for Income
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. They may be used by a Fund only to hedge against possible
variations in exchange rates of currencies in countries in which it may invest.
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.
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 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
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Statement of Additional Information, means the lesser of (1) 67% of the shares
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.
Each Fund has elected to be classified as a diversified series of an
open-end investment company.
In addition, as a matter of fundamental policy, will not:
(A)
(1) borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(3) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
(4) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities;
(5) purchase physical commodities or contracts relating to physical
commodities; or
(6) make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in
accordance with the Fund's investment objective and policies may be
deemed to be loans.
(B) In addition, as a matter of fundamental policy, each Fund other than AARP
Diversified Income with Growth Portfolio and AARP Diversified Growth
Portfolio will not:
(1) concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time (except that each of AARP High Quality Money Fund
and AARP High Quality Tax Free Money Fund reserves the freedom of
action to concentrate its investments in instruments issued by
domestic banks).
(C) In addition, as a matter of fundamental policy, each of AARP Diversified
Income with Growth Portfolio and AARP Diversified
Growth Portfolio will not:
(1) concentrate its investments in investment companies, as the term
"concentrate" is used in the Investment Company Act of 1940, as
amended and interpreted by regulatory authority having jurisdiction
from time to time; except that the Fund may concentrate in an
underlying fund. However, each underlying fund in which each Fund will
invest may concentrate its investments in a particular industry.
(D) In addition, as a matter of fundamental policy, each of AARP High Quality
Tax Free Money Fund and AARP Insured Tax Free General Bond Fund will:
(1) have at least 80% of its net assets invested in securities that are
exempt from Federal income tax during periods of 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.
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As a matter of non-fundamental policy, each of the following Funds
currently do not intend to:
AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP U.S.
Stock Index Fund, AARP Global Growth Fund, AARP Capital Growth Fund, AARP
International Growth and Income Fund, AARP Small Company Stock Fund, AARP
High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund, AARP
Bond Fund for Income, AARP Diversified Income with Growth Portfolio, AARP
Diversified Growth Portfolio
(1) borrow money in an amount greater than 5% of its total assets,
except for (i) temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or other
investments or transactions described in the Trust's registration
statement which may be deemed to be borrowings;
AARP High Quality Money Fund, AARP High Quality Tax Free Money
Fund, AARP Insured Tax Free General Bond Fund
(1) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
AARP Balanced Stock and Bond Fund, AARP Growth and Income
Fund, AARP U.S. Stock Index Fund, AARP Global Growth Fund,
AARP Capital Growth Fund, AARP International Growth and Income
Fund, AARP Small Company Stock Fund
(2) enter into either of reverse repurchase agreements or dollar rolls
in an amount greater than 5% of its total assets;
AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP U.S.
Stock Index Fund, AARP Global Growth Fund, AARP Capital Growth Fund, AARP
International Growth and Income Fund, AARP Small Company Stock Fund, AARP
High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund, AARP
Bond Fund for Income, AARP High Quality Tax Free Money Fund, AARP Insured
Tax Free General Bond Fund
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments, (iv)
that transactions in futures contracts and options shall not be
deemed to constitute selling securities short, and (v) that the
Fund may obtain such short-term credits as may be necessary for
the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its
total assets; or sell put options, if as a result, the aggregate
value of the obligations underlying such put options would exceed
50% of its total assets;
(5) enter into futures contracts or purchase options thereon, unless
immediately after the purchase, the value of the aggregate
initial margin with respect to such futures contracts entered
into on behalf of the Fund and the premiums paid for such options
on futures contracts does not exceed 5% of the fair market value
of the Fund's total assets; provided that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of
the value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to
have no value); and
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AARP High Quality Money Fund, AARP High Quality Short Term
Bond Fund, AARP GNMA and U.S. Treasury Fund, AARP Bond Fund
for Income, AARP High Quality Tax Free Money Fund, AARP
Insured Tax Free General Bond Fund
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
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
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.
For AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund,
Scudder Fund Accounting Corporation also determines net asset value per share as
of noon 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-certificated 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.
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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 custodians are 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.
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 Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The 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.
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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 $100,000 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.
(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.
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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 a Trust 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 $100,000. 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 $100,000 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
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.
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Redemption-in-Kind
The AARP Growth Trust and AARP Managed Investment Portfolios Trust reserve
the right to permit the AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, the AARP Global Growth Fund, AARP Capital Growth Fund, AARP
International Growth and Income Fund, AARP Small Company Fund, AARP U.S. Stock
Index Fund, AARP Diversified Income With Growth Portfolio and AARP Diversified
Growth Portfolio, 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 AARP
Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP GNMA and U.S.
Treasury Fund, the minimum investment is $500. For all other AARP Mutual Funds,
the minimum is $2,000. An account may be opened in any AARP Mutual Fund for $500
if an Automatic Investment Plan of $100 per month is established. 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 the minimums set forth above; otherwise the new account may
be redeemed as described above. (This policy applies to accounts of new
shareholders in a 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 $2000 for non-retirement plan accounts ($500
for AARP Balanced Stock & Bond Fund, AARP Growth and Income Fund and AARP GNMA
and U.S. Treasury Fund). For IRA, Keogh Plan and UGMA/UTMA 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.
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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
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.
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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.
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 15 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.
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RETIREMENT PLANS
Shares of AARP High Quality Money Fund, AARP High Quality Short Term Bond
Fund, AARP GNMA and U.S. Treasury Fund, AARP Bond Fund for Income, AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP Global Growth Fund, AARP
Capital Growth Fund, AARP U.S. Stock Index Fund, AARP International Growth and
Income Fund and AARP Small Company Stock 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. Alternatively, if your compensation during the
taxable year exceeds your spouse's and you file a joint income tax return, you
may contribute up to the lesser of $4,000 or 100% of your aggregate income to
separate IRAs for yourself and your spouse, but no more than $2,000 to either
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
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
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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.
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. Five-year averaging has been eliminated for
taxable years beginning after December 31, 1999. 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 tax-qualified plans, such as the AARP Keogh
Plan, must begin by April 1st in the year following the year in which the
participant reaches age 70 1/2, or following the year in which the participant
retires, if later, unless the participant is a 5% owner, 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.
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Roth IRA: Individual Retirement Account
Shares of the Fund(s) may be purchased as the underlying investment for an
individual Retirement Account which meets the requirements of Section 408A of
the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions from a Roth IRA are taxable
and subject to a 10% tax penalty unless an exception applies. Exceptions to the
10% penalty include: disability, excess medical expenses, the purchase of health
insurance for an unemployed individual and education expenses.
An individual with an income of less than $100,000 (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
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 $500. 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. Investors may also invest in any AARP mutual fund for
$500 a month if they establish a plan with a minimum automatic investment of at
least $100 per month. 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. Shareholders may designate which day they
want the automatic withdrawal to be processed. The check amounts may be based on
the redemption of a fixed dollar amount, fixed share amount 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
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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 10 days prior to the date of the
first automatic withdrawal. 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.
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.)
AARP Income Funds, AARP Growth Funds, AARP Tax Free General Bond
Fund and AARP Managed Investment Portfolios
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 U.S. Stock Index Fund, 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 Small Company Stock Fund, AARP International Growth and
Income Fund, 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 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.
AARP Money Funds
The net investment income of the AARP Money Funds is determined as of the
close of regular trading on the Exchange, usually 4 p.m., eastern time, on each
day the Exchange is open for trading.
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All the investment income of the AARP Money Funds so determined normally
will be declared as a dividend to shareholders of record as of determination of
the net asset value at twelve o'clock noon after the purchase and redemption of
shares. Shares purchased as of the determination of net asset value made as of
the close of the Exchange will not participate in that day's dividend; in such
cases dividends commence on the next business day. Checks will be mailed to
shareholders electing to take dividends in cash, and confirmations will be
mailed to shareholders electing to invest dividends in additional shares for the
month's dividends on the fourth business day of the next month. Dividends will
be invested at the net asset value per share, normally $1.00, determined as of 4
p.m. on the first business day of each month.
Dividends are declared daily on each day on which the Exchange is open for
business. The dividends for a business day immediately preceding a weekend or
holiday will normally include an amount equal to the net income for the
subsequent days on which dividends are not declared. However, no daily dividend
will include any amount of net income in respect of a subsequent semi-annual
accounting period.
Because the net investment income of the AARP Money Funds is declared as a
dividend each time the net income of the Fund is determined, the net asset value
per share of the Fund (i.e., the fair value of the net assets of the Fund
divided by the number of shares of the Fund outstanding) will remain at $1.00
per share immediately after each such determination and dividend declaration,
unless (i) there are unusual or extended fluctuations in short-term interest
rates or other factors, such as unfavorable changes in the creditworthiness of
issuers affecting the value of securities in the Fund's portfolio, or (ii) net
investment income is a negative amount.
Net investment income (from the time of the immediately preceding
determination thereof) consists of (i) all interest income accrued on the
portfolio assets of the Fund less (ii) all actual and accrued expenses. Interest
income included in the daily computation of net income is comprised of original
issue discount earned on discount paper accrued ratably to the date of maturity
as well as accrued interest. Expenses of the AARP Money Funds, including the
management fee payable to the Fund ManagerAdviser, are accrued each day.
Normally the AARP Money Funds will have a positive net investment income
at the time of each determination thereof. Net investment income may be negative
if an unexpected liability must be accrued or a loss realized. If the net
investment income of the AARP Money Funds determined at any time is a negative
amount, the net asset value per share will be reduced below $l.00 unless one or
more of the following steps are taken: the Trustees have the authority (l) to
reduce the number of shares in each shareholder's account, (2) to offset each
shareholder's pro rata portion of negative net investment income from the
shareholder's accrued dividend account or from future dividends, or (3) to
combine these methods in order to seek to maintain the net asset value per share
at $l.00. The AARP Money Funds may endeavor to restore the net asset value per
share to $l.00 by not declaring dividends from net investment income on
subsequent days until restoration, with the result that the net asset value per
share will increase to the extent of positive net investment income which is not
declared as a dividend.
Distributions of realized capital gains, if any, are paid in November or
December of the AARP Money Funds' taxable year although the Fund may make an
additional distribution within three months of the Fund's fiscal year end of
September 30. The AARP Money Funds expect to follow the practice of distributing
all net realized capital gains to shareholders and expect to distribute realized
capital gains at least annually. However, if any realized capital gains are
retained by the AARP Money Funds for reinvestment and federal income taxes are
paid thereon by the Fund, the Fund will elect to treat such capital gains as
having been distributed to shareholders; as a result, shareholders would be able
to claim their share of the taxes paid by the Fund on such gains as a credit
against their individual federal income tax liability.
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 the Funds 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.
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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, 1997 respectively, were 4.64% and 3.16%.
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, 1997
respectively, were 4.64% and 3.16%.
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, AARP Insured
Tax Free General Bond Fund and AARP Managed Investment Portfolios
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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Total Return
--------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
9/30/97 9/30/97 9/30/97(1)
------- ------- ----------
AARP High Quality Money Fund 4.72 3.85 5.15
AARP High Quality Tax Free Money
Fund* 2.80 2.39 3.81
AARP High Quality Short Term Bond 8.15 6.19 8.54
AARP GNMA and U.S. Treasury 8.49 5.43 8.01
AARP Bond Fund for Income+ 6.06 (life of Fund)
AARP Insured Tax Free General Bond 8.57 6.71 8.69
AARP Balanced Stock and Bond Fund 27.34 15.00 (life of Fund)
AARP Growth and Income 40.70 21.30 14.57
AARP U.S. Stock Index Fund+ 21.22 (life of Fund)
AARP Global Growth Fund 24.67 16.41 (life of Fund)
AARP Capital Growth 46.72 20.05 13.88
AARP International Growth and
Income Fund+ 15.73 (life of Fund)
AARP Small Company Stock Fund+ 33.53 (life of Fund)
AARP Diversified Income With
Growth Portfolio+ 93.5 (life of Fund)
AARP Diversified Growth Portfolio+ 16.00 (life of Fund)
(1) For the ten fiscal years ended September 30, 1997 for each of the above
listed Funds except for the period February 1, 1994 (commencement of
operations) to September 30, 1997 for the AARP Balanced Stock and Bond
Fund and for the period February 1, 1996 (commencement of operations) to
September 30, 1996 for the AARP Global Growth 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, 1997 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.
+ AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Growth and Income Fund, AARP Small Company Stock Fund, AARP Diversified
Income With Growth Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
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.
50
<PAGE>
Cumulative Total Return
One Year Five Years Ten Years
Ended Ended Ended
9/30/97 9/30/97 9/30/97(1)
AARP Balanced Stock and 27.34 66.87 (life of
Bond Fund Fund)
AARP Growth and Income 40.70 162.57 289.67
AARP U.S. Stock Index Fund+ 21.22 (life of Fund)
AARP Global Growth Fund 24.67 28.74 (life of Fund)
AARP Capital Growth 46.72 149.33 266.94
AARP International Growth 15.73
and Income Fund+
AARP Small Company Stock 33.53 (life of
Fund+ Fund)
AARP Diversified Growth 16
Portfolio+
(1) For the period February 1, 1994 (commencement of operations) to September
30, 1997 for the AARP Balanced Stock and Bond Fund and for the period
February 1, 1996 (commencement of operations) to September 30, 1997 for the
AARP Global Growth Fund.
+ AARP U.S. Stock Index Fund, AARP International Growth and
Income Fund, AARP Small Company Stock Fund and AARP
Diversified Growth Portfolio commenced operations on February
1, 1997.
c) The AARP Income Funds, AARP Insured Tax Free General Bond Fund
and AARP Diversified Income With Growth Portfolio
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.
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, 1997
---- ------------------------
AARP High Quality Short Term Bond 5.83
AARP GNMA and U.S. Treasury 6.35
AARP Bond Fund for Income+ 6.92
AARP Insured Tax Free General Bond 4.31
AARP Diversified Income With 5.07
Growth Portfolio+
51
<PAGE>
+ AARP Bond Fund for Income and AARP Diversified Income With Growth Portfolio
commenced operations on February 1, 1997.
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, 1997
-------------------------------
Fund Tax Bracket: 28% 31%
----
AARP High Quality Tax Free Money
AARP Insured Tax Free General Bond
AARP High Quality Tax Free Money 4.18% 4.36%
(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.
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.
52
<PAGE>
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.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews
the performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
53
<PAGE>
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.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that
periodically reports mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper
which regularly covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
54
<PAGE>
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because they
assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment - even in blue-chip domestic securities - is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments - everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity, due
partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed - only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global stock
markets do not move in lock step. When the valuations in one market rise, there
are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S. investments
strike the best balance between risk and reward.
TRUST ORGANIZATION
(See "FUND ORGANIZATION" in the Prospectus.)
Each of the AARP Funds is a separate series of a Massachusetts business
trust. AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund,
and the AARP Bond Fund for Income 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 U.S. Stock Index Fund, AARP Global Growth Fund,
AARP Capital Growth Fund, AARP International Growth and Income Fund and AARP
Small Company Stock 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. AARP Diversified Income With
Growth Portfolio and AARP Diversified Growth Portfolio are series of AARP
Managed Investment Portfolios Trust which was established under a Declaration of
Trust on October 21, 1996. 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
55
<PAGE>
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 the Trusts, 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.
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 the Trusts 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.
Scudder, the investment manager for the Fund, has entered into an agreement
with Zurich Insurance Company ("Zurich"), an international insurance and
financial services organization, pursuant to which Scudder will form a new
global investment organization by combining with Zurich's subsidiary, Zurich
Kemper Investments, Inc., and change its name to Scudder Kemper Investments,
Inc. After the transaction is completed, Zurich will own approximately 70% of
the new organization with the balance owned by the new organization's officers
and employees.
MANAGEMENT OF THE FUNDS
(See "FUND ORGANIZATION" in the Prospectus.)
Each Trust has retained Scudder Kemper InvestmentsScudder, Stevens &
Clark, Inc., a Delaware corporation (the "Fund Manager"), to perform management
and investment advisory services for the Funds. Each Trust, except AARP Managed
Investment Portfolios Trust, has retained the Fund Manager pursuant to an
Investment Management Agreement with each Trust ("Management Agreement") dated
December 31, 1998. AARP Managed Investment Portfolios Trust has
retained the Fund Manager to perform management and investment advisory services
for the Portfolios pursuant to an Investment Management Agreement dated December
31, 1998.
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.
56
<PAGE>
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, 1997 were over $16 billion.
All AARP Funds pay a flat individual Fund fee monthly based on the net
assets of that Fund, except AARP Diversified Investment Income Portfolio and
AARP Diversified Investment Growth Portfolio.
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 High Quality Short Term Bond Fund, 19/1200 of 1% (or approximately
.19 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 Bond Fund for Income, 28/1200 of 1% (or approximately .28 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);
58
<PAGE>
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 U.S. Stock Index Fund, 0/1200 of 1% (0 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);
AARP International Growth and Income Fund, 60/1200 of 1% (or approximately
.60 of 1% on an annual basis);
AARP Small Company Stock Fund, 55/1200 of 1% (or approximately .55 of 1%
on an annual basis);
AARP Diversified Income With Growth Portfolio, n/a;
AARP Diversified Growth Portfolio, n/a.
The advisory fees from the Management Agreement for the three fiscal years
ended September 30, 1995, 1996 and 1997 were as follows:
57
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund $ 1,492,545 $ 1,522,929 1,760.550
AARP High Quality Money Fund $ 1,244,322 $ 1,492,545 19,228,620
AARP High Quality Short Term Bond Fund 2,600,629 2,550,245 2,287,683
AARP GNMA and U.S. Treasury Fund 22,095,173 21,113,592 97,012
AARP GNMA and U.S. Treasury Fund 26,198,841 22,095,173 21,113,592
AARP High Quality Bond Fund 2,952,999 2,600,629 2,550,245
AARP Bond Fund for Income** n.a. n.a.
AARP High Quality Tax Free Money Fund 493,693 453,559
AARP Insured Tax Free General Bond Fund 8,813,051 8,665,253
AARP Insured Tax Free General Bond Fund 9,944,429 8,813,051 8,665,253
AARP Balanced Stock and Bond Fund@ 960,412 1,560,129
AARP Growth and Income Fund 12,406,325 17,423,770
AARP Growth and Income Fund 9,533,476 12,406,325 17,423,770
AARP U.S. Stock Index Fund** n.a. n.a.
AARP Global Growth Fund* n.a. 266,155
AARP Capital Growth Fund 3,988,023 4,626,894
AARP Capital Growth Fund 4,184,437 3,988,023 4,626,894
AARP International Growth and Income Fund** n.a. n.a. 59,143
AARP Small Company Stock Fund** n.a. n.a. 111,376
AARP Diversified Income With Growth Portfolio** n.a. n.a. n.a.
AARP Diversified Growth Portfolio** n.a. n.a. n.a.
</TABLE>
@ AARP Balanced Stock and Bond Fund commenced operations on February 1,
1994.
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Growth and Income Fund, AARP Small Company Stock Fund, AARP Diversified
Income With Growth Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
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. 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, 1995, 1996 and
1997 were as follows:
58
<PAGE>
1995 1996 1997
AARP High Quality Money Fund .98% .96% .91%
AARP High Quality Short Term .95 .91 .93
Bond Fund
AARP GNMA and U.S. Treasury .67 .64 .65
Fund
AARP Bond Fund for Income** n.a. n.a.
n.a.
AARP High Quality Tax Free .87 .85 .85
Money Fund
AARP Insured Tax Free General .69 .66 .66
Bond Fund
AARP Balanced Stock and Bond 1.01 .88 .91
Fund@
AARP Growth and Income Fund .72 .69 .71
AARP U.S. Stock Index Fund** n.a. n.a. .50
AARP Global Growth Fund* n.a. 1.75+ 1.75
AARP Capital Growth Fund .95 .90 .92
AARP International Growth and n.a. n.a. 1.75
Income Fund**
AARP Small Company Stock n.a. n.a. 1.75
Fund**
AARP Diversified Income With n.a. n.a. n.a.
Growth Portfolio**
AARP Diversified Growth n.a. n.a. n.a.
Portfolio**
@ AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Growth and Income Fund, AARP Small Company Stock Fund, AARP Diversified
Income With Growth Portfolio and AARP Diversified Growth Portfolio commenced
operations on February 1, 1997.
For the fiscal year ended September 30, 1994, the reimbursement by the
Fund Manager based on the expense limitation then in effect was $8,083 to AARP
High Quality Tax Free Money Fund.
For the fiscal year ended September 30, 1996, the reimbursement by the Fund
Manager based on the expense limitation in effect was $175,025 to AARP Global
Growth Fund, and $74,953 for the fiscal year ended September 30, 1997.
For the fiscal year ended September 30, 1997, the reimbursement and
expense reductions based on the expense limitation in effect was $175,025 to
AARP Global Growth Fund.
For the fiscal year ended September 30, 1997, the reimbursement and
expense reductions based on the expense limitation in effect was $274,705 to
AARP Bond Fund.
For the fiscal year ended September 30, 1997, the reimbursement and
expense reductions based on the expense limitation in effect was $143,398 to
AARP Small Company Stock Fund.
For the fiscal year ended September 30, 1997, the reimbursement and
expense reductions based on the expense limitation in effect was $258,156 to
AARP U.S. Stock Index Fund.
For the fiscal year ended September 30, 1997, the reimbursement and
expense reductions based on the expense limitation in effect was $168,204 to
AARP International Growth and Income Fund.
If reimbursement is required, it will be made as promptly as practicable
after the end of each Fund'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 Kemper Investments,
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
59
<PAGE>
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 the Fund
Manager. 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.)
Pursuant to a Subadvisory Agreement entered into between the Fund Manager
and Bankers Trust Company on February 1, 1997 December 31, 1997, Bankers Trust
Company (the "Subadviser") provides subadvisory services relating to the
management of the AARP U.S. Stock Index Fund. The fee paid to the Subadviser is
calculated on a quarterly basis and depends on the level of total assets in the
AARP U.S. Stock Index Fund. The fee rate decreases as the level of total assets
for the Fund increases. The fee rate for each level of assets is: 0.07% of the
first $100 million of average daily net assets, 0.03% of such assets in excess
of $100 million, and 0.01% of such assets in excess of $200 million with a
minimum annual fee of $75,000. For the first twelve months of management, the
Subadviser has agreed to waive a portion of its fee. After the first year, the
full fee will be charged. For the fiscal year ended September 30, 1997 the
Subadviser received $42,323 in fees and waived a portion of its fee amounting to
$7,469.
A Special Servicing Agreement (the "Service Agreement") has been entered
into among the Fund Manager, the Underlying AARP Mutual Funds, Scudder Service
Corporation, Scudder Fund Accounting Corporation, Scudder Investor Services,
Inc. and the AARP Managed Investment Portfolios Trust on February 1, 1997. Under
the Service Agreement, the Fund Manager will arrange for all services pertaining
to the operation of the Trust including the services of Scudder Service
Corporation and Scudder Fund Accounting Corporation to act as Shareholder
Servicing Agent and Fund Accounting Agent, respectively, for each Portfolio. In
addition, the Service Agreement will provide that, if the officers of any
Underlying AARP Mutual Fund, at the direction of the Board of Trustees,
determine that the aggregate expenses of a Portfolio are less than the estimated
savings to the Underlying AARP Mutual Fund from the operation of that Portfolio,
the Underlying AARP Mutual Fund will bear those expenses in proportion to the
average daily value of its shares owned by that Portfolio. No Underlying AARP
Mutual Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly in
the Underlying AARP Mutual Funds and the resulting reduction in shareholder
servicing costs. In this regard, the shareholder servicing costs to any
Underlying AARP Mutual Fund for servicing one account registered to the Trust
would be significantly less than the cost to that same Underlying AARP Mutual
Fund of servicing the same pool of assets contributed in the typical fashion by
a large group of individual shareholders owning small accounts in each
Underlying AARP Mutual Fund.
Based on actual expense data from the Underlying AARP Mutual Funds and
certain very conservative assumptions with respect to the Trust, the Fund
Manager, the Underlying AARP Mutual Funds, Scudder Service Corporation, Scudder
Investor Services, Inc., Scudder Fund Accounting Corporation, Scudder Trust
Company and the Managed Investment Portfolios anticipate that the aggregate
financial benefits to the Underlying AARP Mutual Funds from these arrangements
will exceed the costs of operating the Portfolios. If such turns out to be the
case, there will be no charge to the Trust for the services under the Service
Agreement. Rather, in accordance with the Service Agreement, such expenses will
be passed through to the Underlying AARP Mutual Funds in proportion to the value
of each Underlying AARP Mutual Fund's shares held by each Portfolio.
60
<PAGE>
In the event that the aggregate financial benefits to the Underlying AARP
Mutual Funds do not exceed the costs of a Portfolio, the Fund Manager will pay,
on behalf of that Portfolio, that portion of costs, as set forth herein,
determined to be greater than the benefits. The determination of whether and the
extent to which the benefits to the Underlying AARP Mutual Funds from the
organization of the Trust will exceed the costs to such funds will be made based
upon the analysis criteria set forth in the Order. This cost-benefit analysis
was initially reviewed by the Trustees of the Underlying AARP Mutual Funds
before participating in the Service Agreement. For future years, there will be
an annual review of the Service Agreement to determine its continued
appropriateness for each Underlying AARP Mutual Fund.
Certain non-recurring and extraordinary expenses will not be paid in
accordance with the Service Agreement including: the fees and costs of actions,
suits or proceedings and any penalties or damages in connection therewith, to
which a Portfolio may incur directly, or may incur as a result of its legal
obligation to provide indemnification to its officers, trustees and agents; the
fees and costs of any governmental investigation and any fines or penalties in
connection therewith; and any federal, state or local tax, or related interest
penalties or additions to tax, incurred, for example, as a result of the
Portfolios' failure to distribute all of its earnings, failure to qualify under
subchapter M of the Internal Revenue Code, or failure to timely file any
required tax returns or other filings. Under unusual circumstances, the parties
to the Service Agreement may agree to exclude certain other expenses.
Scudder 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 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 Pathway Series, 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., Scudder Spain and Portugal 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.
Pursuant to an Agreement between Scudder and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
Scudder has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by Scudder with respect to assets invested by AMA members in Scudder
funds in connection with the AMA InvestmentLinkSM Program. Scudder will also pay
AMA Solutions, Inc. a general monthly fee, currently in the amount of $833. The
AMA and AMA Solutions, Inc. are not engaged in the business of providing
investment advice and neither is registered as an investment adviser or
broker/dealer under federal securities laws. Any person who participates in the
AMA InvestmentLinkSM Program will be a customer of Scudder (or of a subsidiary
thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM is a
service mark of AMA Solutions, Inc.
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
61
<PAGE>
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 Investment 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 Investment 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.
Pursuant to a Member Services Agreement with the Fund Manager, dated
December 31, 1997February 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 0.07 of 1% for the first $6 billion, 0.06 of 1% for the next
$10 billion and 0.05 of 1% thereafter.
The Member Services Agreement will remain in effect until August 31, 19989
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 August 20, 1997June 18,
1996 and by shareholders on October 22, 1997January 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 March 20, 1996 among
the Trusts, except for AARP Managed Investment Portfolios Trust, 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.
The Fund Manager may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or 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
62
<PAGE>
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, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Lin Coughlin##* (46) Chairperson of the Managing Director of Scudder, Director and Senior
Board and Trustee Stevens & Clark, Inc. Vice President
Horace B. Deets+* (59) Vice Chairman and Executive Director, American --
(Trustee of AARP Cash Investment Trustee Association of Retired Persons
Funds, AARP Growth Trust and AARP
Tax Free Income Trust only)
Carole Lewis Anderson (53) Trustee 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 (67) Trustee 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)
Robert N. Butler, M.D. (71) Trustee 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)
63
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Esther Canja+* (70) Trustee Vice President, American --
(AARP Managed Investment Portfolios Association of Retired Persons;
and AARP Income Trust only) 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 (68) Trustee Senior Fellow and Economic --
845 Third Ave. Counselor
New York, NY
Lt. Gen. Eugene P. Forrester (71) Trustee Lt. General (Retired), U.S. --
1101 S. Arlington Ridge Rd. Army; International Trade
Arlington, VA Counselor (1983 to present);
Consultant
Underwriter,
George L. Maddox, Jr. (72) Trustee 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
Robert J. Myers (85) Trustee Actuarial Consultant (1983- --
9610 Wire Ave. present); Formerly Chairman,
Silver Spring, MD Commission on Railroad
Retirement Reform (1988-90);
Deputy Commissioner, 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:
Manufacturers Investment Trust,
Inc.; Member, Prospective
Payment Assessment Commission
(1993-1997)
James H. Schulz (61) Trustee Professor of Economics and --
158 Scruton Pond Road Kirstein Professor of Aging
Barrington, NH Policy, Policy Center on Aging,
Florence Heller School, Brandeis
University
64
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Gordon Shillinglaw (72) Trustee Professor Emeritus of --
196 Villard Ave. Accounting, Columbia University
Hastings-on-Hudson, NY Graduate School of Business
Jean Gleason Stromberg (54) Trustee Consultant, Director, Financial
Institutions Issues, U.S.
General Accounting Office
(11/96-9/97); Partner, Fulbright
& Jaworski Law Firm (1978-1996)
William Glavin ( ) Vice President
Thomas W. Joseph## (58) Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer and
Assistant Clerk
Thomas F. McDonough## (51) Vice President and Principal of Scudder, Stevens & Assistant Clerk
Assistant Secretary Clark, Inc.
James W. Pasman## (45) Vice President Principal of Scudder, Stevens & --
Clark, Inc.
Kathryn L. Quirk# (45) Vice President, Managing Director of Scudder, Senior Vice President
Treasurer and Stevens & Clark, Inc. and Clerk
Secretary
Howard Schneider## (40) Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
John Hebble ( ) Assistant Treasurer -- --
Cornelia M. Small# (53) President Managing Director of Scudder, --
Stevens & Clark, Inc.
</TABLE>
* Mr. Deets, 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.
As of December 31,1997, 1,056,440June 30, 1997, 679,687 shares in the
aggregate, 19.96%29.11% of the outstanding shares of AARP Bond Fund for Income
were held in the name of State Street Bank and Trust Company, Custodian for AARP
65
<PAGE>
Diversified income with Growth PortfolioDiversified Income Portfolio, One
Heritage Drive, Quincy, MA 02171, which may be deemed to be the beneficial owner
of certain of these shares, but disclaims any beneficial ownership therein.
As of December 31, 1997, 862,923June 30, 1997, 452,687 shares in the aggregate,
16.31%19.39% of the outstanding shares of AARP Bond Fund for Income were held in
the name of State Street Bank and Trust Company, Custodian for AARP Diversified
Growth Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to
be the beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of December 31, 1997June 30, 1997, 133,333 shares in the aggregate,
5.49%9.38% of the outstanding shares of AARP U.S. Stock Index Fund were held in
the name of American Association of Retired Persons, AARP Membership Division,
601 E Street NW, Washington, D.C. 20049, which may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of December 31, 1997June 30, 1997, 459,176211,042 shares in the
aggregate, 18.91%14.85% of the outstanding shares of AARP U.S. Stock Index Fund
were held in the name of State Street Bank and Trust Company, Custodian for AARP
Diversified Growth Portfolio, One Heritage Drive, Quincy, MA 02171, which may be
deemed to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
As of December 31, 1997, 153,414June 30, 1997, 100,292 shares in the
aggregate, 6.32%7.06% of the outstanding shares of AARP U.S. Stock Index Fund
were held in the name of State Street Bank and Trust Company, Custodian for AARP
Diversified income with Growth PortfolioDiversified Income Portfolio, One
Heritage Drive, Quincy, MA 02171, which may be deemed to be the beneficial owner
of certain of these shares, but disclaims any beneficial ownership therein.
As of December 31, 1997, 204,450June 30, 1997, 201,307 shares in the
aggregate, 8.42%14.17% of the outstanding shares of AARP U.S. Stock Index Fund
were held in the name of SS&C Investment Corporation, 345 Park Avenue, New York,
NY 10154, which may be deemed to be the beneficial owner of certain of these
shares, but disclaims any beneficial ownership therein.
As of December 31, 1997, 307,374June 30, 1997, 153,035 shares in the
aggregate, 21.27%19.82% of the outstanding shares of AARP International Growth &
Income FundInternational Stock Fund were held in the name of State Street Bank
and Trust Company, Custodian for AARP Diversified Growth Portfolio, One Heritage
Drive, Quincy, MA 02171, which may be deemed to be the beneficial owner of
certain of these shares, but disclaims any beneficial ownership therein.
As of December 31, 1997, 297,619June 30, 1997, 146,019 shares in the
aggregate, 9.53%10.04% of the outstanding shares of AARP Small Company Stock
Fund were held in the name of State Street Bank and Trust Company, Custodian for
AARP Diversified Growth Portfolio, One Heritage Drive, Quincy, MA 02171, which
may be deemed to be the beneficial owner of certain of these shares, but
disclaims any beneficial ownership therein.
To the best of each Trust's knowledge, as of December 31, 1997June 30,
1997, no person owned beneficially more than 5% of any Fund's outstanding
shares, except as stated above.
As of December 31, 1997, 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, 1997 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, Scudder Service Corporation, Scudder Investor Services,
Inc., Scudder Fund Accounting Corp., 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 or AARP will be paid by the Trust(s) for which he or
she serves as Trustee. Until September 30, 1997, each of these unaffiliated
Trustees received an annual retainer of $10,000 from each Fund for which he or
she serves plus $175 for each Trustees' meeting and $80150 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 received $100 per nominating committee meeting, other
than an audit committee meeting, and $125 for each additional 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
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<PAGE>
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, 1997,
the Trustees' fees and expenses for thirteen of the Funds were as follows:
Fund Expense
---- -------
AARP High Quality Money Fund $26,370
AARP High Quality Short Term Bond Fund 27,329
AARP GNMA and U.S. Treasury Fund 27,352
AARP High Quality Tax Free Money Fund 26,792
AARP Insured Tax Free General Bond Fund 26,678
AARP Balanced Stock and Bond Fund 26,346
AARP Growth and Income Fund 26,366
AARP Bond Fund for Income 16,790
AARP U.S. Stock Index Fund 16,790
AARP International Growth and Income Fund 16,790
AARP Small Company Stock Fund 18,680
AARP Global Growth Fund 15,157
AARP Capital Growth Fund 24,009
The following table shows the aggregate compensation received by each
unaffiliated Trustee from each Trust and from all AARP Trusts and Scudder Fund
complex for the year ended December 31, 1997.
AARP All AARP
AARP Cash AARP Tax AARP Trusts+
Name Investmen Income Free Growth and
t Fund+- Trust@- Income Trust##- Scudder
Trust# Fund
Complex
Carole L. $2,449 $7,67 $4,7 17,79 32,6632
Anderson 2 46 6
(15 funds)
Adelaide $2,449 $7,67 $4,7 $17,7 $32,663
Attard 2 46 97
(15 funds)
Robert N. $1,967 $6,26 $3,7 $13,8 $25,863
Butler 4 56 77
(15 funds)
Edgar R. $2,265 $7,03 4,42 $16,5 $80,079
Fiedler 8 6 35
(27 funds)
Eugene P. $2,622 $8,22 $5,0 $18,9 $34,904
Forrester 9 66 87
(15 funds)
George L. $2,622 $8,22 $5,0 $18,9 $34,904
Maddox, Jr. 9 66 87
(15 funds)
Robert J. $2,529 $7,91 $4,0 $18,3 $33,704
Myers 2 96 57
(15 funds)
James H. $2,449 $7,67 $4,7 $17,7 $32,663
Schulz 2 46 96
(15 funds)
Gordon $2,622 $8,22 $5,0 $18,9 $139,32434
Shillinglaw 9 66 87 ,904
(28613
funds)
Jean Gleason $534 $1,83 $927 $4,18 $7,478
Stromberg 5 2
(15 funds)
+ AARP Cash Investment Fund consists of one Fund: AARP High
Quality Money Fund.
@ AARP Income Trust consists of three Funds: AARP High Quality
Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund, and AARP
Bond Fund for Income.*
# AARP Tax Free Income Trust consists of two Funds: AARP High
Quality Tax Free Money Fund and AARP Insured Tax Free General
Bond Fund.
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<PAGE>
## AARP Growth Trust consists of seven Funds: AARP Balanced Stock and Bond Fund,
AARP U.S. Stock Index Fund,* AARP Growth and Income Fund, AARP Global Growth
Fund,* AARP Capital Growth Fund, AARP International Growth and Income Fund,*
and AARP Small Company Stock Fund.*
+ AARP Diversified Income With Growth Portfolio and AARP Diversified Growth
Portfolio, series of AARP Managed Investment Portfolios Trust, commenced
operations on February 1, 1997.
* AARP Global Growth Fund commenced operations on February 1, 1996. AARP Bond
Fund for Income, AARP U.S. Stock Index Fund, AARP International Growth and
Income Fund, and AARP Small Company Stock Fund commenced operations on
February 1, 1997.
** This amount includes Mr. Fiedler received $34,515 accrued for
Mr. Fiedler through a deferred compensation program in 1997. As
of December 31, 1997, Mr. Fiedler had a total of
$228,289147,029 accrued over a number of years in the a
deferred compensation program for serving on the Boards of
Directors of Scudder Institutional Fund, Inc. and Scudder Fund,
Inc.
- - Amounts include pro rata share of Trustee's fees of AARP Managed Investment
Portfolios Trust paid by each of the Trusts pursuant to the Service
Agreement. See discussion of the Service Agreement under "Management of the
Funds" for further information. This includes fees of AARP Managed Investment
Portfolios.
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, a Delaware corporation. The underwriting agreements for
all of the Trusts except AARP Managed Investment Portfolios Trust dated
September 4, 1985 will remain in effect until August 31, 1998_____________ 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. The underwriting agreement for AARP
Managed Investment Portfolios Trust is dated February 1, 1997 and will remain in
effect until August 31, 1998 and from year to year thereafter.
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.
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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 intends to elect 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) 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. If a portion of a Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible for
the corporate dividends-received deduction.
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 taxable at a maximum 20% or 28% (depending
on the Fund's holding period for the assets giving rise to the gain), 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 that a Fund designates as capital gains
dividends are taxable at a maximum 20% or 28% (depending on the Fund's holding
period for the assets giving rise to the gain)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 and are not eligible for the corporate
dividends - received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain on such shares.
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
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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 may be
eligible for reduced capital gains rateswill 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 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 security and at least one
option or other position with respect to the 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
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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.
Notwithstanding any of the foregoing, a Fund may recognize gain (but not
loss) from a constructive sale of certain "appreciated financial positions" if
the Fund enters into a short sale, offsetting notional principal contract,
futures or forward contract transaction with respect to the appreciated position
or substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment of appreciated financial positions does not apply to certain
transactions closed in the 90-day period ending with the 30th day after the
close of the Fund's taxable year, if certain conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will recognize gain at that time as though it
had closed the short sale. Future regulatories may supply similar treatment to
other transactions with respect to property that becomes substantially
worthless.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time 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
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.
A Proposed regulations have been issued which may allow the Fund mayto
make an election to mark to market its shares of these foreign investment
companies in lieu of being subject to U.S. federal income taxation. At the end
of each taxable year to which the election applies, the Fund would report as
ordinary income the amount by which the fair market value of the foreign
company's stock exceeds the Fund's adjusted basis in these shares.; any No mark
to market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any set mark-to-market gains,
included in income in prior yearsmay 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.
The AARP Global Growth Fund and the AARP International Growth and Income
Fund each may qualify for the election permitted under Section 853 of the Code
so that shareholders may (subject to limitations) be able to claim a credit or
deduction on their federal income tax returns for, and will be required to treat
as part of the amounts distributed to them, their pro rata portion of qualified
taxes paid by the Fund to foreign countries (which taxes relate primarily to
investment income). The Fund may make an election under Section 853 of the Code,
provided that more than 50% of the value of the total assets of the Fund at the
close of the taxable year consists of securities in foreign corporations. The
foreign tax credit available to shareholders is subject to certain limitations
imposed by the Code, except in the case of certain electing individual taxpayers
who have limited creditable foreign taxes and no foreign source income other
than passive investment-type income. Furthermore, the payment of foreign taxes
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withheld on dividends if the dividend-paying shares or the shares of the Fund
are held by the Fund or the shareholder, as the case may be, for less than 16
days (46 days in the case of preferred shares) during the 30-day period (90-day
period for preferred shares) beginning 15 days (45 days for preferred shares)
before the shares become ex-dividend.
If a Fund does not make the election permitted under section 853 any
foreign taxes paid or accrued will represent an expense to the Fund which will
reduce its investment company taxable income. Absent this election, shareholders
will not be able to claim either a credit or a deduction for their pro rata
portion of such taxes paid by the Fund, nor will shareholders be required to
treat as part of the amounts distributed to them their pro rata portion of such
taxes paid.
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. If a Fund invests
in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Fund by its corporate shareholders, to the extent attributable
to such portion of accrued original issue discount, may be eligible for this
deduction for dividends received by corporations if so designated by the Fund in
a written notice to shareholders.
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.
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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 a maximum 20% or 28% long-term
capital gains rate (depending on the Fund's holding period for the assets giving
rise to the 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.
Special Information Regarding the AARP Managed Investment Portfolios:
Distribution of an underlying AARP Mutual Fund's investment company taxable
income are taxable as ordinary income to an AARP Managed Investment Portfolio
which invests in the Fund. Distribution of the excess of an underlying AARP
Mutual Fund's net long-term capital gain over its net short-term capital loss,
which are properly designated as "capital gain dividends," are reportedtaxable
as 20% or 28% long-term capital gain byto an AARP Managed Investment Portfolio
which invests in the Fund, regardless of how long the Portfolio held the Fund's
shares, and are not eligible for the corporate dividends-received deduction.
Upon the sale or other disposition by an AARP Managed Investment Portfolio of
shares of an underlying AARP Mutual Fund, the Portfolio generally will realize a
capital gain or loss which will be 20% or 28% long-term or short-term, generally
depending upon the Portfolio's holding period for the shares. The AARP Managed
Investment Portfolios will not be eligible to elect to "pass through" to their
shareholders the ability to claim a deduction or credit with respect to foreign
income and similar taxes paid by an underlying AARP Mutual Fund.
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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
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.
AARP Diversified Portfolio Investments are made directly in Underlying
AARP Funds with no commissions.
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 authorized, when placing portfolio transactions
for the AARP Funds, except for the AARP Growth 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.
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, 1995, 1996 and 1997 the AARP
Growth and Income Fund paid brokerage commissions of $1,690,604, $3,453,660 and
$4,618,820 and the AARP Capital Growth Fund paid brokerage commissions of
$2,636,662, $1,011,500 and $734,958, both respectively. For the fiscal period
ended September 30, 1995, and for the fiscal years ended September 30, 1996 and
1997, the AARP Balanced Stock and Bond Fund paid brokerage commissions of
$149,816, $201,070 and $229,436, respectively. For the fiscal period February 1,
1996 (commencement of operations) until September 30, 1996, the AARP Global
Growth Fund paid brokerage commissions of $209,773 and $180,078 for the fiscal
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year ended September 30, 1997. In the fiscal year ended September 30, 1997,
$4,354,345 (94% of the total brokerage commissions paid by AARP Growth and
Income Fund) and $720,089 (98%) 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
$567,987,991 for the AARP Capital Growth Fund, (74% of all brokerage
transactions) and $2,873,260,718 (80% 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, 1997, $198,249 (86%) of
the total brokerage 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 $164,436,537 for AARP Balanced Stock and Bond Fund, (48%
of all brokerage transactions). For the fiscal period ended September 30, 1997,
$178,368 (99%) of the total brokerage commissions paid by AARP Global 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 $72,794,359 for AARP Global Growth Fund (75% 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.
For the fiscal year ended September 30, 1997, AARP U.S. Stock Index Fund
paid brokerage commissions of $0, AARP International Growth and Income Fund paid
brokerage commissions of $74,937, and AARP Small Company Stock Fund paid
brokerage commissions of $37.
The AARP U.S. Stock Index Fund aggregated $0 (0% of all brokerage
transactions), the AARP International Growth and Income Fund aggregated
$23,325,960 (99% of all brokerage transactions), and the AARP Small Company
Stock Fund aggregated $21,952,906 (52% of all brokerage transactions.)
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 portfolio
turnover rates for the fiscal years ended September 30, 1995, 1996, and 1997 for
five of the non-money market Funds were: AARP High Quality Short Term Bond Fund,
201.07%, 169.96% and 83.26%; AARP GNMA and U.S. Treasury Fund, 70.35%, 83.44%
and 86.76%94.24%; AARP Insured Tax Free General Bond Fund, 17.45%, 18.69% and
7.61%7.82%; AARP Growth and Income Fund, 31.26%, 25.02% and 33.4%; AARP Capital
Growth Fund, 98.44%, 64.84% and 39.04%_____%, all respectively. The portfolio
turnover rate for the period ended September 30, 1995 and for the fiscal years
ended September 30, 1996 and 1997 for the AARP Balanced Stock and Bond Fund was
63.77%, 35.22% and 26.79%, respectively. The portfolio turnover rate for AARP
Global Growth Fund for the period February 1, 1996 (commencement of operations)
to September 30, 1996 was 12.56%; for the fiscal year ended September 30, 1997
the portfolio rate was 31.34%. Under normal investment conditions, it is
anticipated that the AARP Bond Fund for Income's, the AARP U.S. Stock Index
Fund's, the AARP International Stock Fund's or the AARP Small Company Stock
Fund's annual portfolio turnover rate will not exceed 75%. It is also
anticipated that the annual portfolio turnover rate for AARP Diversified Growth
Portfolio and AARP Diversified Income Portfolio will not exceed 50% for the
initial fiscal year.
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NET ASSET VALUE
AARP Money Funds
The net asset value per share of the Funds are 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 AARP High Quality Money 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.
The valuation of AARP High Quality Tax Free Money Fund's portfolio
securities is based upon their amortized cost which does not take into account
unrealized securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price AARP High Quality Tax Free Money Fund would
receive if it sold the instrument. During periods of declining interest rates,
the quoted yield on shares of AARP High Quality Tax Free Money Fund may tend to
be higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized cost
by AARP High Quality Tax Free Money Fund resulted in a lower aggregate portfolio
value on a particular day, a prospective investor in the Fund would be able to
obtain a somewhat higher yield if he purchased shares of the Fund on that day,
than would result from investment in a fund utilizing solely market values, and
existing investors in the Fund would receive less investment income. The
converse would apply in a period of rising interest rates. Other securities and
assets for which market quotations are not readily available are valued in good
faith at fair value using methods determined by the Trustees and applied on a
consistent basis. 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. The Trustees review the valuation of AARP High Quality Tax Free Money
Fund's securities through receipt of regular reports from the Fund
ManagerAdviser at each regular Trustees' meeting. Determinations of net asset
value 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 Funds are 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, Martin Luther King, Jr. 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.
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 most recent 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
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<PAGE>
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
purchased 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 Fund ManagerAdviser 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. Shares
of AARP Underlying Funds in which the AARP Diversified Portfolios invest in next
determine net asset value after the order is placed.
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, 19967, 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.
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
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<PAGE>
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. Bonds rated BBB have an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
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.
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
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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.
The CUSIP for AARP High Quality Money Fund is 000036E-10-7
The CUSIP for AARP GNMA & U.S. Treasury Fund is 00036M-10-9.
The CUSIP for AARP High Quality Short Term Bond Fund is 00036M-20- 8.
The CUSIP for AARP Bond Fund for Income Fund is 00036M-30-7.
The CUSIP for AARP Tax Free Money Fund is 00036Q-10-0.
The CUSIP for AARP Insured Tax Free General Bond Fund is 00036Q-20- 9.
The CUSIP for AARP Balanced Stock & Bond is 00036J-30-4.
The CUSIP for AARP Growth & Income Fund is 00036J-10-6.
The CUSIP for AARP Capital Growth Fund is 00036J-20-5.
The CUSIP for AARP Global Growth Fund is 00036J-40-3.
The CUSIP for AARP U.S. Stock Index Fund is 00036J-50-2
The CUSIP for AARP International Growth and Income Fund is 00036J- 60-1.
The CUSIP for AARP Small Company Stock is 00036J-70-0.
The CUSIP for AARP Diversified Income With Growth Portfolio is
00036W-20-600036W-10-7.
The CUSIP for AARP Diversified Growth Portfolio is 00036W-10- 700036W-20-6.
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.
The firm of Dechert Price & Rhoads of Washington, D.C. is
counsel for the Trusts.
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These Trusts also have a shareholder servicing agreement with Scudder
Service Corporation ("SSC"), a subsidiary of the Fund Manager. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount for each Fund is shown in the
table below, and is included in Services to shareholders in the Statements of
Operations.
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 the Funds. The
amount for each Fund is shown in the table below, and is included in Custodian
and accounting fees in the Statements of Operations.
For the period ended September 30 the amounts charged by SSC to the Funds
were as follows:
1997 Total SSC 1996 1995
Amount Unpaid at Amount Amount
Fund Charged September Charged Charged
to Fund 30, 1997* to Fund to Fund
by SSC(a) by SSC by SSC
AARP High Quality Money $1,505, $121,984 1,526, 1,533,
Fund 677 580 555
AARP High Quality Tax 256,965 20,052 304,92 347,01
Free Money Fund 4 6
AARP GNMA and U.S. 6,732,1 539,940 7,340, 8,104,
Treasury Fund 69 012 169
AARP High Quality Short 1,455,6 114,310 1,586, 1,720,
Term Bond FundHigh 52 232 303
Quality Bond Fund
AARP Insured Tax Free 1,741,4 138,720 1,925, 2,148,
General Bond Fund 82 762 893
AARP Bond Fund for Income - - - -
AARP Balanced Stock and 1,357,9 132,955 724,79 513,03
Bond Fund 72 6 1
AARP Growth and Income 6,853,7 672,527 3,850, 3,249,
Fund 61 612 295
AARP U.S. Stock Index - - - -
Fund
AARP Capital Growth Fund 1,889,0 180,473 1,176, 171,70
72 990 2
AARP Small Company Stock 93,491 93,491 - -
Fund
AARP Global Growth Fund 558,504 51,344 178,75 -
9**
AARP International Growth - - - -
& Income
FundInternational Stock
Fund
* Total unpaid amounts are included in Other payables and accrued expenses in
the Statements of Assets and Liabilities.
* For the period February 7, 1996 (commencement of operations) to September 30,
1996.
(a)SSC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and AARP
International Growth & Income FundInternational Stock Fund amounting to
$40,906, $60,094, $25,298, and $54,419, respectively.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of Scudder Kemper InvestmentsScudder,
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 High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund and
AARP Bond Fund for Income 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,
AARP U.S. Stock Index Fund, AARP Capital Growth Fund and AARP Small Company
Stock 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 and Scudder International Growth and Income Fund each pay Scudder Fund
Accounting Corporation an annual fee equal to 0.065% on the first $150 million
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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 of $13,000 incurred by AARP Bond Fund for Income in conjunction with
its organization are amortized over the five year period beginning February 1,
1997.
Costs of $16,000 incurred by AARP U.S. Stock Index Fund in conjunction
with its organization are amortized over the five year period beginning February
1, 1997.
Costs of $13,000 incurred by AARP International Growth and Income Fund in
conjunction with its organization are amortized over the five year period
beginning February 1, 1997.
Costs of $13,000 incurred by AARP Small Company Stock Fund in conjunction
with its organization are amortized over the five year period beginning February
1, 1997.
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 19981997
calendar year.
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19981997 To Equal Hypothetical
Taxable Tax-Free Yields of 5%, 7%
Income and 9%, a Taxable Investment
Brackets+ Would Have To Earn**
Individual Federal
Return Tax 5% 7% 9%
Rates
$0 - 15.0% 5.88% 8.24% 10.59%
$25,350$24,65
0
$25,351 - 28.0% 6.94% 9.72% 12.50%
$61,400$24,65
1 - $59,750
$61,401 - 31.0% 7.25% 10.14% 13.04%
$128,100$59,7
51 - $124,650
$128,101 - 36.0% 7.81% 10.94% 14.06%
$278,450$124,
651 -
$271,050
Over 39.6% 8.28% 11.59% 14.90%
$278,450$271,
050
Joint Federal
Return Tax 5% 7% 9%
Rates
$0 - 15.0% 5.88% 8.24% 10.59%
$42,350$41,20
0
$42,351 - 28.0% 6.94% 9.72% 12.50%
$102,300$41,2
01 - $99,600
$102,301 - 31.0% 7.25% 10.14% 13.04%
$155,950$99,6
01 - $151,750
$155,951 - 36.0% 7.81% 10.94% 14.06%
$278,450$151,
751 -
$271,050
Over 39.6% 8.28% 11.59% 14.90%
$278,450$271,
050
** 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 $124,500$121,200 ($62,250 $60,600 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
$124,500$121,200 (for single individuals) or $186,800$181,800
(for married individuals filing jointly). The effective
federal tax rates and equivalent yields for such taxpayers
would be higher than those shown above.
+ This illustration is based on estimated break points using the IRS'
formula.
Example:*
Based on 19981997 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $50,000 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 herein.
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<PAGE>
AARP Investment Program
from SCUDDER
--------
REACHING
YOUR
GOALS
--------
ANNUAL REPORT
-------------
TO SHAREHOLDERS
---------------
September 1997
<PAGE>
TABLE OF CONTENTS
Annual Review 1
Special Section 6
Message from the Portfolio Managers 11
Money Market Funds
AARP High Quality Money Fund 12
AARP High Quality Tax Free Money Fund 13
Income Funds
AARP GNMA and U.S. Treasury Fund 14
AARP High Quality Bond Fund 16
AARP Insured Tax Free General Bond Fund 18
AARP Bond Fund for Income 20
Growth and Income Funds
AARP Balanced Stock and Bond Fund 22
AARP Growth and Income Fund 24
AARP U.S. Stock Index Fund 26
U.S. Growth Fund
AARP Capital Growth Fund 28
AARP Small Company Stock Fund 30
Worldwide Growth Funds
AARP Global Growth Fund 32
AARP International Stock Fund 34
Asset Allocation Funds
AARP Managed Investment Portfolios 36
AARP Funds' Investment Portfolios 39
Financial Statements 119
Financial Highlights 135
Notes to Financial Statements 145
Report of Independent Accountants 154
Officers and Trustees 155
Service Information 158
Tax Information 159
Glossary 160
<PAGE>
AARP Investment Program
from SCUDDER
SIDEBAR TEXT:
TAKE ADVANTAGE OF DOLLAR COST AVERAGING
Dollar cost averaging is a simple systematic approach to managing risk. You
invest a specific amount of money on a regular basis -- usually monthly -- to
reduce the average price you pay over time for mutual fund shares. You will
automatically buy shares at different prices: more shares when the prices are
down, and fewer shares when the prices are up. Because you buy more shares when
prices are low, the average price you pay per share may be lower than the actual
average share price during the same period. While there are no assurances, over
time, dollar cost averaging can offer the potential of greater returns and
greater protection from market volatility. You can invest as little as $50 per
month through the AARP Investment Program's Automatic Investment Plan. It is
simple and hassle free. Call us at 1-800-253-2277 for details.
Annual Review
This Annual Report covers the period from October 1, 1996, through
September 30, 1997. During this time many positive changes took place in the
AARP Investment Program. Most significant was the introduction of six new funds
to the family in February. Together, the 15 AARP Mutual Funds offer you a choice
of uniquely managed investments, whose goal is to provide competitive returns,
but with less share price fluctuation than similar funds. More recently,
Scudder, Stevens & Clark, Inc. reached an agreement to form an alliance with the
Zurich Group, a worldwide provider of insurance services. These exciting
developments are described later in this review.
First, let us turn to the favorable performance of the AARP Mutual Funds
over the year, which in part reflected the overall strength of the U.S. stock
market and declining long-term interest rates. We are pleased to report that as
of September 30, 1997, several of the AARP Mutual Funds were highly rated by
Morningstar, which ranks the relative risk versus returns of comparable funds.
Detailed reviews of the performance of each of the Funds begin after page 11.
CALLOUT:
Several AARP Mutual Funds are highly rated by Morningstar. Read further in
A Message from the Portfolio Managers on page 11.
The Stock Market
The upward pace of the U.S. stock market continued during the past 12
months as inflation remained benign and unemployment sank to the lowest level in
more than 20 years. In addition, positive corporate profits, a strengthening
dollar, the recent tax legislation, and the shrinking deficit combined to create
a healthy environment for both large- and small-cap U.S. stocks. Large-cap
stocks, as measured by the unmanaged Standard & Poor's Composite Index of 500
Stocks (S&P 500), returned 40.46%, and small-cap stocks, as measured by the
Russell 2000 Index, returned 33.20% in the 12 months ending September 30, 1997.
This environment prompted Federal Reserve Chairman Alan Greenspan to remark in
July that the current state of the economy was "exceptional." These positive
forces extended to most foreign
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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
THE STOCK MARKET
CHART PERIOD:
1992 - 1997
CHART DATA:
MSCI EAFE Russell 2000 S&P 500
--------- ------------ -------
1992-1993 26.35 33.19 13.00
1993-1994 9.83 2.62 3.69
1994-1995 5.79 23.40 29.75
1995-1996 8.61 13.13 20.34
1996-1997 12.18 33.20 40.46
CAPTION TO PRECEDING CHART:
The stock market total return for the annual period September 30 to
September 30, as measured by the Morgan Stanley Capital International EAFE
Index, the Russell 2000 Index, and the S&P 500 Index.
-------
markets as well, although at a more modest pace. The Morgan Stanley Capital
International Index (MSCI), an unmanaged market- value-weighted measure of
non-U.S. stock markets, rose 12.18% over the period covered by this Report.
It is important to note that while the U.S. stock market has been on an
upward trend, the swings along the way were often quite significant. One of
several examples included the 247-point drop of the Dow Jones Industrial Average
(the Dow) on August 15, 1997. This decline, which represented a 3.1% decline in
the value of the thirty companies included in the Dow, and 2.6% of the S&P 500,
capped a week of declining prices. However, by the following week, stock prices
more than made up for the loss.
THE BOND MARKET
After a strong fourth quarter of 1996 for the bond market, healthy economic
news and fears of potential inflationary pressure caused the bond market to
decline in the first quarter of 1997. In recent months, however, bonds rallied
and more than recovered from these losses. Low inflation, a shrinking federal
deficit, a budget agreement, and reduced government borrowing all had a positive
impact on the bond market. Long-term interest rates, as measured by the 30-year
U.S. Treasury Bond, declined from 6.92% on September 30, 1996, to 6.40% on
September 30, 1997. Short-term rates, as measured by the three-month Treasury
bill, declined from 5.01% to 4.95% over the same period. Bond prices, and
therefore the value of your bond investments, rose.
SIDEBAR TEXT:
A Reminder for Investors -- Have a Long-Term Perspective
While you may be surprised, if not unnerved, by day-to-day swings in the
financial markets, history tells us that long-term investors are best served by
keeping the inevitable volatility of the markets in proper perspective. If you
can accept that both the bond and stock markets will experience volatility, the
downturns in the markets should not be cause for alarm. In fact, these downturns
may provide buying opportunities for some investors.
It is also important to keep the absolute amounts of changes in the markets in
perspective. The Dow Jones Industrial Average has tripled in value over the past
ten years. For example, the 508-point drop in 1987 represented a 22.6% decline
of the market. That same decline would have represented only 6.4% of the market
as of September 30, 1997.
2
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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
THE U.S. BOND MARKET
CHART PERIOD:
1992 - 1997
CHART DATA:
3-Month Treasury 30-Year
Bill Treasury Bond
---------------- -------------
1992-1993 2.98 6.02
1993-1994 4.77 7.82
1994-1995 5.41 6.50
1995-1996 5.03 6.92
1997-1997 4.95 6.40
CAPTION TO PRECEDING CHART:
The U.S. Bond market yield for the annual period September 30 to September
30, as measured by the 3-month Treasury Bill and the 30-year Treasury Bond.
Looking Ahead
As we look toward the end of 1997 into early 1998, it is difficult to
predict how the stock and bond markets will fare. While there are no guarantees
when investing, we continue to believe there is long-term opportunity in both
the stock and bond markets. This should benefit long-term investors (those
willing to invest for five years or more). However, due to the perceived high
value of the U.S. stock market, we maintain a somewhat cautious outlook over the
short term. As always, we encourage diversification among U.S. large- and
small-company equity holdings, international equity holdings, and the fixed
income sector. This serves as protection against a downturn in any one area of
the market.
Reflecting on Important Program Developments
The past year has brought many exciting changes to the AARP Investment
Program. Many of our shareholders, and other AARP members, have expressed a high
level of interest in a greater choice of mutual funds and in taking somewhat
more risk with a portion of their total investment portfolio. In response to
your feedback, we introduced six new funds to the family in February of this
year -- the AARP Bond Fund for Income, the AARP U.S. Stock Index Fund, the AARP
Small Company Stock Fund, the AARP International Stock Fund, and the AARP
Managed Investment Portfolios.
SIDEBAR TEXT:
The AARP Lump Sum Service
For many, receiving a lump sum payout is a significant, if not a
once-in-a-lifetime, event. The process of deciding how best to reinvest this
money can be complex and even intimidating. In fact, many of you have told us
that you need help in making decisions about how to invest your proceeds when
you have received a large lump sum or one-time distribution, such as from a
retirement plan.
In response to your feedback, we have introduced the AARP Lump Sum Service.
You can now work with a specially trained AARP Investment Program retirement
plan specialist who can help you understand tax implications and your investment
options. Our specialists can also assist you in working through the "red tape"
that is sometimes involved with a lump sum distribution.
Taking advantage of the AARP Lump Sum Service can make investment
decision-making easier and the implementation of your decisions hassle free.
Call us at 1-800-253-2277 to find out more about this free service.
3
<PAGE>
While most of the Funds offer the potential of higher returns (and
therefore higher risk) than the existing AARP Mutual Funds, you told us that you
were hopeful that we could manage these Funds for the potential of less downside
risk than comparable funds. The Funds were therefore developed and are managed
to do just that. Their portfolio management teams seek competitive -- but not
the highest -- returns, but with less risk than comparable funds. Designed
specially to meet the needs of AARP members, we know of no other family of funds
that includes a similar risk management mandate for all of its funds. Of course,
while the AARP Mutual Funds are actively managed to reduce share price
fluctuation, remember that your principal is never insured or guaranteed, and
that the value of your investment and your return will move up and down as
market conditions change.
Having launched the six new funds in February, we spent much of the balance
of the year developing a tool that will allow you to actually "pinpoint" how the
AARP Mutual Funds are performing compared to similar mutual funds, from a total
return and risk management standpoint. This new performance measurement system
is being introduced with this Report. We plan to communicate extensively about
it in the future to help you to become more comfortable with the performance
measurement system and to encourage you to use it. Please refer to the special
section of this Report, which describes the system in more detail.
CALLOUT:
The six new AARP Mutual Funds, introduced in February 1997, have been well
received by AARP member investors, having grown to more than 24,000 accounts
with over $271 million in assets as of September 30, 1997.
We were also pleased to announce that Scudder has reached an agreement to
form an alliance with The Zurich Group. Scudder will represent Zurich's core
investment management capability. Zurich, a 125-year-old financial services
company, has a heritage of innovative and customized problem-solving that takes
the form of a disciplined, conservative, and personal approach to risk
management. This is a philosophy that mirrors Scudder's approach to asset
management. As part of the new relationship, Scudder will be combined with
Zurich Kemper Investments, Inc., an investment management company now owned by
Zurich. The new company will be named Scudder Kemper Investments, Inc.
SIDEBAR TEXT:
New Web Site
The AARP Investment Program's Web site is located at:
http://aarp.scudder.com.
This dynamic electronic connection to the Program provides visitors easy
access to a broad range of information, including the AARP Mutual Funds
performance, which is updated daily, and the complete prospectus.
Our Web site also offers News Stories featuring important information about the
markets and investing. The Learning Center offers an investor education overview
through Quick Concepts, and several investment guides, Planning for Retirement
and Managing Your Money In Retirement. The Archives offers newsletter back
issues, while the Resources for Investors offers a Glossary and Lists of
Associations and Publications.
The Program's site allows you to communicate your questions and comments
directly to us and to request informative how-to literature about investing,
published by the AARP Investment Program from Scudder. Visit us often, as
content is regularly updated.
4
<PAGE>
SIDEBAR TEXT:
A Note About the Expense of
Publishing This Report
Some shareholders have appropriately asked about the expense of publishing this
SEC-required Report. Our goal is to provide information about the performance of
the Funds, current investment strategies, and details about the expenses of the
Funds. We also review certain developments in the Program that you should be
aware of as a shareholder.
Further, we go to great lengths to assure easy reading, utilizing larger
typeface and the liberal use of white space. Our challenge is to accomplish all
of this as cost-effectively as possible. So, for example, in addition to sending
only one copy of the Annual Report to every shareholder's home, we use
lower-quality, less-expensive paper.
We have also determined that our consolidated Report, featuring all 15 Funds, is
a less expensive means of communicating Fund information to you than publishing
and mailing individual Fund Reports, as do other mutual fund companies. This
year's Report cost approximately 85 cents per copy to produce. This compares to
the cost of last year's Report at 78 cents per copy. We are comfortable with
this modest increase given the Report's expansion to include the six new AARP
Mutual Funds.
Viewed from the standpoint of expense ratios, the total publication cost is
approximately 1/24th of 1 basis point for the AARP family of fifteen mutual
funds with average expenses of 95 basis points, which compares favorably to the
Lipper average fund expenses of 135 basis points.*
If you require additional copies of the Report, please call 1-800-253-2277.
* Lipper Analytical Services, Inc. is the source for the average expenses of
similar mutual funds.
The Program's core commitment to risk managed investment performance and
the delivery of the highest service levels will not change as a result of the
alliance. In fact, we expect that this new alliance will offer significant
benefits over time resulting from the Program's access to greater resources --
human and capital -- that will take the form of greater investment expertise and
enhanced services.
All of us at the AARP Investment Program from Scudder are excited about the
future and about working with you to make informed investment decisions that
lead to financial security and independence as you plan for and live in
retirement. Please do not hesitate to contact us with any questions you may have
at 1-800-253-2277.
Our best,
/s/Linda C. Coughlin /s/Cornelia Small
Linda C. Coughlin Cornelia Small
Chairperson President and
Investment Director
5
<PAGE>
Special Section:
Measuring the Performance of
The AARP Mutual Funds
The past year has been an exciting one for the AARP Investment Program from
Scudder, due in large part to the addition of six new funds to the family.
Together, the 15 AARP Mutual Funds offer you a choice of uniquely managed
investments, whose goal is to provide competitive returns but with less share
price volatility than similar funds. The addition of the new funds offers you a
significantly greater opportunity to be well diversified in keeping with your
individual circumstances and investment objectives. The family of AARP Mutual
Funds addresses four major investment needs: stability of principal, income,
tax-free income, and growth.
CALLOUT:
We provide these market index comparisons in accordance 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 the fund) to that of a broad-based
securities market index.
Assessing the risk and return potential of the vast array of mutual funds
available today can be an overwhelming task. Measuring and evaluating the
performance of the AARP Mutual Funds presents a further challenge for investors
because of the emphasis our portfolio managers put on the active management of
risk as they strive to produce competitive returns. As you read through the
individual fund summaries that follow this section, you will note that all of
the AARP Mutual Funds except the AARP Money Funds have been compared to market
indices.
The problem with these comparisons is that the performance of indices may
vary significantly from the performance of actual mutual funds. The reason is
that indices are unmanaged baskets of securities, and do not include the
expenses of operating a fund, such as advisory fees and portfolio transaction
costs. Due to these factors, even index funds such as the AARP U.S. Stock Index
Fund tend to underperform the market indices. Indices, therefore, do not provide
a complete picture. This is important to remember when comparing the performance
of any mutual fund to the performance of a market index.
With this in mind, we have devoted this special section to an explanation
of a new performance measurement system. It is proving to be a valuable tool for
those of us at Scudder and AARP who have responsibility for overseeing the
performance of your funds. It can be helpful to you as well. Your understanding
of the process will make it easier for you to select from the expanded choices
of AARP Mutual Funds.
6
<PAGE>
Our plans are to continue to communicate with you about this new
performance system to help you evaluate investment performance of the AARP
Mutual Funds, not just as it relates to total return but also to the management
of risk. Our goal has been to create an easy-to-understand approach that will
permit you to fairly and objectively assess:
o the total return of the AARP Mutual Funds;
o the downside risk of the AARP Mutual Funds, measured by the
frequency and amount by which the total return fluctuates
downward; and
o the total return and downside risk of the AARP Mutual Funds
relative to similar mutual funds.
Creating a Performance Measurement System:
Four Principles to Remember
We have been guided by four principles that are important to remember as
you familiarize yourself with the performance measurement system.
1) A single performance measure does not necessarily tell the whole story
-- particularly in the case of your AARP Mutual Funds, which put
significant emphasis on the active management of risk. As you will see
in the graphs provided later in this Report, we measure the
performance of your Funds in terms of total return and downside risk.
2) We measure downside risk because most investors view risk as related
to the chances of a loss and the likely size of that loss. We have
therefore chosen to track, measure, and evaluate the frequency and
amount by which each fund's total return fluctuates downward --
absolutely and compared to groups of similar mutual funds.
3) One-year performance is not a strong indicator because of its
variability -- produced by frequent and large swings in the markets.
Of greater significance, however, is the fact that most investors have
an investment horizon of more than one year. Indeed, a recent study
conducted by the Investment Company Institute (ICI) showed that only
4% of investors have a time horizon of less than one year, and that
the median investment time horizon was eight years. We therefore focus
our evaluation of performance over three-year time periods or more,
although we monitor shorter-term performance to identify emerging
trends affecting the longer-term performance of the AARP Mutual Funds.
4) Benchmarks such as the S&P 500 and the various bond market indices may
be of limited use in evaluating performance, as previously mentioned.
Mutual fund investors like you care increasingly about how your funds
are performing compared to similar mutual funds you could have
purchased. We have therefore made a good faith effort to create peer
universes of similar mutual funds
7
<PAGE>
against which you can assess risk and return for each of your AARP
Mutual Funds. We have selected funds from the larger universe of funds
tracked by Lipper Analytical Services, Inc. We included any fund with
at least $100 million in assets, and with a three-year track record.
The universes will be updated periodically as new funds meet the
criteria.
Pinpointing the Tradeoff Between Risk and Return
of the AARP Funds
All of the AARP Mutual Funds with share price volatility (i.e., all except
AARP Money Funds) that have been in existence for three years or more are
represented on risk/return graphs in their individual sections of this Report.
They are the:
o AARP GNMA and U.S. Treasury Fund o AARP Balanced Stock and Bond Fund
o AARP High Quality Bond Fund o AARP Growth and Income Fund
o AARP Insured Tax Free General Bond Fund o AARP Capital Growth Fund
The AARP Bond Fund for Income, AARP Global Growth Fund, AARP U.S. Stock
Index Fund, AARP Small Company Stock Fund, AARP International Stock Fund, and
the two AARP Managed Investment Portfolios have been in existence for less than
three years. Therefore, we have not included them in this analysis. We will be
providing their risk-managed performance information in upcoming AARP Investment
Program communications.
How to Read the Performance Graphs
First, and most important, be patient. While we are confident that the
performance measurement system has great value in helping you to assess the
investment performance of your Funds, it may take more than one review of the
graphs for you to feel comfortable with them.
Here's how to read them:
o The vertical (y) axis represents the percentage of average monthly
return.
o The horizontal (x) axis represents the combination of the frequency
and amount by which monthly total return has fluctuated downward,
expressed in percentage terms. Unlike total return, the lower the risk
percentage, the better we are doing at controlling downside
fluctuation of total return.
o Two dotted lines divide the graph into four sections or quadrants. The
point where the two dotted lines meet represents the median risk and
median return of the peer universe of similar funds.
8
<PAGE>
Our goal is for the AARP Mutual Funds to perform in the upper-left
quadrant. If that cannot be achieved (it is not possible all the time), then our
goal is for the Funds to perform in the lower-left quadrant. This reflects the
priority we put on the management of risk in response to your feedback. You have
told us that the achievement of competitive returns is important, but that you
do not necessarily expect your investments to achieve the highest total returns
if we can provide less downside risk. You know that in general the achievement
of the highest levels of return involves the acceptance of a potentially and
perhaps uncomfortably high level of risk (funds in the upper and lower-right
quadrants).
The graph below pinpoints the performance of the AARP Growth and Income
Fund in terms of average monthly return and average monthly downside risk for
the three years ending September 30, 1997. The result is shown in relation to
the the median performance of its peer universe of other growth and income
funds. The Fund's total return was slightly better than the average of its peers
as represented by its location slightly above the horizontal axis. The Fund is
shown to the left of the vertical axis which means the frequency and magnitude
with which the Fund's total return has declined is less during this period than
the average of the peer mutual fund universe.
A DESCRIPTIVE DIAGRAM EXPLAINING THE REPORT'S SCATTER CHARTS APPEARS HERE
A fund in the upper-left quadrant has better-than-median return and
lower-than-median risk as defined by the frequency of down months and amount by
which total return declines in those months. Such a fund has better overall
performance than the typical peer fund. This is the best combination of results
- -- less risk with more return.
A fund in the upper-right quadrant has better-than-median return but
higher-than-median risk.
AARP Growth and Income Fund Three-Year Risk/Return Performance
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Growth and 2.00 1.26
Income Fund
Peer Funds 1.97 1.52
Average
(Data represented from October 1, 1994 through September 30, 1997 for 269
similar funds.)
A fund in the lower- left quadrant has lower-than-median return but
lower-than- median risk.
A fund in the lower-right quadrant has lower- than-median returns and
higher-than-median risk. Such a fund has worse overall performance than the
typical peer fund. This is the worst combination of results -- more risk with
less return.
9
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Working with Us to Assess Fund Performance
Your frank and honest views about your investment needs and performance
expectations, especially as they relate to your willingness to trade off risk
for return, have been invaluable in helping us to develop the new AARP Mutual
Funds and to refine the investment goals and strategies of the existing AARP
Mutual Funds. More recently your perspectives have greatly informed the
development of a process by which we and you can measure performance of your
funds. As we introduce and refine our new performance measurement system, we
hope you will continue to provide us with your reactions, questions, and
concerns.
Most importantly, we encourage you to get comfortable with and use this
tool. It will help you feel confident with the investment decisions you have
made and continue to make as you plan for, and during, your all-important
retirement years.
If you have any questions about the Program's performance measurement
system, this Annual Report in general, or on how to diversify your portfolio to
achieve competitive returns and protection against the volatility of the
financial markets, please do not hesitate to call one of our AARP Mutual Fund
Representatives, toll free, at 1-800-253-2277, 8:00 a.m. to 8:00 p.m., eastern
time. They can help you to evaluate, if not enhance, the appropriateness of your
investment portfolio based on your risk tolerance, time horizon, and specific
investment objectives -- whether or not your portfolio includes AARP Mutual
Funds.
Remember, we are here to help.
10
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A Message from the Portfolio Managers
On the following pages you will find our reviews of the investment
performance of the individual AARP Mutual Funds for the period October 1, 1996
to September 30, 1997.
The year has been exciting, challenging and rewarding, as we have worked
to:
o integrate the six new AARP Mutual Funds into the family consistent
with our unique mandate to provide competitive returns but with less
downside share price volatility than similar funds;
o deliver on this commitment during a period of considerable market
volatility; and
o develop an easy-to-understand approach that will help you evaluate the
investment performance of your funds -- not just as it relates to
total return, but also to the management of risk.
CALLOUT:
Current performance information for all of your Funds is available through the
Easy Access Line at 1-800-631-4636 or by calling a Mutual Fund Representative at
1-800-253-2277.
The summaries of most funds include the one-, five-, and ten-year total
return or, as in the case of those funds with less than ten years, life of fund
total return. Remember that one-year returns can be extremely high or low due to
market conditions, therefore it is important to evaluate twelve-month returns in
relation to five-year and ten-year returns. You will see that where appropriate,
a one-year total return is expressed in terms of its two components: distributed
income, which includes reinvested dividends; and capital change, defined as the
change in the price per share and includes reinvested capital gains
distributions.
Finally, we have worked to strengthen the quality of our individual
portfolio reviews with the inclusion of more relevant information about the:
o performance of the funds over longer periods of time compared to
various market indices, and
o risk-managed performance of your funds compared to similar mutual
funds. If you have not done so already, read more about our new
performance measurement system in the Special Section that begins on
page 6.
We hope this information helps you to make informed investment decisions
and that you feel confident and comfortable in the process.
SIDE BAR TEXT:
The AARP Mutual Fund family was recently awarded a Five-Star Rating from Mutual
Funds Magazine,* based on its independent evaluations of 210 fund families'
risk-adjusted returns over the last two to ten years. Family ratings are on a
Five-Star to One-Star scale, where the top fifth of all families receive five
stars; the next fifth, four-stars; the middle fifth, three stars; the
next-to-lowest fifth, two stars, and the bottom fifth, just one star.
*1997 edition of Mutual Funds Magazine
Six of the AARP Mutual Funds are rated by Morningstar* and received the
following 3-year ratings as of 9/30/97.
AARP Growth and Income Fund 4 Star
AARP GNMA and
U.S. Treasury Fund 4 Star
AARP Balanced Stock and
Bond Fund 4 Star
AARP Capital Growth Fund 4 Star
AARP High Quality Bond Fund 3 Star
AARP Insured Tax Free
General Bond Fund 3 Star
* Morningstar proprietary rankings reflect historical risk-adjusted
performance and are calculated as of 9/30/97. 2143, 1187, and 638
Equity Funds, 1309, 713 and 301 Taxable Bond Funds and 1374, 668, and
326 Municipal Bond Funds were rated for the 3-, 5-, and 10-year
periods, respectively. The ratings are subject to change each month.
Morningstar ratings are calculated from the Funds' 3-, 5-, and 10-year
average annualized total returns in excess of 90-day T-Bill returns,
with appropriate adjustments and a risk factor that reflects fund
performance below 90-day T-Bill returns. The Funds' 3-, 5-, and
10-year ratings are 5, 5, and 4 Stars, respectively. Those funds
receiving 5 Stars are in the top 10% of their investment category,
while the top 22.5% of funds that Morningstar evaluates receive 4
Stars, and 35% of the funds receive 3 Stars. Past performance is not a
guarantee of future results.
11
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AARP HIGH QUALITY MONEY FUND
----------------------------
FUND OVERVIEW
The AARP High Quality Money Fund is designed to maintain stability and safety of
your principal while providing current income. The Fund has quality standards
high enough to have secured an AAAm rating from Standard & Poor's Corp.,* 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
The Fund may be appropriate for investors who have short-term needs or those who
do not want the risks associated with investing in stocks or bonds. These
investors include those requiring current income for day-to-day expenses,
immediate access to their assets through free checkwriting, and investment
diversification with a degree of safety and stability; and those seeking a
short-term investment prior to making long-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
David Wines
Lead Portfolio Manager
K. Sue Cote
Debra A. Hanson
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.
THE FUND'S INVESTMENT STRATEGY
As with most money funds, the performance of the AARP High Quality Money
Fund mirrored the movement of short-term interest rates during the period
covered by this Report. Short-term interest rates, as measured by the
three-month U.S. Treasury Bill, declined from 5.01% on September 30, 1996 to
4.95% on September 30, 1997. In this environment, our aim was to keep a long
average maturity in the Fund. We were able to provide you with a competitive
yield compared to other money funds by lengthening its average maturity from 46
days on September 30, 1996 to 55 days on September 30, 1997.
In keeping with your Fund's objective, all securities we bought over the
past 12 months were rated within the two highest quality rating categories of
one or more rating agencies such as Moody's Investors Service, Inc., Standard &
Poor's Corporation, and Fitch Investors Service, Inc. In addition, we complied
with the guidelines established by S&P, which are more stringent than the
guidelines most money funds utilize. This enabled us to retain our AAAm rating
from S&P, the highest rating available.
Since we do not anticipate interest rates rising significantly over the
next several months, we expect your Fund's average maturity to remain within the
45- to 55-day range. If interest rates rise, we will shorten its average
maturity by purchasing shorter-maturity securities. We believe our overall
strategy will provide competitive income while maintaining stability and
liquidity.
PORTFOLIO STATISTICS
--------------------
Number of Issues 32
7-Day Current Yield 4.64%
Average Maturity 55 days
Average Quality AAAm
PORTFOLIO RETURNS
-----------------
One-Year Cumulative
Total Return 4.72%
Five-Year Average
Annualized Total Return 3.85%
Ten-Year Average
Annualized Total Return 5.15%
Five-Year Cumulative
Total Return 20.82%
Ten-Year Cumulative
Total Return 65.27%
12
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
-------------------------------------
FUND OVERVIEW
The AARP High Quality Tax Free Money Fund is designed to offer you stability and
safety of principal, along with current income free from federal income taxes.^1
The quality of the Fund is high enough to have secured an AAAm rating from
Standard & Poor's (S&P).^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 in high tax brackets or those 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 an
investment designed to offer stability, and those seeking a short-term
investment prior to making long-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
K. Sue Cote
Lead Portfolio Manager
Donald C. Carleton
Rebecca L. Wilson
Portfolio Managers
- ----------
^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 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.
THE FUND'S INVESTMENT STRATEGY
As short-term interest rates in general declined over the period
covered by this Report, our aim was to purchase securities with a one-year
maturity. Recently, securities with a one-year maturity have provided
above-average value. We combined these purchases with short variable rate notes
to create what we think is the best mix of yield and stability. As of September
30, 1997, the average maturity of your Fund was 51 days, which is longer than
the 49-day average maturity of the Fund back on September 30, 1996. Standard &
Poor's Corp. limits the average maturity of all its AAA-rated money funds to 60
days.
As always, all securities we bought over the past 12 months were 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
Investors Service, Inc., or S&P. The AARP High Quality Tax Free Money Fund is
rated AAAm by S&P, their highest rating. As a result, there are particular
guidelines with which we must comply in order to maintain our AAAm rating. In
addition, within the universe of securities that fit the S&P criteria, Scudder
credit analysts approve only a small percentage. Therefore, the number of
securities that we have to choose from is much smaller and in most cases of
better quality than other tax-free money funds.
We do not expect short-term interest rates to rise dramatically over
the next few months. Therefore, we intend to maintain a slightly above-average
maturity of the Fund. By doing so, we hope to provide you with price stability
and competitive tax-free income.
PORTFOLIO STATISTICS
--------------------
Number of Issues 54
7-Day Current Yield 3.16%
Average Maturity 51 Days
Average Quality AAAm
PORTFOLIO RETURNS
-----------------
One-Year Cumulative
Total Return 2.80%
Five-Year Average
Annualized Total Return 2.39%
Ten-Year Average
Annualized Total Return 3.81%
Five-Year Cumulative
Total Return 12.55%
Ten-Year Cumulative
Total Return 45.40%
13
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
--------------------------------
FUND OVERVIEW
The AARP GNMA and U.S. Treasury Fund seeks to produce a high level of current
income from a conservatively managed government fixed-income 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 have less share price
volatility than other GNMA funds. 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.
PORTFOLIO
MANAGEMENT TEAM
Thomas M. Poor
Lead Portfolio Manager
Mark S. Boyadjian
Scott E. Dolan
David H. Glen
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
- -------------------------
1 yr. 8.49% 10.27%
5 yr. 30.26% 40.24%
10 yr. 116.18% 155.38%
AVERAGE ANNUAL
FUND INDEX+
-------------------------
1 yr. 8.49% 10.27%
5 yr. 5.43% 6.99%
10 yr. 8.01% 9.82%
HOW THE FUND HAS PERFORMED
The AARP GNMA and U.S. Treasury Fund provided a 6.35% 30-day SEC yield as
of September 30, 1997. The Fund was actively managed to protect you from some of
the share price volatility caused by rising interest rates early in the year.
However, during times of declining interest rates such as that of more recent
months, your Fund will often lag behind other GNMA funds and its comparative
index due to its U.S. Treasury holdings. The Annual Investment Returns chart
below shows that the AARP GNMA and U.S. Treasury Fund's one-year total return of
8.49% (representing 6.81% in distribution of income and 1.68% in capital change)
underperformed the unmanaged Lehman Brothers Mortgage GNMA Index of 10.27%. It
is important to remember that the index return does not reflect investment in
cash or short-term Treasury securities like those held in the Fund; nor does the
index reflect the impact of servicing, investment management, or administrative
expenses that a mutual fund incurs. The Fund's underperformance was due in part
to its holdings of investments in lower yielding U.S. Treasuries and other
short-term instruments in keeping with its discipline to reduce share price
volatility. Secondly, mortgages as a class performed exceptionally well over the
past several months. Therefore, comparable funds that were almost entirely
invested in mortgages performed better than the AARP GNMA and U.S. Treasury
Fund.
Twelve-month returns for the Fund will vary. By maintaining a long-term
focus and staying invested through periods of rising and declining interest
rates, you have the opportunity to earn high monthly income. The graph above
right shows how $10,000 invested in the Fund on September 30, 1987 would have
grown by September 30, 1997, assuming all distributions were reinvested.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- ---------------------
1987 $10000 $10000
1988 11107 11506
1989 12014 12807
1990 13079 14016
1991 14925 16343
1992 16595 18210
1993 17572 19411
1994 17238 19176
1995 19016 21873
1996 19926 23159
1997 21618 25538
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return %)
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- --------------------
1993 5.89% 6.59%
1994 -1.9 -1.22
1995 10.31 14.07
1996 4.79 5.88
1997 8.49 10.27
- ----------
^+ The unmanaged Lehman Brothers Mortgage GNMA Index is a market-value-weighted
measure of all fixed-rate securities backed by mortgage pools of 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.
14
<PAGE>
THE FUND'S INVESTMENT STRATEGY
In keeping with our strategy to produce monthly income from a
conservatively managed government portfolio, we used shorter term U.S. Treasury
securities (20% of the portfolio as of September 30, 1997) to reduce share price
volatility while using high-yielding GNMA securities (76% as of September 30,
1997) for income. We increased our position in GNMA securities to approximately
76% as of September 30, 1997 from 66% on September 30, 1996 for two reasons: we
believed that mortgages were an attractive category relative to Treasuries and
we didn't anticipate a major rise in interest rates. Within the GNMA universe,
we invested across a variety of maturities with interest rate coupons ranging
from 6.5% to 16%. To dampen the share price volatility during this period, the
remainder of the portfolio was invested in shorter term U.S. Treasury
obligations and cash equivalents with maturities of three years or less.
CALLOUT:
This is a unique Fund because it is designed for older Americans who seek more
income from conservative investments. The Fund generally has at least 20% of its
assets in securities such as short-term Treasuries, to cushion it from too much
share price fluctuation.
We believe that the current blend of GNMA securities will continue to
provide a competitive stream of income, while the shorter term Treasury
securities and cash equivalents will continue to help dampen share price
volatility.
The following graph shows your Fund's monthly downside risk and average
monthly return for the last three years compared to its peer group. The dotted
lines divide the graph into four sections or quadrants. The point where they
intersect represents the median risk and the median return for the peer group of
funds. Our goal is for this Fund to place in the upper-left quadrant, otherwise
the lower-left quadrant. See page 6 for a complete description of our
performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP GNMA and U.S. Treasury Fund Three-Year Risk/Return Performance
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP GNMA and U.S.
Treasury Fund .63% .21%
Peer Funds
Average .72% .35%
(Data represented from October 1994 through September 1997 for 20 similar
funds.)
Your Fund is located in the lower-left quadrant. Its return was slightly less
than the median return of its Lipper* GNMA fund peer group. However, it had the
second lowest risk in the universe of 20 similar mutual funds.
- ----------
*Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for conservative investors who want relatively high current
income but some protection from bond market fluctuation. As an investor, you
should be investing for the longer term (three years or more) and be comfortable
with fluctuation in the value of your principal and yield.
PORTFOLIO DIVERSIFICATION
-------------------------
As of September 30, 1997
Government National
Mortgage Association 76%
U.S. Treasury Obligations 20%
Cash Equivalents 4%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 2112
30-Day Yield 6.35%
Average Coupon 7.44%
Yield to Maturity 6.60%
Average Maturity 5.33 Years
Average Duration 2.59 Years
Average Quality AAA
15
<PAGE>
AARP HIGH QUALITY BOND FUND
---------------------------
FUND OVERVIEW
To help achieve a high level of income compared to similar bond funds, the AARP
High Quality Bond Fund invests in a range of investment-grade bonds. The Fund
maintains quality standards that are among the highest of any general bond fund
currently available, with at least 65% of the Fund's assets invested in
securities rated in the two highest rating categories by Moody's and Standard &
Poor's. The Fund may also invest up to 20% of its assets in bonds rated Baa by
Moody's or rated BBB by S&P. The Fund is also managed to have less share price
volatility than other high quality bond funds.
PORTFOLIO
MANAGEMENT TEAM
William M. Hutchinson
Lead Portfolio Manager
Scott E. Dolan
David H. Glen
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX^+
- -------------------------
1 yr. 8.15% 9.73%
5 yr. 35.05% 39.70%
10 yr. 126.98% 147.26%
AVERAGE ANNUAL
FUND INDEX^+
- -------------------------
1 yr. 8.15% 9.73%
5 yr. 6.19% 6.91%
10 yr. 8.54% 9.47%
HOW THE FUND HAS PERFORMED
The AARP High Quality Bond Fund's one-year total return of 8.15%
(representing 6.13% in distribution of income and 2.02% in capital change)
underperformed the unmanaged Lehman Brothers Aggregate Bond Index of 9.73%.
Because your Fund attempts to reduce share price volatility, it will often
underperform the index when long-term interest rates decline, as they have over
much of the period covered by this Report. Long-term interest rates, as measured
by the 30-year Treasury Bond, declined from 6.92% to 6.39% for the same period.
It is important to remember that the index return does not reflect investment in
cash or short-term securities like those held in the Fund; nor does the index
reflect the impact of servicing, investment management, or administrative
expenses that a mutual fund incurs.
The Fund's return will vary from year to year, however, by maintaining
a long-term focus and staying invested through periods of rising and declining
interest rates, you increase the chances of achieving your long-term objective.
The graph to the right shows how $10,000 invested in the Fund on September 30,
1987 would have grown as of September 30, 1997, assuming all distributions were
reinvested.
THE FUND'S INVESTMENT STRATEGY
Over the past 12 months we focused our efforts on implementing our
diversification strategy by investing across a range of maturities, quality
ratings, and industries. Your Fund continued to be well diversified in
high-quality securities. As of September 30, 1997, 66% of the portfolio was
invested in government, AAA-rated, or AA-rated securities; 12% of the Fund was
invested in A-rated bonds; 16% was invested
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------
1987 $10000 $10000
1988 11238 11330
1989 12404 12606
1990 13051 13556
1991 15066 15724
1992 16807 17699
1993 18804 19464
1994 17761 18835
1995 20066 21485
1996 20988 22533
1997 22698 24726
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------
1993 11.88% 9.98%
1994 -5.54 -3.22
1995 12.98 14.06
1996 4.59 4.90
1997 8.15 9.73
- ----------
^+ 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.
16
<PAGE>
in BBB securities; and 6% was invested in cash equivalents. We favored
attractively priced mortgage-backed securities, with an allocation of
approximately 25% of the portfolio's assets, because of their high quality and
income potential. We also continued to invest in a broad range of corporate
securities such as those in financial, transportation, and consumer staples
companies. Utilizing an investment provision implemented in February of this
year, we invested 16% of the portfolio assets in BBB-rated securities. This
helped provide you with a 30-day SEC yield of 5.83% as of September 30, 1997.
Overall, we maintained a barbell maturity strategy with 18% of the
portfolio invested in securities that mature in under one year and 24% of the
portfolio invested in securities maturing in more than ten years.
CALLOUT:
The Fund attempts to reduce share price fluctuation by investing in a variety of
different economic sectors.
The following graph shows the Fund's monthly downside risk and average
monthly return for the last three years compared to its peer group. The dotted
lines divide the graph into four sections or quadrants. The point where they
intersect represents the median risk and the median return for the peer group of
funds. Our goal is for this Fund to place in the upper-left quadrant, otherwise
in the lower-left quadrant. See the special section on page 6 for a complete
description of our performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP High Quality Bond Fund Three-Year Risk/Return Performance
SCATTER CHART TITLE:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP High Quality 0.68% 0.46%
Bond Fund
Peer Funds 0.76% 0.53%
Average
(Data represented from October 1994 through September 1997 for 44 similar
funds.)
Your Fund is located in the lower-left quadrant. Its return was slightly less
than the median return of its Lipper* "Corporate Rated A" fund peer group.
However, it had the 12th lowest risk in this universe of 44 similar mutual
funds.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
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 three years or more) and be comfortable with fluctuation in the
value of their principal and yield.
PORTFOLIO DIVERSIFICATION
-------------------------
As of September 30, 1997
Corporate Bonds 33%
U.S. Treasury Obligation 21%
Government National
Mortgage Association 14%
Asset Backed 13%
U.S. Government Agency
Pass-Throughs 11%
Cash Equivalents 6%
Foreign Bonds--U.S. $
Denominated 2%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 52
30-Day SEC Yield 5.83%
Average Coupon 7.19%
Yield to Maturity 5.31%
Average Maturity 9.08 Years
Average Duration 4.35 Years
Average Quality AA
17
<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 income 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 is also managed to
have less share price volatility than other tax-free bond funds.
PORTFOLIO
MANAGEMENT TEAM
Donald C. Carleton
Lead Portfolio Manager
Philip G. Condon
Portfolio Manager
Total Return
------------
CUMULATIVE
FUND INDEX+
- -------------------------
1 yr. 8.57% 9.04%
5 yr. 38.36% 41.40%
10 yr. 130.07% 131.82%
AVERAGE ANNUAL
FUND INDEX+
- -------------------------
1 yr. 8.57% 9.04%
5 yr. 6.71% 7.17%
10 yr. 8.69% 8.76%
- ----------
* 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 generally will be subject to
federal, state, and local taxes.
HOW THE FUND HAS PERFORMED
The AARP Insured Tax Free General Bond Fund provided you with a competitive
return and high, tax-exempt income over the past 12 months. Your Fund's one-year
total return was 8.57% (representing 5.15% in income distributions and 3.42% in
capital change); its 30-day SEC yield as of September 30, 1997 was 4.31%. This
is a taxable equivalent yield of 7.14% for shareholders in the 39.6% tax
bracket.
The AARP Insured Tax Free General Bond Fund's one-year return
underperformed the unmanaged Lehman Brothers Municipal Bond Index's return of
9.04%. It is important to note that due to the Fund's investment strategy to
moderate share price volatility, the Fund will often underperform versus similar
funds and the index. Also, the index return does not reflect investment in cash
or the deduction of any servicing, investment management, or administrative
expenses as a mutual fund does.
By maintaining a long-term focus and staying invested through strong and
weak markets, your investment has the opportunity to grow over time. The graph
to the right shows how $10,000 invested in the Fund on September 30, 1987 would
have grown by September 30, 1997, assuming all distributions were reinvested.
THE FUND'S INVESTMENT STRATEGY
In keeping with your Fund's objective to reduce share price volatility,
purchasing bonds with call protection remained a fundamental part of the Fund's
investment strategy over the past 12 months. Generally, a bond is called by the
issuer so that it can be refinanced at a lower interest
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
HART DATA:
AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------
1987 10000 10000
1988 11439 11296
1989 12658 12277
1990 13276 13113
1991 15115 14842
1992 16628 16395
1993 19009 18484
1994 18158 18033
1995 20012 20051
1996 21190 21260
1997 23007 23182
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------
1993 14.31% 12.74%
1994 -4.47 -2.44
1995 10.21 11.18
1996 5.88 6.04
1997 8.57 9.04
- ----------
^+ 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.
18
<PAGE>
rate. Our call-protection strategy provided a more reliable income stream than
would have existed if the Fund held a significant amount of bonds that could be
called in by the issuer before their stated maturity. As of September 30, 1997,
85% of the portfolio was invested in non-callable bonds.
CALLOUT:
Investing in securities of varying maturities helps reduce the share price
volatility of this Fund.
The maturity structure of the portfolio was not significantly altered
during the past twelve months. We still prefer bonds from the 5- to 15-year
range of the market, which accounted for approximately 69% of the Fund's assets
as of September 30, 1997. The remaining 31% of the portfolio was divided equally
between short-term securities and bonds maturing in more than 15 years.
In addition, as of September 30, 1997, 95% of the portfolio was invested in
insured securities (or securities with escrowed 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.
We believe that our strategy of maintaining a moderate duration (see
Glossary on page 160 for a definition of the word "duration"), presently of 7.39
years, will continue to serve you well. We seek to provide you with high income
free from federal income taxes and to keep your Fund's share price more stable
than that of a long-term municipal bond fund.
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise the lower- left quadrant.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Insured Tax Free General Bond Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Tax Free 0.66% 0.68%
General Bond Fund
Peer Funds 0.65% 0.78%
Average
(Data represented from October 1994 through September 1997 for 16 similar
funds.)
Your Fund is located at the intersection of the upper- and lower-left quadrants.
Its return was the same as the median return of its Lipper* Insured Muni Bond
fund peer group. The Fund had the third lowest risk in this universe of 16
similar mutual funds.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
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
long term (at least three years or more) and be comfortable with fluctuation in
the value of their principal and yield.
MUNICIPAL BOND EFFECTIVE
MATURITIES ALLOCATION
---------------------
As of September 30, 1997
Less than 1 year 3%
1 to less than 5 years 11%
5 to less than 10 years 28%
10 to less than 15 years 41%
Greater than 15 years 17%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 368
30-Day SEC Yield 4.31%
Average Coupon 4.79%
Average Maturity 10.8 Years
Effective Duration 7.39 Years
Average Quality AAA
19
<PAGE>
AARP BOND FUND FOR INCOME
-------------------------
FUND OVERVIEW
The AARP Bond Fund for Income is designed to provide the highest level of
monthly income of any AARP Fund by investing primarily in investment- grade
bonds. The Fund can invest up to 35% in below-investment-grade bonds (at least
25% of which must be BB or Ba and no more than 10% of which may be B). The AARP
Bond Fund for Income is also managed to have less share price volatility than
other investment-grade long-term bond funds.
PORTFOLIO
MANAGEMENT TEAM
William M. Hutchinson
Lead Portfolio Manager
Kelly D. Babson
David H. Glen
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX^+
- -------------------------
Life of
Fund* 6.06% 6.21%
HOW THE FUND HAS PERFORMED
The AARP Bond Fund for Income has performed close to its index since it was
introduced on February 1, 1997. For the life of the Fund (February 1, 1997
through September 30, 1997), the total return of 6.06% (not annualized) slightly
underperformed the Lehman Brothers Aggregate Bond Index's return of 6.21% for
the same period. It is important to note that due to the Fund's investment
strategy to moderate share price volatility, the Fund will often underperform
versus similar funds and the index. Also, the index return does not reflect
investment in cash or the deduction of any servicing, investment management, or
administrative expenses that a mutual fund has.
CALLOUT:
In pursuit of the highest level of income of any AARP Mutual Fund, the Fund has
the flexibility to invest in a full array of maturities and credit quality.
THE FUND'S INVESTMENT STRATEGY
Your Fund must invest at least 65% of its assets in investment-grade bonds.
The Fund also invests a portion of its assets in lower-grade bonds. Our
investment orientation is towards the "upper end" -- or high-quality end -- of
the low-grade market, primarily BB-quality securities. We anticipate that
investing in these lower-grade securities will produce a higher yield and more
share price appreciation than the other income funds offered by the Program,
although the investment risk is somewhat higher. As of September 30, 1997, 78%
was invested in investment-grade bonds of BBB or higher, 14% in BB bonds, and 8%
in B bonds.
We also chose to keep the Fund richly diversified, utilizing a full array
of maturities and
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Bond Fund Lehman Brothers
for Income Aggregate Bond Index^+
-------------- ---------------------
2/1/97 10000 10000
10039 10025
3/31/97 9921 9914
10004 10062
10139 10158
6/30/97 10266 10279
10567 10556
10457 10467
9/30/97 10606 10621
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Period ended September 30
Total Return %
CHART DATA:
AARP Bond Fund Lehman Brothers
for Income Aggregate Bond Index^+
-------------- ---------------------
2/1/97* - 6.06% 6.21%
9/30/97
- ----------
^+ 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, 1997.
20
<PAGE>
credit quality. As of September 30, 1997, 53% of the portfolio was invested in
the corporate sector, 6% in mortgage-backed securities, 9% in asset-backed
securities, and 32% in cash and U.S. government securities (due to the large
inflow of cash into this new fund). In the corporate sector, we were invested
32% in industrials, 16% in financials, and 5% in utilities. We also maintained a
barbell strategy where 29% of the portfolio is invested in bonds maturing in ten
years or more and 30% is invested in bonds maturing in under one year.
We will continue to manage the AARP Bond Fund for Income for higher yields
than other AARP Income Funds, but to have less downside share price volatility
than other investment-grade bond funds. In turn, it is important to remember
that this Fund will likely experience more volatility than the AARP GNMA and
U.S. Treasury Fund or the AARP High Quality Bond Fund. Investors in this Fund
must therefore be in a position to tolerate greater risk to the value of their
investment for the potential of greater returns over the long term.
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors who seek high monthly income from a
diversified portfolio of largely investment-grade bonds, but who are willing to
accept the additional risk of a portfolio with some investment in lower-quality
bonds. Investors should be prepared to invest for the long term (at least three
years or more) and be comfortable with fluctuation in the value of their
principal. The AARP Bond Fund for Income could serve as a core bond investment
in most investors' portfolios because it offers the potential for high yields,
competitive total returns, and less share price fluctuation than other
investment-grade bond funds.
PORTFOLIO ALLOCATION
--------------------
As of September 30, 1997
Corporate Bonds 50%
Cash Equivalents 31%
Asset-Backed Securities 9%
Government National
Mortgage Association 4%
Foreign Bonds -- U.S. $
Denominated 3%
U.S. Government Agency
Pass-Throughs 2%
U.S. Treasury Obligations 1%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 67
30-Day SEC Yield 6.92%
Average Coupon 7.85%
Yield to Maturity 5.05%
Average Maturity 9.85 Years
Average Duration 4.96 Years
Average Quality A
21
<PAGE>
AARP BALANCED STOCK AND BOND FUND
---------------------------------
FUND OVERVIEW
By investing in 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 balanced funds. The Fund is also managed to have less share price
volatility than other balanced funds.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
William M. Hutchinson
Benjamin W. Thorndike
Portfolio Managers
Total Return
------------
CUMULATIVE
BLENDED
FUND INDEX+
- -------------------------
1 yr. 27.34% 23.96%
Life of
Fund* 66.87% 64.21%
AVERAGE ANNUAL
BLENDED
FUND INDEX+
- -------------------------
1 yr. 27.34% 23.96%
Life of
Fund* 15.00% 14.49%
HOW THE FUND HAS PERFORMED
The AARP Balanced Stock and Bond Fund's one-year total return of 27.34%
(representing 4.57% in income distributions and 22.77% in capital change)
outperformed the blended index's return of 23.96%. The blended index is made up
of the unmanaged Standard & Poor's Composite Index of 500 Stocks (50%), the
unmanaged Lehman Brothers Aggregate Bond Index (40%), and the three-month
Treasury Bill Index (10%). (Please note that the Fund was introduced on February
1, 1994; therefore, five-year and ten-year data are not available.)
By maintaining a long-term focus and staying invested through good and bad
times, your investment has the opportunity to grow significantly over time. The
graph to the right shows how a $10,000 investment in the Fund would have grown
if you invested in the Fund on February 1, 1994, assuming all distributions were
reinvested.
THE FUND'S INVESTMENT STRATEGY
In general, the stock portion of your Fund (representing 61% of the
portfolio as of September 30, 1997) uses an approach similar to the AARP Growth
and Income Fund. We invest in stocks that are believed to have favorable
long-term capital appreciation outlooks and 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, please refer to the AARP Growth
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Semiannual Periods from February 1, 1994*
to September 30, 1997
CHART DATA:
AARP Balanced Standard & Poor's Lehman Brothers
Stock and Bond 500 Stock Price Aggregate Bond Blended
Fund Index Index Index^+
---- ----- ----- -----
2/94* $10000 $10000 $10000 $10000
3/94 10154 9305 9583 9490
9/94 10584 9800 9543 9747
3/95 11024 10752 10062 10461
9/95 12361 12715 10885 11776
3/96 13343 14203 11146 12602
9/96 13978 15299 11416 13247
3/97 15007 17019 11694 14157
9/97 17800 21489 12527 16421
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Balanced Blended
Stock and Bond Fund Index^+
------------------- -----
2/1/94* -
9/30/94 -0.78% -3.83%
1995 16.80 20.43
1996 13.08 14.50
1997 27.34 23.96
- ----------
^+ 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.
22
<PAGE>
and Income Fund Report on page 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 31% of the
portfolio as of September 30, 1997) must include investment-grade securities --
those rated Baa or higher by Moody's or BBB or higher by Standard & Poor's, both
independent ratings organizations. At least 75% of these securities must be
rated within the three highest quality ratings (AAA, AA, and A) by Moody's or
S&P. (At all times, at least 30% of your Fund's assets will be a combination of
investment-grade bonds and cash equivalents.) We moved from intermediate bonds
over the past 12 months to a barbell strategy (with an emphasis on short and
long maturities) in anticipation of a flattening yield curve (short-term yields
rising faster than long-term yields). The remaining 8% of the Fund's assets were
invested in cash equivalents.
ASSET ALLOCATION
----------------
As of September 30, 1997
Stocks 61%
Bonds 31%
Cash Equivalents 8%
----
100%
====
We continue to believe that stocks will outperform bonds and cash over the
longer term; therefore, a majority of the portfolio will continue to be invested
in stocks. While we are comfortable with our current asset allocation of 61%
stocks, 31% bonds, and 8% cash equivalents, this allocation may be gradually
changed depending upon our expectations for the financial markets.
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise in the lower-left quadrant. See page 6 for a complete
description of our performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Balanced Stock and Bond Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Balanced 1.46% 0.76%
Fund
Peer Funds 1.46% 0.93%
Average
(Data represented from October 1994 through September 1997 for 85 similar
funds.)
Your Fund is located at the intersection of the upper- and lower-left quadrants.
Its return was the same as the median return of its Lipper* Balanced fund peer
group. The Fund had the 12th lowest risk in this universe of 85 similar mutual
funds.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
This Fund is designed for investors who are seeking long-term growth of their
assets, but who seek less risk than an investment solely in stocks. Investors
should be able to invest for the long term (at least three years or more) and be
comfortable with the value of their principal fluctuating up and down.
STOCK ALLOCATION
----------------
As of September 30, 1997
Financial 24%
Manufacturing 17%
Energy 8%
Consumer Staples 8%
Communications 7%
Utilities 7%
Durables 6%
Health 6%
Consumer Discretionary 6%
Other 11%
----
100%
====
BOND ALLOCATION
---------------
As of September 30, 1997
Corporate Bonds 41%
U.S. Treasury Obligations 22%
U.S. Gov't. Agency
Pass-Throughs 20%
Asset-Backed Securities 7%
Gov't. National Mortgage
Association 5%
Foreign Bonds-U.S. $
Denominated 5%
----
100%
====
23
<PAGE>
AARP GROWTH AND INCOME FUND
---------------------------
FUND OVERVIEW
The AARP Growth and Income Fund is a conservatively managed equity fund that
provides the potential for long-term growth and quarterly income. It invests in
above-average, dividend-yielding stocks that may offer the opportunity for
long-term growth of capital. The AARP Growth and Income Fund is also managed to
have less share price volatility than other growth and income funds.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
Lori J. Ensinger
Deborah A. Chaplin
Kathleen T. Millard
Benjamin W. Thorndike
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
- ------------------------
1 yr. 40.70% 40.46%
5 yr. 162.57% 156.92%
10 yr. 289.67% 295.87%
AVERAGE ANNUAL
FUND INDEX+
- ------------------------
1 yr. 40.70% 40.46%
5 yr. 21.30% 20.76%
10 yr. 14.57% 14.74%
HOW THE FUND HAS PERFORMED
The AARP Growth and Income Fund performed well over the past 12 months. Its
one-year total return of 40.70% (representing 3.22% in distributions of income
and 37.48% in capital change) outperformed the unmanaged Standard & Poor's
Composite Index of 500 Stocks' return of 40.46%. This performance was due to the
strong appreciation of the Fund's largest holdings.
Of course, the returns for your Fund will vary from year to year, however,
by maintaining a long-term focus and avoiding overreaction to short-term market
volatility, your investment has the opportunity to grow significantly over time.
The graph to the lower right shows what $10,000 invested in the Fund on
September 30, 1987 would be worth on September 30, 1997, assuming all
distributions were reinvested.
THE FUND'S INVESTMENT STRATEGY
We continued to focus on investing in undervalued securities with
above-average relative dividend yields. The manufacturing sector contributed
significantly to the favorable performance over the past 12 months. For example,
Xerox, our largest holding, returned 59.3% for the period. This was due to key,
company-specific events, namely a new product introduction in modular-based
digital office copiers, and an announcement that the company was acquiring the
remaining 20% interest in Rank Xerox, a cornerstone of Xerox's European
strategy. Another manufacturing stock, Philips Electronics, returned 136.1% for
the period, based in part on the success of internal asset restructuring and
news it had
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP Growth and Standard & Poor's
Income Fund 500 Stock Price Index^+
----------- -----------------------
1987 $10000 $10000
1988 8922 8763
1989 11644 11653
1990 10457 10577
1991 13300 13873
1992 14841 15408
1993 17717 17411
1994 19132 18053
1995 23041 23423
1996 27696 28183
1997 38967 39587
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Growth and Income Standard & Poor's 500
Fund Stock Price Index+
---- ------------------
1993 19.38% 12.97%
1994 7.99 3.68
1995 20.43 29.75
1996 20.20 20.34
1997 40.70 40.46
- ----------
^+ 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 traded on the 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.
24
<PAGE>
entered into a joint venture with Lucent, a consumer communications company.
CALLOUT:
The Fund focuses on stocks with above-average dividends and sound fundamentals
to help reduce share price volatility.
The Fund's health care weighting, concentrated in pharmaceuticals, also
helped the Fund's favorable performance. Earnings acceleration from new product
introductions and favorable long-term demographic trends have made this group
one of the strongest performing market sectors over the last few years. Holdings
such as Warner Lambert and Bristol Myers performed extremely well over this
period. This kind of dramatic outperformance always forces one to ask how much
higher the stocks can rise and whether their current levels are sustainable. As
pharmaceutical stocks have become more fully valued, we have been gradually
reducing our holdings.
There were mixed results in the financial sector over this period. Our real
estate investment trust (REIT) holdings, despite strong absolute returns,
continued to lag banking and insurance stocks. During the past several months,
we scaled back REITs that have posted strong gains, such as Equity Residential
Properties and Developing Diversified Realty. We did, however, experience solid
total returns with our finance holdings, led by EXEL Limited and Lincoln
National, as well as SLM Holding Corp. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise in the lower-left quadrant. See page 6 for a complete
description of our performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Growth and Income Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Growth and 2.00% 1.26%
Income Fund
Peer Funds 1.97% 1.52%
Average
(Data represented from October 1994 through September 1997 for 269 similar
funds.)
Your Fund is located in the upper-left quadrant. Its return was slightly
better than the median return of its Lipper* Growth and Income peer group. The
Fund also had the 30th lowest risk in this universe of 269 similar mutual funds,
putting it in the top 11% for lowest risk.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
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 five years or more and be comfortable with fluctuation in
the value of their principal that is associated with investing in stocks.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 22%
Manufacturing 20%
Consumer Staples 9%
Energy 8%
Communications 7%
Durables 7%
Utilities 7%
Consumer Discretionary 6%
Health 6%
Other 8%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 97%
Cash Equivalents 3%
----
100%
====
25
<PAGE>
AARP U.S. STOCK INDEX FUND
--------------------------
FUND OVERVIEW
The AARP U.S. Stock Index Fund uses the S&P 500 Index as a benchmark, but holds
securities in S&P 500 companies with higher yields. Standard & Poor's Index is
an unmanaged broad market index of 500 large "blue chip" companies. The Fund is
managed to have less share price volatility than other stock index funds and the
unmanaged S&P 500 Index.
PORTFOLIO
MANAGEMENT TEAM
Philip S. Fortuna
Lead Portfolio Manager
James M. Eysenbach
Portfolio Manager
NOTE:
Bankers Trust Company has been retained as Subadvisor to the Fund. The
Subadvisor handles the day-to-day investment and trading functions. The
Portfolio Managers are in regular contact with the Subadvisor, receive records
of daily transactions, monitor returns and relative risk, and scrutinize
portfolio activity.
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 21.22% 22.02%
HOW THE FUND HAS PERFORMED
The AARP U.S. Stock Index Fund was introduced on February 1, 1997.
Since inception (February 1, 1997 through September 30, 1997), your Fund
provided a total return of 21.22% (not annualized) vs. 22.02% for Standard &
Poor's Index of 500 Stocks. Consistent with its strategy, the Fund has exhibited
slightly lower day-to-day volatility than the S&P 500 Index and outperformed the
index on 61% of the down days.
CALLOUT:
The AARP U.S. Stock Index Fund strives to reduce share price fluctuation by
favoring dividend-paying S&P 500 stocks. Stocks of this type historically have
been more stable, especially in periods of decline.
THE FUND'S INVESTMENT STRATEGY
Our investment strategy is to invest in a broadly diversified portfolio
consisting of more than 400 S&P 500 companies as of the end of September 1997.
Using a technique referred to as "sampling," the portfolio is tilted towards
those common stocks of S&P 500 companies that are expected to pay higher
dividends than S&P 500 companies in the aggregate. By managing the Fund in this
way, we expect performance to be less volatile than the S&P 500 over time. We
also seek to offer shareholders a competitive return with a higher dividend
yield than comparable index funds.
The AARP U.S. Stock Index Fund offers a low-cost way of investing in a
diversified stock portfolio that provides a high degree of performance
similarity to the S&P 500.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP U.S. Standard &
Stock Index Poor's 500 Stock
Fund Price Index^+
---- ------------
2/1/97* $10000 $10000
10073 10078
3/31/97 9659 9664
10207 10241
10802 10864
6/30/97 11293 11352
12146 12255
11508 11568
9/30/97 12122 12202
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Period ended September 30
Total Return %
CHART DATA:
AARP U.S. Standard &
Stock Index Poor's 500 Stock
Fund Price Index^+
---- ------------
2/1/97* -
9/30/97 21.22% 22.02%
----------
^+ 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 traded on the
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.
* The Fund commenced operations on February 1, 1997.
26
<PAGE>
The sector diversification, excluding cash equivalents as of September 30, 1997:
Financial 14%
Technology 13%
Health 11%
Manufacturing 11%
Consumer Staples 10%
Energy 9%
Communications 7%
Utilities 6%
Durables 6%
Other 13%
Asset Allocation
----------------
As of September 30, 1997
Stock Holdings 97%
Cash Equivalents 3%
----
100%
===
FOR WHOM THE
FUND IS DESIGNED
The Fund is suitable for investors seeking long-term growth of their investment
and who prefer a more "passive" approach to stock market investing. It is
appropriate for more conservative investors who are seeking higher dividend
income and somewhat lower than average volatility than a similar S&P 500 Index
Fund. Investors should invest for the long term (at least five years or more)
and be comfortable with the value of their principal moving up and down.
27
<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. It is managed to have less share price
volatility than other growth funds.
PORTFOLIO
MANAGEMENT TEAM
William F. Gadsden
Lead Portfolio Manager
Bruce F. Beaty
Portfolio Manager
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
1 yr. 46.72% 40.46%
5 yr. 149.33% 156.92%
10 yr. 266.94% 295.87%
AVERAGE ANNUAL
FUND INDEX+
-------------------------
1 yr. 46.72% 40.46%
5 yr. 20.05% 20.76%
10 yr 13.88% 14.74%
HOW THE FUND HAS PERFORMED
The AARP Capital Growth Fund performed exceptionally well over the past
year, providing shareholders in the Fund with a one-year total return of 46.72%
(representing 1.27% in distributions of income and 45.45% in capital change).
This return outperformed the Standard & Poor's 500 return of 40.46%. Your Fund's
favorable performance over this period can be attributed to the overall strength
of the U.S. stock market, and to our overweighted position in selected
technology and finance issues -- two strongly performing stock sectors during
this period. We are pleased that our valuation disciplines and diversification,
which we instituted in late 1994 to reposition the Fund within the growth fund
category, lead to competitive returns with less share price volatility.
Remember that returns for the Fund will vary from year to year, however, by
maintaining a long-term focus and staying invested through the ups and downs of
the market, we believe your investment has the opportunity to grow significantly
over time. The graph to the right shows how a $10,000 investment in the Fund on
September 30, 1987 would have grown by September 30, 1997, assuming all
dividends were reinvested.
THE FUND'S INVESTMENT STRATEGY
We have maintained a consistent investment strategy, which resulted in only
a few portfolio changes. The two top performing sectors of the market continued
to be technology and finance. In the technology sector, several of our holdings
experienced spectacular returns. The financial sector rose on the long-term
trends of restructuring and consolidation in the banking industry. Financial
stocks were
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------
87 $10000 $10000
88 9452 8763
89 13575 11653
90 9915 10577
91 14159 13873
92 14717 15408
93 18327 17411
94 17466 18053
95 21565 23423
96 25009 28183
97 36694 39587
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------
1993 24.53% 12.97%
1994 -4.70 3.68
1995 23.47 29.75
1996 15.97 20.34
1997 46.72 40.46
- ----------
^+ 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 traded on the
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.
28
<PAGE>
well represented in your Fund's top ten holdings, including American Express,
EXEL, and Franklin Resources.
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 other
growth funds.
We recently began investing in oil field services companies. This is one of
the few industries where we see competitive pricing and strong demand for
services. After a decade of attrition, downsizing, and restructuring, we expect
oil field service companies to exhibit strong earnings as worldwide oil demand
remains firm. For example, oil companies are now able to drill wells with a
higher success rate because of the improved technology provided by oil field
services companies. This is significant for oil companies because it has
effectively lowered the high cost of drilling deep wells. At the end of
September 1997, the Fund had oil field service holdings in Schlumberger and
Sante Fe International.
While we avoid making predictions about the market and prefer to focus on
picking quality stocks that meet our investment requirements, we think the
favorable investment environment of 1997 should continue into 1998. Company
fundamentals remain positive: growth is strong, inflation is low, and
productivity continues to improve at many companies. We believe that leading
American companies -- the primary focus of your Fund's investment -- will
continue to provide some of the best opportunities in this environment.
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise in the lower-left quadrant.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Capital Growth Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Capital 2.10% 1.54%
Growth Fund
Peer Funds 2.01& 1.92%
Average
(Data represented from October 1994 through September 1997 for 74 similar
funds.)
Your Fund is located in the upper-left quadrant. Its return was better than the
median return of its Lipper* Growth fund peer group. The Fund had the fifth
lowest risk in this universe of 74 similar mutual funds, with almost half the
downside risk of the riskiest fund.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
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 long term (at least five years or
more) and be comfortable with the short-term fluctuation of their principal that
is associated with investing in stocks.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 21%
Technology 17%
Energy 14%
Manufacturing 13%
Consumer Discretionary 9%
Health 9%
Service Industries 5%
Durables 4%
Consumer Staples 4%
Other 4%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 95%
Cash Equivalents 5%
----
100%
====
29
<PAGE>
AARP SMALL COMPANY STOCK FUND
-----------------------------
FUND OVERVIEW
From investment primarily in the stocks of small U.S. companies, the Fund seeks
to provide long-term capital growth. It is also managed to have less share price
volatility than similar small company stock funds.
PORTFOLIO
MANAGEMENT TEAM
James M. Eysenbach
Lead Portfolio Manager
Philip S. Fortuna
Portfolio Manager
Total Return
------------
CUMULATIVE
FUND INDEX+
- -------------------------
Life of
Fund* 33.53% 24.13%
HOW THE FUND HAS PERFORMED
The AARP Small Company Stock Fund was introduced to shareholders on
February 1, 1997. Since inception, (February 1, 1997 through September 30,
1997), your Fund's total return of 33.53% (not annualized) outperformed the
Russell 2000 Index's return of 24.13% for the same period. Consistent with its
risk management mandate, your Fund has exhibited lower volatility than the
Russell 2000 Index of small companies and outperformed the Index on 88% of the
down days.
CALLOUT:
The Fund seeks to be more stable than other small company stock funds by
targeting undervalued small companies which, as a group, typically pay
above-average dividends.
THE FUND'S INVESTMENT STRATEGY
In pursuing capital appreciation from small company stocks, we utilize
a disciplined approach to uncover undervalued stocks within a broad universe of
small companies. First, we conduct a quantitative evaluation of approximately
2,000 small U.S. stocks, analyzing valuations, sales and earnings growth rates,
price momentum, and risk characteristics. We focus on companies selling at
prices that we believe do not reflect their underlying value. We emphasize those
companies with stable or improving sales and earnings growth or other
characteristics indicating that the undervaluation will be recognized in the
future. Then we build a diversified portfolio by assessing the risk/return
tradeoff of various combinations of attractively rated companies, with an
objective of maintaining an overall risk profile that is approximately 10% to
20% below that of the Russell 2000 Index. An important element of
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Small
Company Russell
Stock Fund 2000 Index^+
----------- ------------
2/1/97* $10000 $10000
10120 9758
3/31/97 9940 9297
9933 9323
11033 10360
6/30/97 11660 10805
12273 11307
12513 11566
9/30/97 13353 12413
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Period ended September 30
Total Return %
CHART DATA:
AARP Small
Company Russell
Stock Fund 2000 Index^+
----------- ------------
2/1/97* -
9/30/97 33.53% 24.13%
- ----------
^+ The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks.
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, 1997.
30
<PAGE>
this strategy, given the potential cost of trading small stocks, is working with
our experienced team of traders to ensure the most efficient means of executing
our purchase and sale decisions.
The emphasis on valuation is reflected in the resulting portfolio, which
has an average price-to-earnings ratio of about one-half of the Russell 2000
Index of small companies. (The price-to-earnings [P/E] ratio gives you an idea
of how much you are paying for a company's earning power. The lower the P/E, the
less you are paying for a dollar of earnings. While a high P/E may be an
indication of higher expected earnings growth, high-P/E stocks are typically
riskier.) Many of the lower-P/E stocks are found in the manufacturing sector of
the market. These small U.S. manufacturing firms currently represent the
portfolio's largest sector weighting. Meanwhile, we are finding relatively few
stocks meeting our valuation criteria within the health care sector. In terms of
size, a typical holding in the Fund has a market capitalization (price times
shares outstanding) of $480 million. By comparison, the typical S&P 500 company
has a market capitalization of $5 billion.
As of September 30, 1997, your Fund was well diversified, with 149 stocks
selected from the Russell 2000 Index of small companies. As you may know, the
risk of holding individual small company stocks can be high because small
companies generally have higher business risks than more established companies.
This is because small companies may have untested management, less diversified
product lines, and limited financial resources. This makes small companies more
vulnerable to adverse business developments than larger companies. We attempted
to control these risks by holding a relatively large number of securities in the
portfolio in addition to maintaining an overall above-average dividend yield. As
a direct result, your Fund has experienced lower than average small stock
volatility since inception compared to similar funds.
Going forward, we will continue to apply our disciplined, value- oriented
approach to selecting small company stocks in accordance with your Fund's
objective of seeking long-term capital appreciation with less share price
volatility than other small company stock funds. We believe that the AARP Small
Company Stock Fund continues to be appropriate for investors seeking
diversification and exposure to the small company sector of the stock market as
part of a well-rounded portfolio.
FOR WHOM THE
FUND IS DESIGNED
The AARP Small Company Stock Fund is suitable for investors seeking long-term
growth of their investment. Investors should invest for the long term (at least
five years or more) and be comfortable with the value of their principal
fluctuating up and down.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Manufacturing 25%
Financial 18%
Technology 10%
Consumer Discretionary 8%
Service Industries 7%
Construction 6%
Utilities 5%
Durables 5%
Metals & Minerals 5%
Other 11%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 94%
Cash Equivalents 6%
----
100%
====
31
<PAGE>
AARP GLOBAL GROWTH FUND
-----------------------
FUND OVERVIEW
The AARP Global Growth Fund seeks to offer long-term capital growth in a
globally diversified portfolio. It is also managed to have less share price
volatility than other global growth funds. 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 investment risks such as
currency exchange risk.
PORTFOLIO
MANAGEMENT TEAM
William E. Holzer
Lead Portfolio Manager
Diego Espinosa
Nicholas Bratt
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
1 yr. 24.67% 24.11%
Life of
Fund* 28.74% 32.31%
AVERAGE ANNUAL
FUND INDEX+
-------------------------
1 yr. 24.67% 24.11%
Life of
Fund* 16.41% 18.30%
HOW THE FUND HAS PERFORMED
The AARP Global Growth Fund performed well returning 24.67% (.46% in income
distributions and 24.21% in capital change) for the one-year period ended
September 30, 1997. Your fund outperformed the unmanaged Morgan Stanley Capital
International (MSCI) World Index's return of 24.11%. Its outperformance was due
in part to the strong performance of many of our top holdings and the favorable
global investment environment.
THE FUND'S INVESTMENT STRATEGY
Our approach to investing in the global equity markets focuses first on
identifying long-term growth trends of the world economy and capital markets,
and then identifying the companies with appropriate stock values that are best
positioned to take advantage of these opportunities. This strategy results in a
well-diversified portfolio of approximately 120 issues across many countries. We
do not try to pick the best country or the best currency. Rather, we focus on
picking the best individual companies.
We continued to expand your Fund's holdings of companies that share two
characteristics we believe will provide an increasingly important advantage in
the new global environment: dominant worldwide market share and declining
production costs.
Over the past 12 months, we looked to companies in previously regulated
economies or industries that are restructuring. We already have seen
considerable restructuring in Europe --
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Quarterly Periods from February 1, 1996*
to September 30, 1997
CHART DATA:
AARP Global
Growth Fund MSCI World Index^+
----------- ------------------
2/1/96* $10000 $10000
3/96 10180 10224
6/96 10280 10521
9/96 10327 10661
12/96 10907 11149
3/97 11141 11181
6/97 12399 12863
9/97 12874 13231
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Periods ended September 30
Total Return %
CHART DATA:
AARP Global
Growth Fund MSCI World Index^+
----------- ------------------
2/1/96*
3/31/97 3.27% 6.60%
9/30/97 24.67% 24.11%
- ----------
^+ The MSCI (Morgan Stanley Capital International) World Index is an unmanaged
capitalization-weighted measure of global stock markets, including the U.S.,
Canada, Europe, Australia, and the Far East. Index returns assume dividends
reinvested net of withholding tax and, unlike Fund 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, 1996.
32
<PAGE>
primarily Germany and France -- in the chemicals and pharmaceutical industries.
Many industries, such as insurance, utilities, and banks, are still in the early
stages of restructuring. Stocks such as Daimler-Benz, Mannesmann, and Siemens,
all in Germany, contributed to the Fund's favorable performance. We also began
to turn our attention to Japan, where there are early indications that the first
wave of restructuring is beginning. As a result, we have added Nomura, a
Japanese financial services company to the portfolio.
We have favored companies that have completed the restructuring process and
are becoming industry leaders. The tire industry is a good example where
Bridgestone (Japan), and Michelin (France) in particular have been strong
performers.
CALLOUT:
The Fund seeks to offer less share price volatility than other global growth
funds by maintaining core holdings in well-established companies of developed
countries.
Another theme focuses on the world's demographics. Due to an aging
population, we believe pharmaceutical products and health providers, such as
Astra (Sweden), Biogen (U.S.), and Novartis (Switzerland) will continue to
thrive. In addition, many retirees are looking for both a healthy and a wealthy
retirement. Therefore we believe financial companies should also benefit.
Insurance companies such as AEGON (the Netherlands) and Skandia (Sweden) are
examples of companies that fit this theme. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)
We have recently taken a more cautious approach toward equities, adding to
both cash and bonds. While we remain optimistic about our equity holdings, we
recognize that rising valuations, particularly in the U.S., have increased the
risk of equity ownership. However, we continue to search for outstanding
investment opportunities in individual stocks.
PIE CHART TITLE:
Geographical Diversification -- Excludes Cash Equivalents
As of September 30, 1997
CHART PERIOD:
CHART DATA:
Europe 56%
U.S. & Canada 23%
Japan 10%
Pacific Basin 5%
Latin America 4%
Africa 2%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The AARP Global Growth Fund is suitable for investors who want to add worldwide
stock opportunities to their portfolio. Investors should invest for the long
term (at least five years or more) and be comfortable with the value of their
principal fluctuating up-and-down.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 24%
Manufacturing 22%
Technology 8%
Metals and Minerals 7%
Durables 5%
Health 5%
Consumer Staples 4%
Service Industries 4%
Energy 4%
Other 17%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 83%
Cash Equivalents 11%
Bond Holdings 6%
----
100%
====
33
<PAGE>
AARP INTERNATIONAL STOCK FUND
-----------------------------
FUND OVERVIEW
The AARP International Stock Fund seeks to offer long-term capital growth and
income from a diversified portfolio of foreign securities. It is managed to have
less share price volatility than other international equity funds. Because the
Fund invests internationally, it will be affected by up-and-down movements in
international stock markets. The Fund will also be subject to international
investment risks such as currency exchange risk.
PORTFOLIO
MANAGEMENT TEAM
Sheridan Reilly
Lead Portfolio Manager
Irene Cheng
Marc Joseph
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 15.73% 14.43%
HOW THE FUND HAS PERFORMED
The AARP International Stock Fund performed well over the period covered by
this Report, with a total return of 15.73% (not annualized) for the period
February 1, 1997 to September 30, 1997. Your Fund outperformed the Morgan
Stanley Capital International (MSCI) EAFE Index return of 14.43%. This was due
in part to the Fund's geographic distribution. We were heavily weighted in
Europe, at roughly 77% of the portfolio. Europe not only displayed strong
performance in the earlier part of the year, but also weathered the August
decline quite well when foreign markets fell significantly. Southeast Asia was
hit hard in August, causing considerable market declines in this region. Our
underweighting in Southeast Asia, reflecting less than 10% of the portfolio,
helped us weather these turbulent times. In fact, over the past three months,
when the MSCI EAFE provided a return of -0.71%, the AARP International Stock
Fund provided shareholders a positive return of 5.60%.
THE FUND'S INVESTMENT STRATEGY
Since the Fund was introduced in February 1997, our priority has been to
make this a well-diversified portfolio in keeping with our strategy to
concentrate on individual stocks of well-established companies in developed
overseas markets. As of September 30, 1997, your Fund was diversified among 17
countries, including Germany, the United Kingdom, France, and Japan. As stated
in the section above, our geographic distribution contributed to the Fund's
favorable performance over this period.
On an industry and sector level, the Fund had significant weightings in
banks and insurers, manufacturers, and consumer goods companies, all of which
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP
International
Stock Fund MSCI EAFE Index^+
----------- -----------------
2/1/97* $10000 $10000
10053 10164
3/31/97 10140 10201
10007 10255
10507 10922
6/30/97 10960 11524
11287 11711
10833 10836
9/30/97 11573 11443
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP
International
Stock Fund MSCI EAFE Index^+
----------- -----------------
2/1/97 -
9/30/97 15.73% 14.43%
- ----------
^+ The MSCI (Morgan Stanley Capital International) EAFE Index is an unmanaged
capitalization-weighted measure of global stock markets, including Europe,
Australia, and the Far East. Index returns assume dividends reinvested net of
withholding tax and, unlike Fund 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, 1997.
34
<PAGE>
held up better than the overall market. We identify companies within these
sectors through a "relative yield" investment approach. This means we target
stocks that have high dividend yields relative to the median of the market --
typically 25% or higher. Reflective of this strategy was our investment in Bank
of Austria, Dorling Kindersley (a U.K. publisher), Elf Aquitane (a French oil
company), and Winterthur (a Swiss insurer). Bank of Austria has a dividend yield
approximately 50% higher than the local market and was priced well below the
book value of the company. At the time we purchased Dorling Kindersley, the
company's dividend yield was double its historical level.
CALLOUT:
By primarily targeting well-managed, dividend-paying companies in established
markets other than the United States, the Fund seeks long-term growth with less
downside share price fluctuation than other international stock funds.
We also sold some stocks that were extremely profitable to the Fund and
used these profits to make some of the investments mentioned above. We sold our
positions in Shishedo (a Japanese cosmetics company) and Chubb Securities (an
insurance company based in the U.K.). (Please note that portfolio changes should
not be considered recommendations for action by individual investors.)
Since the Fund's inception, we have seen increased volatility in the
foreign markets, with steep highs and lows. We believe that this was ideal
ground for testing the Fund's strategy. We were able to offer competitive
returns during market rallies, while offering protection from severe share price
declines when the market declined. We are confident that our emphasis on value
will continue to be appropriate for investors who wish to allocate assets
overseas in a relatively conservative fashion, and for investors seeking to add
balance to other more aggressive international investments.
PIE CHART TITLE:
Geographical Diversification -- Excludes Cash Equivalents
As of September 30, 1997
CHART PERIOD:
CHART DATA:
Europe 77%
Japan 11%
Pacific Basin 8%
Canada 4%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is suitable for investors seeking long-term growth of their principal
who want to add international stock market opportunities to their portfolio.
Investors in this Fund should have an investment time horizon of at least five
years or more, and be comfortable with the value of their principal fluctuating
up and down.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 24%
Manufacturing 22%
Consumer Staples 8%
Transportation 8%
Consumer Discretionary 7%
Communications 7%
Durables 6%
Construction 4%
Energy 3%
Other 11%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 93%
Cash Equivalents 7%
----
100%
====
35
<PAGE>
AARP MANAGED INVESTMENT PORTFOLIOS:
-----------------------------------
AARP DIVERSIFIED INCOME PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
PORTFOLIO OVERVIEWS
The AARP Managed Investment Portfolios are conservatively managed "funds of
funds" -- portfolios that invest exclusively in other AARP Mutual Funds. Two
portfolios are offered.
o The AARP Diversified Income Portfolio seeks current income with modest
long-term appreciation. It invests 60% to 80% of its assets in the AARP Bond
Mutual Funds and AARP Money Mutual Funds.
o The AARP Diversified Growth Portfolio seeks long-term growth of capital by
investing 60% to 80% of its assets in the AARP Stock Mutual Funds.
The investment mix in both portfolios may change when certain asset classes
appreciate or depreciate significantly as economic conditions change.
PORTFOLIO
MANAGEMENT TEAM
Philip S. Fortuna
Lead Portfolio Manager
Salvatore J. Bruno
Shahram Tajbakhsh
Portfolio Managers
TOTAL RETURN
DIVERSIFIED INCOME PORTFOLIO
- ----------------------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 9.35% 10.87%
TOTAL RETURN
DIVERSIFIED GROWTH PORTFOLIO
- ----------------------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 16.00% 17.20%
HOW THE PORTFOLIOS HAVE PERFORMED
The AARP Managed Investment Portfolios performed well since their inception
in February. The Diversified Income Portfolio provided a total return of 9.35%
(not annualized) vs. the blended index's total return of 10.87% for the same
period. The blended index is made up of the unmanaged Standard & Poor's 500
Index (30%) and the Lehman Brothers Aggregate Bond Index (70%). The Diversified
Growth Portfolio provided shareholders with a total return of 16.00% (not
annualized) vs. the blended index's total return of 17.20% for the same period.
The blended index is made up of the unmanaged Standard & Poor's 500 Index (70%)
and the Lehman Brothers Aggregate Bond Index (30%).
THE PORTFOLIOS' INVESTMENT STRATEGIES
Since the Portfolios were introduced in early February, we have been
implementing an investment process that applies our global perspective and
judgment of capital markets, combined with sophisticated quantitative risk
management techniques, to investing in a mix of AARP Mutual Funds. Each
underlying Fund is also managed to reduce risk of loss to the Portfolio.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
DIVERSIFIED INCOME PORTFOLIO
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Standard & Lehman
Diversified Poor's 500 Brothers
Income Stock Price Aggregate Blended
Portfolio Index Bond Index Index+
----------- ----------- ---------- -------
2/1/97* $10000 $10000 $10000 $10000
10090 10078 10025 10041
3/31/97 9987 9664 9914 9839
10127 10241 10062 10119
10339 10864 10158 10371
6/30/97 10548 11352 10279 10597
10849 12255 10556 11050
10689 11568 10467 10798
9/30/97 10935 12202 10621 11087
BAR CHART TITLE: GROWTH OF A $10,000 INVESTMENT
DIVERSIFIED GROWTH PORTFOLIO
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Standard & Lehman
Diversified Poor's 500 Brothers
Growth Stock Price Aggregate Blended
Portfolio Index Bond Index Index+
----------- ----------- ---------- -------
2/1/97* $10000 $10000 $10000 $10000
10113 10078 10025 10062
3/31/97 9973 9664 9914 9739
10133 10241 10062 10190
10560 10864 10158 10653
6/30/97 10927 11352 10279 11026
11413 12255 10556 11729
11127 11568 10467 11239
9/30/97 11600 12202 10621 11720
- ----------
^+ The performance of the blended benchmark is a weighting comprised of the
Standard & Poor's 500 Stock Price Index (S&P), and the Lehman Brothers
Aggregate Bond Index (LBAB). The 30/70 measure of the Diversified Income
Portfolio and 70/30 measure of the Diversified Growth Portfolio 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.
* These Funds commenced operations on February 1, 1997.
36
<PAGE>
We began by deciding which asset classes we expected to outperform and
compared that to historical trends. We then used this data to allocate the
Portfolios as follows: The Diversified Income Portfolio allocation as of
September 30, 1997:
AARP High Quality Money Fund 14%
AARP Bond Fund for Income 30%
AARP GNMA and U.S. Treasury Fund 31%
AARP Growth and Income Fund 11%
AARP U.S. Stock Index Fund 5%
AARP Global Growth Fund 9%
The Diversified Growth Portfolio allocation as of September 30, 1997:
AARP High Quality Money Fund 1%
AARP GNMA and U.S. Treasury Fund 18%
AARP Bond Fund for Income 18%
AARP U.S. Stock Index Fund 11%
AARP Growth and Income Fund 24%
AARP Global Growth Fund 10%
AARP International Stock Fund 7%
AARP Small Company Stock Fund 7%
AARP Capital Growth Fund 4%
As you can see by these breakdowns, both Portfolios were well diversified
among the AARP Mutual Funds. We believe the current mix of investments in the
Diversified Income Portfolio provide a competitive yield from its bond
investments and the potential for growth through its stock exposure. For the
Diversified Growth Portfolio, we believe that the 35% investment in fixed-income
securities will help protect the Fund from share price volatility. We also
included some international exposure for further diversification.
The AARP Managed Investment Portfolios offer shareholders a simplified,
all-in-one approach to diversification. Moreover, investors also benefit from
the professional investment management and strong risk control disciplines of
each AARP Mutual Fund in which the Portfolios invest.
FOR WHOM THE
PORTFOLIOS ARE DESIGNED
The AARP Managed Investment Portfolios are for investors who don't have time or
are less confident in making the all-important asset allocation decisions. They
in turn prefer to entrust the selection of their portfolios of mutual funds to
professional money managers. These portfolios offer a simple, inexpensive (among
the lowest management fees for this type of fund), one-step approach to
investing all or a portion of an individual's assets.
The AARP Managed Investment Portfolios are appropriate for investors seeking to
create an investment plan during pre- and post-retirement. The AARP Diversified
Income Portfolio may be appropriate for investors in retirement with an
investment time horizon of three to five years. The AARP Diversified Growth
Portfolio is designed for investors with an investment time horizon of more than
five years.
ASSET ALLOCATION
AARP DIVERSIFIED
INCOME PORTFOLIO
----------------
As of September 30, 1997
Stock Holdings 25%
Bond Holdings 61%
Cash Equivalents 14%
----
100%
====
ASSET ALLOCATION
AARP DIVERSIFIED
GROWTH PORTFOLIO
----------------
As of September 30, 1997
Stock Holdings 64%
Bond Holdings 35%
Cash Equivalents 1%
----
100%
====
37
<PAGE>
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38
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A A R P F U N D S
I N V E S T M E N T P O R T F O L I O S
List of investments as of September 30: A detailed
breakdown of the investments in each AARP Mutual Fund's
portfolio at the close of the fiscal year.
Principal amount/shares: The face value of a bond or the
shares held by an AARP Mutual Fund.
Cost: The amount the AARP Mutual Fund actually paid for
the listed securities.
In addition, the tax-free AARP Funds list the credit
ratings for each of their bond holdings. Moody's
Investors Service, Inc., Fitch Investors Service, Inc.,
and Standard & Poor's Corporation -- three independent
rating services -- have developed credit rating systems
that are designed to indicate a bond issuer's ability to
meet its obligations. For example, bonds with the lowest
risk of default receive a rating of "AAA," while bonds
involving greater risk receive progressively lower
ratings. Bonds rated "BBB" or better are considered
investment grade ("AAA" ratings are assigned only to
bonds with the highest credit quality). The Portfolios
also shows the coupon rates and maturity dates of the
AARP Funds' bond holdings. The coupon rate is the
interest rate on a debt security the bond issuer
promises to pay to the bond holder until maturity. The
maturity date is the date on which a bond issuer is
scheduled to repay the principal to the bond holder.
Market value: The current value of the securities held
in a fund's portfolio.
39
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40
<PAGE>
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 9.9%
- -------------------------------------------------------------------------------------------------------------------------------
41,334,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125%
to be repurchased at $41,341,033 on 10/01/97 collateralized by a $35,110,000
U.S. Treasury Bond, 8.125%, 8/15/19 ................................................... 41,334,000
5,379,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $5,379,897 on 10/01/97 collateralized by a
$5,475,000 U.S. Treasury Note, 6.125%, 3/31/98 ........................................ 5,379,000
-----------
Total Repurchase Agreements (Cost $46,713,000) ........................................... 46,713,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 50.0%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Staples 3.1%
Food & Beverage
15,000,000 Campbell Soup Company, 5.51%, 3/04/98** .................................................... 14,642,854
-----------
Financial 37.4%
Business Finance 4.2%
20,000,000 New Center Asset Trust Discount Note, 5.55%, 10/10/97** .................................... 19,969,444
-----------
Other Financial Companies 33.2%
20,000,000 AVCO Financial Services, 5.668%, 12/12/97** ................................................ 19,775,728
23,000,000 Associates Corp. of North America, 5.51%, 3/03/98** ........................................ 22,455,909
15,000,000 CSW Credit, Inc., 5.52%, 11/18/97** ........................................................ 14,887,503
20,000,000 Ciesco, L.P., 5.51%, 10/30/97** ............................................................ 19,911,228
20,000,000 General Electric Capital Corp., 5.5%, 10/15/97** ........................................... 19,954,166
17,000,000 Household Finance Co., 5.53%, 11/05/97** ................................................... 16,906,159
11,000,000 Matterhorn Capital Corp., 5.53%, 10/02/97** ................................................ 10,998,310
20,000,000 Norwest Corp., 5.49%, 10/20/97** ........................................................... 19,938,888
12,000,000 Prudential Funding Corp., 5.764%, 3/26/98** ................................................ 11,673,730
-----------
156,501,621
-----------
Manufacturing 4.2%
Chemicals
20,000,000 E.I. du Pont de Nemours & Co., 5.47%, 2/17/98** ............................................ 19,569,889
-----------
Energy 2.1%
Oil & Gas Production
10,000,000 Elf Aquitaine Finance S.A. Discount Note, 5.73%, 10/27/97** ................................ 9,958,599
-----------
Utilities 3.2%
Electric Utilities
15,000,000 Virginia Electric Power Corp., 5.51%, 10/09/97** ........................................... 14,979,375
-----------
Total Commercial Paper (Cost $235,659,919) ................................................. 235,621,782
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 12.7%
- -------------------------------------------------------------------------------------------------------------------------------
10,000,000 Abbey National North America, 5.5%, 11/26/97 ............................................... 9,995,664
20,000,000 Chase Bank Delaware, 5.81%, 12/05/97 ....................................................... 20,001,565
10,000,000 Federal Farm Credit Bank, 5.6%, 11/03/97 ................................................... 10,001,727
10,000,000 Lasalle National Bank, 5.91%, 8/12/98 ...................................................... 10,012,035
5,000,000 Morgan Guaranty Trust Company, 5.71%, 1/06/98 .............................................. 4,996,619
</TABLE>
The accompanying notes are an integral part of the financial statements
41
<PAGE>
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
<C> <S> <C>
5,000,000 National Bank of Detriot, 5.76%, 2/03/98 ................................................... 4,996,934
-----------
Total Certificates Of Deposit (Cost $59,998,768) ........................................... 60,004,544
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 9.0%
- -------------------------------------------------------------------------------------------------------------------------------
17,000,000 Federal National Mortgage Association, 5.29%, 7/14/99* ..................................... 16,911,260
10,000,000 Student Loan Marketing Association, 5.41%, 10/30/97* ....................................... 10,004,623
15,500,000 Student Loan Marketing Association, 5.29%, 7/12/99* ........................................ 15,475,200
-----------
Total U. S. Government Agency Obligations (Cost $42,500,000) ............................... 42,391,083
-----------
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 18.1%
- -------------------------------------------------------------------------------------------------------------------------------
Financial
10,000,000 American Express Centurion Bank, 5.626%, 4/24/98* .......................................... 9,998,200
15,000,000 Bank One, Columbus, N.A., 5.52%, 6/10/98* .................................................. 15,015,600
10,000,000 Bank of America Illinois, 6.15%, 5/05/98 ................................................... 10,016,629
20,000,000 Bankers Trust Co., Medium-Term Note, 5.71%, 4/14/98* ....................................... 20,000,000
5,000,000 FCC National Bank Note, 5.725%, 1/07/98 .................................................... 4,996,792
10,000,000 FCC National Bank Note, 5.59%, 11/07/97 .................................................... 9,997,021
15,000,000 First Bank Minnesota Corp., 5.616%, 11/19/97* .............................................. 15,001,720
-----------
Total Short-Term Notes (Cost $85,005,147) .................................................. 85,025,962
-----------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $469,876,834) (a) .................... 99.7 469,756,371
Other Assets and Liabilities, Net ..................................... 0.3 1,554,496
----- -----------
Net Assets ............................................................ 100.0 471,310,867
===== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</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 September 30, 1997.
** (Unaudited) Bond equivalent yield to maturity; not a coupon rate.
(a) At September 30, 1997, the net unrealized depreciation on investments
based on cost for federal income tax purposes of $469,876,834 was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 45,640
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (166,103)
---------
Net unrealized depreciation $(120,463)
=========
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $132,230, of which $74,841
expires September 30, 2004, and $57,389 expires September 30, 2005. In
addition, from November 1, 1996 through September 30, 1997, the Fund
incurred approximately $3,906 of net realized capital losses which the
Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
42
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INVESTMENTS 101.0%
- -----------------------------------------------------------------------------------------------------------------------------
ALASKA
Alaska Housing Finance Corp., General Mortgage Revenue,
Series 1991-A, Weekly Demand Note, 4%, 6/01/26* ............................ 3,000,000 A1+ 3,000,000
ARIZONA
Apache County, AZ, Industrial Development Authority, Tucson Electric
Power Co., 1983 Series C, Weekly Demand Note, 4.15%, 12/15/18* ............. 1,000,000 A1 1,000,000
Maricopa County, AZ, Pollution Control Revenue:
Palos Verde Project, Series 1985F, Tax Exempt Commercial Paper,
3.7%, 1/20/98 ........................................................... 1,500,000 A1 1,500,000
Public Service of New Mexico, Weekly Demand Note, 4%, 11/01/22* ............ 4,000,000 A1+ 4,000,000
Pima County, AZ, Industrial Development Authority,
Tucson Electric Power Co.:
Series 1982, Weekly Demand Note, 4.15%, 10/01/22* ....................... 3,900,000 A1+ 3,900,000
Series 1992 A, Weekly Demand Note, 4.15%, 7/01/22* ...................... 1,000,000 A1+ 1,000,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper, Weekly
Demand Note, 4.15%, 12/01/11* .............................................. 1,900,000 A1 1,900,000
CALIFORNIA
Los Angeles County, CA, Tax and Revenue Anticipation Notes,
Series 1997 A, 4.5%, 6/30/98 ............................................... 2,000,000 SP1+ 2,009,326
COLORADO
Clear Creek County, CO, Colorado Counties Financing Program,
Series 1988, Weekly Demand Note, 4.1%, 6/01/98* ............................ 55,000 A1+ 55,000
Colorado Health Facilities Authority, Composite Issue for Kaiser
Permanente, 1995 Series A, Weekly Demand Note, 4%, 8/01/15* ................ 3,000,000 A1+ 3,000,000
DISTRICT OF COLUMBIA
District of Columbia, Tax and Revenue Anticipation Note, Series 1997B,
4.5%, 9/30/98 .............................................................. 1,500,000 SP1+ 1,509,060
FLORIDA
City of Gainesville, FL, Utilities System, Series C, Tax Exempt
Commercial Paper, 3.7%, 11/14/97 ........................................... 1,000,000 A1+ 1,000,000
Dade County, FL, Industrial Development Authority Revenue,
Dolphins Stadium Project:
Series C, Weekly Demand Note, 4.1%, 1/01/16* ............................ 1,000,000 A1+ 1,000,000
Series D, Weekly Demand Note, 4.1%, 1/01/16* ............................ 1,300,000 A1+ 1,300,000
Palm Beach County, FL, Tax Exempt Commercial Paper,
3.7%, 1/12/98 (c) .......................................................... 2,000,000 AAA 2,000,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric
Cooperative Finance Corp., 1984 Series H-1, Weekly Demand Note,
4.1%, 3/15/14* ............................................................. 4,150,000 A1+ 4,150,000
INDIANA
City of Sullivan, IN, National Rural Utilities Cooperative Finance Corp.,
Hoosier Energy Rural Electric, Tax Exempt Commercial Paper,
3.75%, 12/11/97 ............................................................ 1,790,000 A1+ 1,790,000
Indiana Bond Bank, Advance Funding Notes, Series 1997 A-2,
4.25%, 1/21/98 ............................................................. 3,000,000 MIG1 3,004,892
</TABLE>
The accompanying notes are an integral part of the financial statements
43
<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, Series 88C, Tax Exempt
Commercial Paper, 3.75%, 1/13/98 ........................................... 1,000,000 A1+ 1,000,000
IOWA
Iowa Schools Cash Anticipation Program, Series 1997 A, 4.5%,
6/26/98 (c) ................................................................ 1,000,000 SP1+ 1,004,948
West Des Moines, IA, Commercial Development Revenue, Greyhound
Lines, Weekly Demand Note, 4.05%, 12/01/14* ................................ 6,400,000 A1+ 6,400,000
KENTUCKY
Kentucky Development Finance Authority, Healthcare System,
Appalachian Regional Health Care, Series 1991, Weekly Demand Note,
4.1%, 9/01/06* ............................................................. 6,300,000 VMIG1 6,300,000
MARYLAND
Anne Arundel County, MD, Baltimore Electric & Gas Company,
Tax Exempt Commercial Paper, 3.85%, 11/14/97 ............................... 800,000 A1 800,000
MASSACHUSETTS
Massachusetts Bay Transportation Authority, Series 1997B, 4.25%,
9/04/98 .................................................................... 1,000,000 SP1 1,005,612
MINNESOTA
Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982,
Weekly Demand Note, 4.071%, 8/01/12* ....................................... 300,000 AAA 300,000
Southern Minnesota Municipal Power Agency, Power Supply System,
Series B, Tax Exempt Commercial Paper, 3.75%, 11/21/97 ..................... 1,300,000 P1 1,300,000
MISSOURI
Missouri Health & Educational Facilities Authority Revenue,
Washington University, Series 1996 C, Variable Rate Demand Note,
3.85%, 9/01/30* ............................................................ 1,000,000 VMIG1 1,000,000
NEVADA
Clark County, NV, Airport System, McCarran International Airport,
Series A, Weekly Demand Note, 4.1%, 7/01/12 (c)* ........................... 5,100,000 A1+ 5,100,000
NEW HAMPSHIRE
New Hampshire Business Finance Authority, Connecticut Light & Power,
Weekly Demand Note, 4.15%, 12/01/22* ....................................... 1,700,000 A1+ 1,700,000
NEW MEXICO
Albuquerque, NM, Gross Receipts/Lodgers Tax, Series 1991,
Weekly Demand Note, 4.15%, 7/01/22* ........................................ 2,000,000 A1+ 2,000,000
NEW YORK
New York City, NY, General Obligation, Series A-4, Daily Demand
Note, 3.8%, 8/01/22* ....................................................... 1,100,000 VMIG1 1,100,000
State of New York, General Obligation, Bond Anticipation Note, Series T,
Tax Exempt Commercial Paper, 3.6%, 11/06/97 ................................ 1,500,000 A1 1,500,000
OHIO
Hamilton County, OH, Franciscan Sisters of the Poor Health System,
Series A, Daily Demand Note, 3.95%, 3/01/17* ............................... 300,000 VMIG1 300,000
</TABLE>
The accompanying notes are an integral part of the financial statements
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA
Emmaus, PA, General Authority, Local Government Revenue Bond
Pool Program:
1989 Series E, Weekly Demand Note, 4.2%, 3/01/24* ....................... 1,800,000 A1 1,800,000
1989 Series E-6, Weekly Demand Note, 4.15%, 3/01/24* .................... 2,000,000 A1+ 2,000,000
1989 Series E-8, Weekly Demand Note, 4.15%, 3/01/24* .................... 1,200,000 A1+ 1,200,000
Philadelphia, PA, School District General Obligation, Series 1993A,
4.5%, 7/01/98 (c) .......................................................... 2,000,000 AAA 2,008,712
Philadelphia, PA, Tax and Revenue Anticipation Note, Series 1997A,
4.5%, 6/30/98 .............................................................. 2,000,000 MIG1 2,007,163
Temple University of the Commonwealth, PA, Higher Education,
Series 1997, 4.75%, 5/18/98 ................................................ 3,000,000 SP1+ 3,015,382
SOUTH CAROLINA
South Carolina Public Service Authority, Series 1997, Tax Exempt
Commercial Paper, 3.75%, 10/21/97 .......................................... 1,000,000 A1 1,000,000
TENNESSEE
Franklin, TN, Industrial Development Revenue, Franklin Oaks
Apartments, Weekly Demand Note, Series 1985, 4.15%, 12/15/21* .............. 5,000,000 VMIG1 5,000,000
TEXAS
Grapevine, TX, Industrial Development Revenue Bond, Variable Rate
Demand Note, 3.85%, 12/01/24* .............................................. 800,000 P1 800,000
Harris County Children's Hospital, Series 1996, Weekly Demand Note,
4.1%, 8/01/20* ............................................................. 1,000,000 A1+ 1,000,000
Harris County, TX, Tax Anticipation Note, Series 1997,
4.25%, 2/27/98 ............................................................. 1,000,000 MIG1 1,002,112
Harris County, TX, Health Facilities Authority, Saint Lukes:
Series A, Daily Demand Note, 3.85%, 2/15/27* ............................... 300,000 A1+ 300,000
Series B, Daily Demand Note, 3.85%, 2/15/27* ............................... 900,000 A1+ 900,000
State of Texas, Tax and Revenue Anticipation Note, Series 1998A,
4.75%, 8/31/98 ............................................................. 1,000,000 MIG1 1,008,106
State of Texas, General Obligation, Veterans Housing Assistance
Refunding Bonds, Series 1995, Weekly Demand Note, 4.1%,
12/01/16* .................................................................. 1,500,000 A1+ 1,500,000
Texas Municipal Power Agency, Bond Anticipation Note, Tax
Exempt Commercial Paper, 3.7%, 1/20/98 ..................................... 1,100,000 A1 1,100,000
UTAH
Salt Lake City, UT, Tax Exempt Commercial Paper, 3.7%, 11/13/97 ............... 1,000,000 A1+ 1,000,000
State of Utah, General Obligation Highway, Series 1997B,
Tax Exempt Commercial Paper, 3.8%, 10/07/97 ................................ 2,000,000 A1+ 2,000,000
VERMONT
Vermont Educational & Health Buildings Financing Agency Revenue,
Capital Asset Financing, Series 2005-A, Weekly Demand Note,
4.1%, 8/01/05* ............................................................. 3,200,000 VMIG1 3,200,000
WASHINGTON
Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand
Note, 4%, 11/01/18* ........................................................ 1,900,000 A1+ 1,900,000
</TABLE>
The accompanying notes are an integral part of the financial statements
45
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WYOMING
Sweetwater County, WY, Pollution Control Revenue Refunding,
Pacificorp Project, 1990 Series A, Weekly Demand Note,
4%, 7/01/15* ............................................................... 2,000,000 VMIG1 2,000,000
Total Municipal Investments (Cost $103,670,313) ............................... 103,670,313
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio (Cost $103,670,313) (a) ......... 101.0 103,670,313
Other Assets and Liabilities, Net .......................... (1.0) (1,056,420)
----- -----------
Net Assets ................................................. 100.0 102,613,893
===== ===========
- -----------------------------------------------------------------------------------------------------------------------------
</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. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
(a) At September 30, 1997, the cost for federal income tax purposes of
$103,670,313.
(b) (Unaudited) 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) (Unaudited) Bond is insured by one of these companies: AMBAC, FGIC, FSA,
BIG, or MBIA.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $655,541, of which $19,559
expires September 30, 1999, $323,801 expires September 30, 2000, $401
expires September 30, 2001, $89,046 expires September 30, 2003, $5,140
expires September 30, 2004, and $217,594 expires September 30, 2005. In
addition, from November 1, 1996 through September 30, 1997, the Fund
incurred approximately $102,679 of net realized capital losses which the
Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
46
<PAGE>
AARP GNMA and U.S. Treasury Fund
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 4.0%
- -----------------------------------------------------------------------------------------------------------------------------
96,622,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/97 at 6.02%
to be repurchased at $96,638,157 on 10/01/97 collateralized by
a $96,561,000 U.S. Treasury Note, 6%, 8/15/99 ......................................... 96,622,000
73,000,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125% to
be repurchased at $73,012,420 on 10/01/97 collateralized by
a $62,010,000 U.S. Treasury Bond, 8.125%, 8/15/19 ..................................... 73,000,000
12,000,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $12,002,000 on 10/01/97 collateralized by
a $12,210,000 U.S. Treasury Note, 6.125%, 3/31/98 ..................................... 12,000,000
-------------
Total Repurchase Agreements (Cost $181,622,000) .......................................... 181,622,000
-------------
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 20.3%
- -----------------------------------------------------------------------------------------------------------------------------
250,000,000 U.S. Treasury Note, 5.375%, 11/30/97 ..................................................... 250,000,000
200,000,000 U.S. Treasury Note, 5.25%, 12/31/97 ...................................................... 199,968,000
180,000,000 U.S. Treasury Note, 5.5%, 2/28/99 ........................................................ 179,409,600
200,000,000 U.S. Treasury Note, 6.375%, 5/15/00 ...................................................... 202,374,000
100,000,000 U.S. Treasury Note, 5.5%, 11/15/98 ....................................................... 99,766,000
-------------
Total U. S. Treasury Obligations (Cost $932,878,906) .................................... 931,517,600
-------------
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 79.3%
- -----------------------------------------------------------------------------------------------------------------------------
278,062,162 6.5% with various maturities to 9/15/25 .................................................. 272,945,491
710,640,982 7% with various maturities to 7/15/25 .................................................... 713,075,381
39,208,348 7.125% with various maturities to 9/15/24 ................................................ 40,409,979
748,766,034 7.5% with various maturities to 9/15/27 .................................................. 761,950,976
890,038,904 8% with various maturities to 7/15/27 (b) ................................................ 921,534,055
164,141,932 8.5% with various maturities to 9/15/22 .................................................. 173,459,423
295,125,474 9% with various maturities to 11/15/25 ................................................... 319,080,776
209,460,578 9.5% with various maturities to 9/15/24 .................................................. 227,882,584
151,875,628 10% with various maturities to 3/15/25 ................................................... 168,926,213
42,464 10.25%, 12/15/98 ......................................................................... 44,441
14,507,665 10.5% with various maturities to 1/20/21 ................................................. 16,304,223
3,105,215 11.5% with various maturities to 2/15/16 ................................................. 3,577,751
6,362,423 12% with various maturities to 7/15/15 ................................................... 7,437,849
4,761,039 12.5% with various maturities to 8/15/15 ................................................. 5,625,209
938,535 13% with various maturities to 8/20/15 ................................................... 1,117,986
701,647 13.5% with various maturities to 10/15/14 ................................................ 844,838
295,359 14% with various maturities to 12/15/14 .................................................. 356,154
94,630 14.5%, 10/15/14 .......................................................................... 115,152
190,602 15% with various maturities to 10/15/12 .................................................. 232,744
163,342 16%, 2/15/12 ............................................................................. 200,195
-------------
Total Government National Mortgage Association (Cost $3,550,215,482) ..................... 3,635,121,420
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
47
<PAGE>
AARP GNMA and U.S. Treasury Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $4,664,716,388) (a) .................... 103.6 4,748,261,020
Other Assets and Liabilities, Net ....................................... (3.6) (164,280,560)
----- -------------
Net Assets .............................................................. 100.0 4,583,980,460
===== =============
</TABLE>
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $4,664,716,388 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost .......................................... $ 90,347,064
Aggregate gross unrealized depreciation for all
investments in which there is an excess of
tax cost over value .................................... (6,802,432)
-------------
Net unrealized appreciation ............................ $ 83,544,632
=============
(b) When-issued or forward delivery pools included.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities, all of which were U.S.
Government and U.S. Government agencies' obligations (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$4,050,070,014 and $4,415,045,854, respectively.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $316,261,626, all of which
expires September 30, 2003. In addition, from November 1, 1996 through
September 30, 1997, the Fund incurred approximately $6,993,048 of net
realized capital losses which the Fund intends to elect to defer and treat
as arising in the fiscal year ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
48
<PAGE>
AARP HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 5.7%
- -----------------------------------------------------------------------------------------------------------------------------
25,971,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02%
to be repurchased at $25,975,343 on 10/01/97, collateralized by a $25,394,000
U.S. Treasury Note, 6.625%, 7/31/01 (Cost $25,971,000) ................................ 25,971,000
-----------
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 20.6%
- -----------------------------------------------------------------------------------------------------------------------------
40,000,000 U.S. Treasury Note, 5.75%, 10/31/97 ...................................................... 40,012,400
6,500,000 U.S. Treasury Note, 5.875%, 8/15/98 ...................................................... 6,511,180
20,000,000 U.S. Treasury Note, 6.75%, 5/31/99 ....................................................... 20,300,000
12,500,000 U.S. Treasury Note, 6.875%, 7/31/99 ...................................................... 12,722,625
14,000,000 U.S. Treasury Note, 6.25%, 10/31/01 ...................................................... 14,126,840
-----------
Total U. S. Treasury Obligations (Cost $93,998,750) ...................................... 93,673,045
-----------
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 13.4%
- -----------------------------------------------------------------------------------------------------------------------------
26,297,261 8% with various maturities to 4/15/27 .................................................... 27,217,717
33,045,074 7.5% with various maturities to 9/15/27 .................................................. 33,612,789
-----------
Total Government National Mortgage Association (Cost $59,926,976) ........................ 60,830,506
-----------
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 10.8%
- -----------------------------------------------------------------------------------------------------------------------------
8,190,493 Federal Home Loan Mortgage Corp. 8%, 4/01/08 ............................................. 8,432,932
9,533,592 Federal Home Loan Mortgage Corp. 7.79%, 9/01/24 .......................................... 9,920,942
7,083,331 Federal National Mortgage Association 8.5%, 11/01/09 ..................................... 7,402,081
12,381,444 Federal National Mortgage Association 8% with various maturities to 12/01/09 ............. 12,763,411
10,988,012 Federal National Mortgage Association 6.5%, 11/01/25 ..................................... 10,737,265
-----------
Total U. S. Government Agency Pass-Thrus (Cost $49,171,515) .............................. 49,256,631
-----------
- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 2.2%
- -----------------------------------------------------------------------------------------------------------------------------
10,000,000 Abbey National PLC Global Medium-Term Note, 6.69%, 10/17/05
(Cost $9,997,100) ..................................................................... 10,022,300
-----------
- -----------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 13.9%
- -----------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 3.0%
13,500,000 Ford Credit Automobile Trust Series 1996-B A3, 6.1%, 3/15/00 ............................. 13,516,875
-----------
Credit Card Receivables 1.1%
5,000,000 Advanta Corp. Series 1997-1 A4, 7.65%, 5/25/27 ........................................... 5,143,750
-----------
Home Equity Loans 4.8%
10,000,000 Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/28 ................. 10,184,375
6,682,000 The Money Store Home Equity Loan Trust Series 1996-B A1, 6.72%, 2/15/10 .................. 6,677,791
5,000,000 The Money Store Home Equity Series 1997-A A6, 7.21%, 10/15/21 ............................ 5,114,063
-----------
21,976,229
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
49
<PAGE>
AARP HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufactured Housing 5.0%
3,750,000 Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/28 ................... 3,868,945
4,500,000 Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/26 .............................. 4,619,520
4,000,000 Green Tree Financial Corp., Series 1997-1 B1, 7.23%, 3/15/28 ............................. 4,009,063
1,500,000 Green Tree Financial Corp., Series 1997-2 B2, 8.05%, 4/15/28 ............................. 1,561,172
3,730,000 Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/27 ............................ 3,765,406
4,500,000 Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/11 ................ 4,736,250
-----------
22,560,356
-----------
Total Asset Backed (Cost $62,115,271) .................................................... 63,197,210
-----------
- -----------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 32.1%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Staples 2.5%
10,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/01/22 ............................................... 11,470,000
-----------
Financial 10.2%
1,500,000 American Express Credit Corp., 11.625%, 12/12/00 ......................................... 1,544,250
15,000,000 Associates Corp. of North America, 6.625%, 5/15/01 ....................................... 15,126,000
10,000,000 Deutsche Bank, 7.5%, 4/25/09 ............................................................. 10,567,400
5,500,000 Shurgard Storage Centers, Inc. (REIT), 7.5%, 4/25/04 ..................................... 5,701,520
5,000,000 Susa Partnership L.P., 8.2%, 6/01/17 ..................................................... 5,281,250
8,250,000 Taubman Realty Group L.P., Medium-Term Note, 7%, 10/01/03 ................................ 8,346,690
-----------
46,567,110
-----------
Media 1.6%
7,000,000 A.H. Belo Corp., 7.75%, 6/01/27 .......................................................... 7,321,650
-----------
Service Industries 2.2%
10,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................................................... 10,087,500
-----------
Durables 1.8%
7,500,000 Northrop Grumman Corp., 7.875%, 3/01/26 .................................................. 8,065,800
-----------
Technology 3.2%
15,000,000 International Business Machines Corp., 7%, 10/30/45 ...................................... 14,583,150
-----------
Energy 2.9%
2,500,000 Lyondell Petrochemical Co., 7.55%, 2/15/26 ............................................... 2,509,400
-----------
10,000,000 Norsk Hydro AS, 7.75%, 6/15/23 ........................................................... 10,598,100
-----------
13,107,500
-----------
Metals & Minerals 1.5%
6,500,000 Potash Corp., 7.125%, 6/15/07 ............................................................ 6,627,400
-----------
Transportation 4.1%
13,500,000 Continental Airlines Inc., Series 1997-1A, 7.461%, 4/01/15 ............................... 14,145,300
4,000,000 Norfolk Southern Corp., 7.8%, 5/15/27 .................................................... 4,283,880
-----------
18,429,180
-----------
Utilities 2.1%
10,000,000 Public Service Electric & Gas Co., 1st Refunding Mortgage, 6.25%, 1/01/07 ................ 9,655,400
-----------
Total Corporate Bonds (Cost $141,260,543) ................................................ 145,914,690
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $442,441,155) (a) .................... 98.7 448,865,382
Other Assets and Liabilities, Net ..................................... 1.3 6,004,136
----- -----------
Net Assets ............................................................ 100.0 454,869,518
===== ===========
</TABLE>
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $442,441,155 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ......... $ 7,613,705
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ......... (1,189,478)
-----------
Net unrealized appreciation ................................ $ 6,424,227
===========
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $2,264,764,844.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the year ended September 30, 1997 aggregated $220,023,243
and $92,541,818, respectively. Purchases and sales of obligations of the
U.S. Government and U.S. Government agencies aggregated $138,952,123 and
$266,185,773, respectively.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had a capital loss carryforward of approximately $8,993,357, of which
$7,756,158 expires September 30, 2003, and $1,237,199 expires September
30, 2005. In addition, from November 1, 1996 through September 30, 1997,
the Fund incurred approximately $1,252,429 of net realized capital losses
which the Fund intends to elect to defer and treat as arising in the
fiscal year ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
51
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL INVESTMENTS (UNDER 1 YEAR) - 0.5%
- -----------------------------------------------------------------------------------------------------------------------------
INDIANA
Jasper County, IN, Pollution Control Revenue, Northern Indiana Public
Services, Series C, Daily Demand Bond, 3.8%, 4/01/19* ....................... 1,400,000 VMIG1 1,400,000
MASSACHUSETTS
Massachusetts Health & Educational Facilities Authority, Brigham and
Women's Hospital, Series A, Weekly Demand Note, 4.1%,
7/01/17* .................................................................... 900,000 AA 900,000
OHIO
Cuyahoga County, OH, Health & Education, University Hospital of
Cleveland, Daily Demand Note, 3.85%, 1/01/16* ............................... 3,400,000 VMIG1 3,400,000
PUERTO RICO
Puerto Rico, Series 1996, Variable Rate Demand Bond, 3.65%,
7/01/11* (c) ................................................................ 2,000,000 AAA 2,000,000
TEXAS
Harris County, TX, Health Facilities Authority, Saint Lukes, Daily
Demand Note:
Series A, 3.85%, 2/15/27* ................................................ 400,000 A1+ 400,000
Series B, 3.85%, 2/15/27* ................................................ 1,000,000 A1+ 1,000,000
-------------
Total Short-Term Municipal Investments (Cost $9,100,000) ....................... 9,100,000
-------------
- -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL INVESTMENTS (OVER 1 YEAR) - 97.8%
- -----------------------------------------------------------------------------------------------------------------------------
ALASKA
Alaska Housing Finance Corp., Veterans Mortgage Project, 8.1%,
9/01/20 ..................................................................... 3,675,000 AAA 3,748,537
Anchorage, AK, Electric Utility Revenue, 6.5%, 12/01/07 (c) .................... 2,620,000 AAA 2,993,009
North Slope Borough, AK, General Obligation Capital Appreciation:
Series 1997A, Zero Coupon, 6/30/08 (c) ...................................... 7,000,000 AAA 4,116,560
Series A, Zero Coupon, 6/30/06 (c) .......................................... 4,000,000 AAA 2,630,000
Series B, Zero Coupon:
1/01/03 (c) .............................................................. 16,000,000 AAA 12,580,640
6/30/04 (c) .............................................................. 15,500,000 AAA 11,305,390
6/30/05 (c) .............................................................. 25,600,000 AAA 17,752,064
ARIZONA
Arizona Municipal Finance Program, Certificate of Participation,
Series 25, 7.875%, 8/01/14 (c) .............................................. 3,500,000 AAA 4,602,500
Maricopa County, AZ, School District #28, Kyrene Elementary, Series B,
Zero Coupon, 1/01/04 (c) .................................................... 4,000,000 AAA 3,004,440
Maricopa County, AZ, School District #6, Washington Elementary,
Series B, 4.1%, 7/01/13 (c) ................................................. 2,950,000 AAA 2,578,300
Maricopa County, AZ, Unified School District #41, Gilbert School,
Zero Coupon, 1/01/05 (c) .................................................... 5,280,000 AAA 3,775,042
CALIFORNIA
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/01/09 (c) ......................................................... 8,995,000 AAA 9,526,694
</TABLE>
The accompanying notes are an integral part of the financial statements
52
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Banning, CA, Wastewater, Certificate of Participation:
8%, 1/01/19 (c) ............................................................. 960,000 AAA 1,294,061
8%, 1/01/19 (c) ............................................................. 1,080,000 AAA 1,455,818
Big Bear Lake, CA, Series 1996, 6%, 4/01/11 (c) ................................ 3,800,000 AAA 4,233,276
California Housing Finance Agency, 5.7%, 8/01/16 (c) ........................... 5,175,000 AAA 5,270,893
California Housing Finance Agency, 5.3%, 8/01/14 (c) ........................... 3,460,000 AAA 3,506,745
California State Public Works Board, Lease Revenue, Series A, 6.3%,
12/01/06 (c) (d) ............................................................ 8,095,000 AAA 9,211,867
Irvine Ranch, CA, Water District, 7.875%, 2/15/23 .............................. 3,000,000 A 3,042,750
Los Angeles County, CA, Capital Asset Leasing, 6%, 12/01/06 (c) ................ 9,000,000 AAA 9,990,180
Los Angeles County, CA, Public Works Authority:
Series 1996B, 5.25%, 9/01/11 (c) ............................................ 3,000,000 AAA 3,052,290
Series 1996A, 6%, 9/01/04 (c) ............................................... 2,920,000 AAA 3,208,759
Los Angeles County, CA, Public Works Finance Authority, Lease
Revenue, Multiple Projects IV, 4.75%, 12/01/10 (c) .......................... 11,140,000 AAA 10,862,503
Madera County, CA, Certificates of Participation, Valley Children's
Hospital, 6.5%, 3/15/10 (c) ................................................. 2,840,000 AAA 3,291,617
Oakland, CA, Redevelopment Agency, Tax Allocation, 6%,
2/01/07 (c) ................................................................. 2,000,000 AAA 2,223,280
Riverside, CA, Transportation Commission, Sales Tax Revenue, Series A,
5.7%, 6/01/06 (c) ........................................................... 5,400,000 AAA 5,892,966
San Diego Water Authority, CA, Certificate of Participation:
5.632%, 4/25/07 (c) ......................................................... 6,300,000 AAA 6,782,265
5.681%, 4/22/09 (c) ......................................................... 4,500,000 AAA 4,848,435
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue
Refunding, 6.75%, 7/01/10 (c) ............................................... 2,000,000 AAA 2,370,680
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road
Revenue, Capital Appreciation, Refunding, Series 1997A, Zero
Coupon, 1/15/12 (c) ......................................................... 3,000,000 AAA 1,424,460
San Joaquin, CA, Certificate of Participation, County Public Facilities
Project, 5.5%, 11/15/13 (c) ................................................. 2,000,000 AAA 2,109,680
Sweetwater Authority, CA, Water Revenue, 5.25%, 4/01/10 (c) .................... 10,000,000 AAA 10,428,900
Three Valleys Municipal Water District Certificates of Participation, CA,
5%, 11/01/14 (c) ............................................................ 3,000,000 AAA 2,939,130
Whittier, CA, Presbyterian Intercommunity Hospital, Health Facilities
Revenue, 6.25%, 6/01/08 (c) ................................................. 1,780,000 AAA 2,015,672
COLORADO
Castle Rock Ranch, CO, Public Facilities Revenue:
6.3%, 12/01/07 .............................................................. 3,115,000 AA 3,429,272
6.4%, 12/01/08 .............................................................. 3,310,000 AA 3,672,677
6.375%, 12/01/11 ............................................................ 2,000,000 AA 2,205,840
Mesa County, CO, Residual Revenue, Single Family Housing, ETM,
Zero Coupon, 12/01/11** (c) ................................................. 3,855,000 AAA 1,857,455
CONNECTICUT
Connecticut Resource Recovery Authority:
Series 1996, 6.25%, 11/15/05 (c) ............................................ 2,000,000 AAA 2,224,360
Series 1996A, 6.25%, 11/15/06 (c) ........................................... 4,525,000 AAA 5,065,240
Connecticut State Health Facility Authority, Series 1992B, 6.15%,
11/15/04 .................................................................... 5,000,000 AA 5,222,300
</TABLE>
The accompanying notes are an integral part of the financial statements
53
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISTRICT OF COLUMBIA
District of Colombia, General Obligation:
6.5%, 6/01/10 (c) ........................................................... 2,270,000 AAA 2,581,943
Series B, Zero Coupon, 6/01/00 (c) .......................................... 3,500,000 AAA 3,117,730
Series B, 6.125%, 6/01/03 (c) ............................................... 4,000,000 AAA 4,319,720
Refunding, 1993 Series A, 5.875%, 6/01/05 (c) ............................... 4,750,000 AAA 5,108,720
Series B, 5.4%, 6/01/06 (c) (d) ............................................. 18,905,000 AAA 19,782,192
Series B3, 5.4%, 6/01/06 (c) ................................................ 10,000,000 AAA 10,464,000
Series B, 5.5%, 6/01/07 (c) (d) ............................................. 25,000,000 AAA 26,319,500
Series B, 5.5%, 6/01/08 (c) (d) ............................................. 21,300,000 AAA 22,459,146
Series A, Prerefunded 6/1/99 at 102, 7.5%, 6/01/09*** (c) ................... 5,000,000 AAA 5,373,100
Series B, 5.5%, 6/01/09 (c) (d) ............................................. 16,150,000 AAA 16,958,307
Series B, 5.5%, 6/01/09 (c) ................................................. 2,840,000 AAA 2,982,142
Series B, 5.5%, 6/01/10 (c) (d) ............................................. 15,590,000 AAA 16,284,067
Series B, 5.5%, 6/01/12 (c) ................................................. 1,050,000 AAA 1,090,729
FLORIDA
Florida Department of Environmental Preservation, Series A, 4.75%,
7/01/12 (c) ................................................................. 10,000,000 AAA 9,549,600
Florida Municipal Power Agency, Stanton II Project, 4.5%, 10/01/16 (c) ......... 4,400,000 AAA 3,880,580
GEORGIA
Cobb County, GA, Kennestone Hospital Authority, Series A, 5.625%,
4/01/11 (c) ................................................................. 2,305,000 AAA 2,461,602
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central
Georgia, Series C, 5.25%, 8/01/11 (c) ....................................... 6,975,000 AAA 7,217,730
Municipal Electric Authority of Georgia, 5th Crossover, Project #1, 6.4%,
1/01/13 (c) ................................................................. 3,500,000 AAA 3,990,000
HAWAII
Hawaii State, General Obligation, Series 1992 BZ, 6%, 10/01/09 (c) ............. 2,000,000 AAA 2,217,040
ILLINOIS
Central Lake County, IL, Joint Action Water Agency, Refunding Revenue,
Zero Coupon, 5/01/02 (c) .................................................... 2,245,000 AAA 1,823,995
Chicago O'Hare International Airport, IL, Refunding Revenue:
Series 1996A, 6%, 1/01/06 (c) ............................................... 2,000,000 AAA 2,178,840
Series C, 5%, 1/01/11 (c) ................................................... 6,500,000 AAA 6,537,115
Chicago, IL, Board of Education, 6.125%, 1/01/06 (c) ........................... 4,000,000 AAA 4,403,080
Chicago, IL, Wastewater Transmission Revenue:
5.5%, 1/01/09 (c) (d) ....................................................... 11,990,000 AAA 12,744,411
5.5%, 1/01/10 (c) ........................................................... 7,220,000 AAA 7,656,016
Chicago, IL, General Obligation:
6.25%, 1/01/11 (c) .......................................................... 3,000,000 AAA 3,366,150
Emergency Telephone System, 5.55%, 1/01/08 (c) (d) .......................... 5,820,000 AAA 6,189,163
Series A, 5.375%, 1/01/13 (c) (d) ........................................... 15,410,000 AAA 15,887,248
Series B, 5.125%, 1/01/15 (c) ............................................... 9,550,000 AAA 9,484,391
Series B, 5%, 1/01/10 (c) ................................................... 5,200,000 AAA 5,232,760
Series B, 5%, 1/01/11 (c) ................................................... 1,620,000 AAA 1,621,426
Chicago, IL, General Obligation Lease, Board of Education:
Series 1996, 6.25%, 12/01/11 (c) ............................................ 1,600,000 AAA 1,804,656
Series A, 6.25%, 1/01/10 (c) ................................................ 11,550,000 AAA 12,938,656
Series A, 6.25%, 1/01/15 (c) (d) ............................................ 26,000,000 AAA 29,145,480
</TABLE>
The accompanying notes are an integral part of the financial statements
54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A, 6%, 1/01/16 (c) ................................................... 11,025,000 AAA 12,000,933
Series A, 6%, 1/01/20 (c) ................................................... 36,625,000 AAA 39,797,091
Chicago, IL, Public Building Commission, Building Revenue:
Series A, 5.25%, 12/01/07 (c) ............................................... 3,500,000 AAA 3,648,225
Series A, 5.25%, 12/01/09 (c) (d) ........................................... 10,420,000 AAA 10,877,021
Series A, 5.25%, 12/01/11 (c) ............................................... 9,705,000 AAA 10,018,277
Chicago, IL, Public Building Commission, Board of Education, Series A,
Zero Coupon, 1/01/06 (c) .................................................... 2,430,000 AAA 1,642,850
Cook & Dupage Counties, IL, Housing Development Authority:
Zero Coupon, 12/01/07 (c) ................................................... 2,550,000 AAA 1,550,910
Zero Coupon, 12/01/08 (c) ................................................... 2,625,000 AAA 1,503,836
Zero Coupon, 12/01/09 (c) ................................................... 2,860,000 AAA 1,538,566
Cook County, IL, General Obligation, Zero Coupon, 11/01/04 (c) ................. 3,205,000 AAA 2,315,612
Cook County, IL, Community High School District #233,
Capital Appreciation:
Series 1993 B, Zero Coupon, 12/01/08 (c) ................................. 1,700,000 AAA 979,234
Series 1993 B, Zero Coupon, 12/01/09 (c) ................................. 1,700,000 AAA 919,972
Series 1993 B, Zero Coupon, 12/01/10 (c) ................................. 1,665,000 AAA 845,753
Cook County, IL, General Obligation, Series C, 6%, 11/15/07 (c) ................ 5,000,000 AAA 5,527,100
Decatur, IL, General Obligation:
Series 1991, Zero Coupon, 10/01/03 (c) ...................................... 1,455,000 AAA 1,105,436
Series 1991, Zero Coupon, 10/01/04 (c) ...................................... 1,415,000 AAA 1,019,946
Decatur, IL, Public Building Commission, General Obligation,
Certificate of Participation:
6.5%, 1/01/03 (c) ........................................................ 1,725,000 AAA 1,890,565
6.5%, 1/01/06 (c) ........................................................ 1,500,000 AAA 1,689,360
Evergreen Park, IL, Little Company of Mary Hospital, 7.75%,
2/15/09 (c) ................................................................. 2,935,000 AAA 3,033,029
Hoffman Estates, IL, Tax Increment Revenue, Capital Appreciation,
Junior Lien, Series 1991, Zero Coupon, 5/15/07 .............................. 17,460,000 A 10,803,724
Illinois Dedicated Tax Revenue, Civic Center Project:
6.25%, 12/15/11 (c) ......................................................... 3,000,000 AAA 3,414,090
6.25%, 12/15/20 (c) ......................................................... 6,975,000 AAA 7,823,090
Series A, 6.5%, 12/15/07 (c) ................................................ 4,765,000 AAA 5,487,136
Series A, 6.5%, 12/15/08 (c) ................................................ 5,255,000 AAA 6,081,349
Illinois Educational Facilities Authority, Loyola University:
Series 1991 A, Zero Coupon, 7/01/04 (c) ..................................... 2,860,000 AAA 2,085,769
Zero Coupon, 7/01/05 (c) .................................................... 4,000,000 AAA 2,773,400
Illinois Health Facilities Authority, Brokaw-Mennonite Healthcare:
6%, 8/15/06 (c) ............................................................. 1,380,000 AAA 1,506,781
6%, 8/15/07 (c) ............................................................. 1,460,000 AAA 1,597,620
6%, 8/15/08 (c) ............................................................. 1,550,000 AAA 1,701,915
6%, 8/15/09 (c) ............................................................. 1,640,000 AAA 1,802,409
Illinois Health Facilities Authority:
Children's Memorial Hospital, 6.25%, 8/15/13 (c) ............................ 3,400,000 AAA 3,813,848
Felician Healthcare Inc., Series A, 6.25%, 12/01/15 (c) (d) ................. 17,000,000 AAA 18,953,300
Memorial Medical Center, 6.75%, 10/01/11 (c) ................................ 2,135,000 AAA 2,307,444
Methodist Health Service, Series 1985 G, 8%, 8/01/15 (c) .................... 9,880,000 AAA 10,622,087
Sherman Hospital, 6.75%, 8/01/11 (c) ........................................ 2,700,000 AAA 2,943,567
SSM Healthcare System, 6.4%, 6/01/08 (c) .................................... 1,350,000 AAA 1,527,390
</TABLE>
The accompanying notes are an integral part of the financial statements
55
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joliet, IL, Junior College Assistance Corp., Lease Revenue, North Campus
Extension Center, 6.7%, 9/01/12 (c) ......................................... 2,500,000 AAA 2,969,275
Kane County, IL, Series 1996A, 6.5%, 2/01/10 (c) ............................... 1,775,000 AAA 2,039,013
Kane, Cook and Dupage Counties, IL, School District #46 Elgin:
Series 1996B, Zero Coupon, 1/01/11 (c) ...................................... 1,040,000 AAA 517,941
Series 1996B, Zero Coupon, 1/01/12 (c) ...................................... 1,300,000 AAA 609,999
Series 1996B, Zero Coupon, 1/01/13 (c) ...................................... 2,095,000 AAA 925,299
Kendall, Kane and Will Counties, IL, Community Unit School District
Number 308, Oswego:
Zero Coupon, 3/01/02 (c) ................................................. 1,055,000 AAA 863,655
Zero Coupon, 3/01/05 (c) ................................................. 1,540,000 AAA 1,084,699
Zero Coupon, 3/01/06 (c) ................................................. 1,595,000 AAA 1,065,460
Metropolitan Pier & Exposition Authority, IL, McCormick Place
Expansion Project:
Series 1994, Zero Coupon, 6/15/13 (c) .................................... 5,625,000 AAA 2,424,544
Zero Coupon, 12/15/03 (c) ................................................ 3,200,000 AAA 2,408,448
Zero Coupon, 6/15/04 (c) ................................................. 10,300,000 AAA 7,527,240
Northwest Surburban Municipal Joint Action Water Agency, IL, Supply
System Revenue, 6.45%, 5/01/07 (c) .......................................... 2,575,000 AAA 2,915,183
Rosemont, IL, Tax Increment:
Series C, Zero Coupon, 12/01/05 (c) ......................................... 4,455,000 AAA 3,028,643
Series C, Zero Coupon, 12/01/07 (c) ......................................... 2,655,000 AAA 1,614,771
Skokie, IL, Park District, Series 1994B, Zero Coupon, 12/01/11 (c) ............. 3,000,000 AAA 1,423,710
State University Retirement System, IL, Special Revenue, Zero Coupon,
10/01/03 (c) ................................................................ 2,750,000 AAA 2,089,312
University of Illinois, Board of Trustees:
Series 1991, Zero Coupon, 4/01/03 (c) ....................................... 3,890,000 AAA 3,023,853
Series 1991, Zero Coupon, 4/01/05 (c) ....................................... 3,830,000 AAA 2,687,051
Will County, IL, Community Unit School District #201-U, Crete-Monee,
Capital Appreciation:
Zero Coupon, 12/15/00 (c) ................................................ 1,325,000 AAA 1,153,041
Zero Coupon, 12/15/01 (c) ................................................ 1,730,000 AAA 1,435,727
INDIANA
Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%,
11/15/12 (c) ................................................................ 1,400,000 AAA 1,485,932
Indiana Health Facilities Finance Authority, Hospital Revenue,
Community Hospital Project:
6.4%, 5/01/12 (c) ........................................................ 5,000,000 AAA 5,431,900
6%, 7/01/01 (c) .......................................................... 1,395,000 AAA 1,474,292
Indiana Health Facilities Financing Authority, Hospital Revenue, Tax
Exempt Custodian Receipts Refund, Series 1997A, 6%, 7/01/02 (c) ............. 1,480,000 AAA 1,579,796
Indiana Health Facilities Financing Authority:
Series 1990A, 6%, 7/01/03 (c) ............................................... 1,570,000 AAA 1,688,896
Series 1990A, 6%, 7/01/04 (c) ............................................... 1,665,000 AAA 1,799,865
Series 1990A, 6%, 7/01/05 (c) ............................................... 1,765,000 AAA 1,916,066
Series 1990A, 6%, 7/01/06 (c) ............................................... 1,875,000 AAA 2,045,306
Series 1990A, 6%, 7/01/07 (c) ............................................... 1,985,000 AAA 2,171,848
Series 1990A, 6%, 7/01/09 (c) ............................................... 1,125,000 AAA 1,231,313
Series 1990A, 6%, 7/01/10 (c) ............................................... 1,185,000 AAA 1,293,297
</TABLE>
The accompanying notes are an integral part of the financial statements
56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1990A, 6%, 7/01/11 (c) ............................................... 1,260,000 AAA 1,374,912
Series 1990A, 6%, 7/01/12 (c) ............................................... 1,345,000 AAA 1,466,386
Series 1990A, 6%, 7/01/13 (c) ............................................... 1,420,000 AAA 1,545,812
Series 1990A, 6%, 7/01/14 (c) ............................................... 1,505,000 AAA 1,634,881
Series 1990A, 6%, 7/01/15 (c) ............................................... 1,600,000 AAA 1,733,456
Series 1990A, 6%, 7/01/16 (c) ............................................... 1,700,000 AAA 1,835,949
Series 1990A, 6%, 7/01/17 (c) ............................................... 1,800,000 AAA 1,941,444
Series 1990A, 6%, 7/01/18 (c) ............................................... 1,910,000 AAA 2,054,281
Series 1997A, 6%, 7/01/08 (c) ............................................... 1,085,000 AAA 1,189,453
Indiana University, Revenue Refunding, Series H, Zero Coupon,
8/01/06 (c) ................................................................. 8,500,000 AAA 5,565,715
Indiana University, Student Fee Revenue, Series J, 5%, 8/01/18 (c) ............. 4,200,000 AAA 3,971,016
Indiana University, Revenue Refunding, Student Fee Revenue, Series H,
Zero Coupon, 8/01/08 (c) .................................................... 10,000,000 AAA 5,825,000
Madison County, IN, Community Hospital of Anderson, Prerefunded
1/1/98 at 102, 8%, 1/01/14*** (c) ........................................... 7,055,000 AAA 7,269,260
Merrillville, IN, Multiple School Building Corp., First Mortgage,
Zero Coupon, 1/15/11 (c) .................................................... 4,000,000 AAA 1,988,000
IOWA
Polk County, IA, Mercy Hospital, 6.75%, 11/01/05 (c) ........................... 5,000,000 AAA 5,464,900
KANSAS
Kansas City, KS, Utility System Revenue:
Capital Appreciation, Prerefunded, Zero Coupon, 3/01/01*** (c) .............. 4,095,000 AAA 3,529,931
ETM, Zero Coupon, 9/01/04** (c) ............................................. 3,575,000 AAA 2,602,743
ETM, Zero Coupon, 9/01/05** (c) ............................................. 5,300,000 AAA 3,657,212
ETM, Zero Coupon, 9/01/06** (c) ............................................. 1,875,000 AAA 1,228,181
Zero Coupon, 9/01/04 (c) .................................................... 2,640,000 AAA 1,929,840
Zero Coupon, 9/01/05 (c) .................................................... 3,950,000 AAA 2,748,963
Zero Coupon, 9/01/06 (c) .................................................... 1,375,000 AAA 908,545
LOUISIANA
Louisiana Public Facilities Authority, Prerefunded, 2/15/08 at 100,
4.75%, 5/01/16*** ........................................................... 5,765,000 AAA 5,844,903
New Orleans, LA, General Obligation:
Zero Coupon, 7/15/06 (c) .................................................... 4,850,000 AAA 2,941,379
Zero Coupon, 9/01/07 (c) .................................................... 10,000,000 AAA 6,216,700
Orleans, LA, Levee District, Levee Improvement Bonds, Series 1986,
5.95%, 11/01/14 (c) ......................................................... 1,945,000 AAA 2,079,847
MARYLAND
Baltimore, MD, Revenue Exchanged, Auto Parking Revenue,
Series 1996A, 5.9%, 7/01/12 (c) ............................................. 3,100,000 AAA 3,405,474
MASSACHUSETTS
Massachusetts General Obligation, Series D, 7%, 10/01/03 (c) ................... 7,000,000 AAA 7,532,490
MICHIGAN
Detroit, MI, General Obligation, Distributable State Aid Refunding,
5.25%, 5/01/08 (c) .......................................................... 1,500,000 AAA 1,566,855
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess
Medical Center, Series A, 6%, 7/01/09 (c) ................................... 8,250,000 AAA 8,530,252
Michigan Hospital Finance Authority, Sisters of Mercy Healthcorp
Obligated Group, Series P, 5.25%, 8/15/08 (c) ............................... 8,655,000 AAA 9,018,770
</TABLE>
The accompanying notes are an integral part of the financial statements
57
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MINNESOTA
Northern Minnesota Municipal Power Agency, Series 1989A, 7.25%,
1/01/16 ..................................................................... 7,500,000 A 7,928,475
MISSOURI
Missouri Health & Educational Facilities Authority, SSM Healthcare:
1992 Series AA, 6.35%, 6/01/08 (c) .......................................... 8,125,000 AAA 9,231,787
1992 Series AA, 6.4%, 6/01/09 (c) ........................................... 8,640,000 AAA 9,863,510
NEVADA
Clark County, NV, School District:
General Obligation, Series B, Zero Coupon, 3/01/05 (c) ...................... 8,070,000 AAA 5,725,504
Series 1991B, Zero Coupon, 3/01/09 (c) ...................................... 4,350,000 AAA 2,458,489
NEW JERSEY
New Jersey Highway Authority, ETM, 6.5%, 1/01/11 ............................... 4,835,000 AAA 5,350,266
New Jersey Housing and Finance Agency, Home Mortgage Purchase
Revenue, Zero Coupon, 10/01/16 (c) .......................................... 3,980,000 AAA 603,806
New Jersey Turnpike Authority:
6.5%, 1/01/09 (c) ........................................................... 5,000,000 AAA 5,760,200
Series 1991A, 6.3%, 1/01/01 (c) ............................................. 1,250,000 AAA 1,329,325
NEW YORK
New York City, NY, General Obligation:
8%, 11/01/01 (c) ............................................................ 760,000 AAA 774,128
5.9%, 2/01/05 (c) ........................................................... 5,500,000 AAA 5,936,975
8.125%, 11/01/05 (c) ........................................................ 1,400,000 AAA 1,426,166
Series 1989 E, 7%, 12/01/07 (c) ............................................. 115,000 AAA 117,348
Series A, ETM, 8%, 11/01/01** (c) ........................................... 740,000 AAA 790,720
Series A, 3%, 8/15/02 (c) ................................................... 9,000,000 AAA 8,418,420
Series C, 6.4%, 8/01/04 (c) ................................................. 500,000 AAA 546,200
Series C, 6.4%, 8/01/05 (c) ................................................. 430,000 AAA 468,167
Series C, Prerefunded 8/01/02 at 101.50, 6.4%, 8/01/05*** (c) ............... 10,000,000 AAA 11,061,900
Series D, 8%, 8/01/05 (c) ................................................... 5,000 AAA 5,167
Series D, 6%, 8/01/06 (c) ................................................... 140,000 AAA 144,525
Series D, 6%, 8/01/08 (c) ................................................... 370,000 AAA 381,958
Series E, ETM, 7%, 12/01/07** (c) ........................................... 1,385,000 AAA 1,408,143
New York State Dormitory Authority:
College and University Pooled Capital Program, 7.8%, 12/01/05 (c) ........... 8,840,000 AAA 9,394,445
State University of New York, 6%, 7/01/09 (c) ............................... 2,000,000 AAA 2,215,400
New York State Dormitory Authority Revenue, City University:
Series C, 7.5%, 7/01/10 (c) ................................................. 5,750,000 AAA 7,173,470
Series D, 7%, 7/01/09 (c) ................................................... 4,000,000 AAA 4,787,040
New York State Energy Research and Development Authority, Pollution
Control Revenue, Electric and Gas, 5.9%, 12/01/06 (c) ....................... 5,300,000 AAA 5,818,658
New York State, Urban Development Authority, Correctional Facilities,
6.5%, 1/01/11 (c) ........................................................... 4,500,000 AAA 5,185,845
Suffolk County, NY, Industrial Development Agency, Southwest Sewer
System, 6%, 2/01/07 (c) ..................................................... 8,000,000 AAA 8,771,760
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency:
5.5%, 1/01/07 (c) ........................................................... 2,000,000 AAA 2,121,860
Power System Revenue, Series B, 6%, 1/01/18 (c) ............................. 8,775,000 AAA 9,611,959
</TABLE>
The accompanying notes are an integral part of the financial statements
58
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
North Carolina Municipal Power Agency, Number One, Catawba Electric
Power Revenue:
5.25%, 1/01/08 (c) ....................................................... 2,500,000 AAA 2,612,725
6%, 1/01/11 (c) .......................................................... 8,235,000 AAA 9,101,157
7.5%, 1/01/17 ............................................................ 4,520,000 A 4,648,730
Series 1992, 7.25%, 1/01/07 (c) .......................................... 5,000,000 AAA 5,947,300
Series 1997, 6%, 1/01/08 (c) ............................................. 2,585,000 AAA 2,849,058
NORTH DAKOTA
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center, Series 1991,
Zero Coupon, 5/01/02 (c) .................................................... 2,850,000 AAA 2,324,716
OHIO
Cleveland, OH, Water Works Revenue, Series 1993G, 5.5%,
1/01/13 (c) (d) ............................................................. 10,000,000 AAA 10,495,600
Hamilton County, OH, Electric System Mortgage Revenue, Series B,
Prerefunded 10/15/98 at 102, 8%, 10/15/22*** (c) ............................ 3,720,000 AAA 3,948,296
Ohio Air Quality Development Authority, Ohio Power Company,
Series B, 7.4%, 8/01/09 (c) ................................................. 5,000,000 AAA 5,367,550
OKLAHOMA
Tulsa, OK, Industrial Development Authority, Hospital Revenue,
St. John's Medical Center:
Zero Coupon, 12/01/02 (c) ................................................ 3,930,000 AAA 3,133,428
Zero Coupon, 12/01/04 (c) ................................................ 5,430,000 AAA 3,924,695
Zero Coupon, 12/01/06 (c) ................................................ 6,430,000 AAA 4,199,626
PENNSYLVANIA
Pennsylvania Industrial Development Authority, Economic
Development Revenue:
5.8%, 1/01/08 (c) ........................................................ 4,250,000 AAA 4,622,938
5.8%, 7/01/08 (c) ........................................................ 4,875,000 AAA 5,318,918
Philadelphia, PA, Water & Wastewater Refunding Revenue:
5.5%, 6/15/07 (c) ........................................................... 5,000,000 AAA 5,304,550
5.625%, 6/15/09 (c) ......................................................... 20,000,000 AAA 21,537,600
5.625%, 6/15/09 (c) ......................................................... 10,855,000 AAA 11,689,532
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health System, 5.375%, 7/01/11 (c) ............................. 7,300,000 AAA 7,621,054
PUERTO RICO
Commonwealth of Puerto Rico, Highway & Transportation Authority
Revenue, 5.5%, 7/01/09 (c) .................................................. 10,940,000 AAA 11,732,822
RHODE ISLAND
Rhode Island Clean Water Protection Agency, Pollution Control Revenue,
Revolving Fund, Series A, 5.4%, 10/01/15 (c) ................................ 2,000,000 AAA 2,058,220
Rhode Island Convention Center Authority, Refunding Revenue:
Series 1993 B, 5%, 5/15/10 (c) .............................................. 5,000,000 AAA 5,046,400
Series 1993 B, 5.25%, 5/15/15 (c) (d) ....................................... 22,000,000 AAA 22,251,460
Rhode Island Depositors Economic Protection Corp., Special Obligation:
Series B, 5.8%, 8/01/10 (c) ................................................. 6,200,000 AAA 6,751,242
Series B, 5.8%, 8/01/11 (c) ................................................. 4,525,000 AAA 4,920,892
Series B, 5.8%, 8/01/12 (c) ................................................. 2,500,000 AAA 2,715,775
Series B, 5.8%, 8/01/13 (c) ................................................. 7,340,000 AAA 7,959,790
</TABLE>
The accompanying notes are an integral part of the financial statements
59
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOUTH CAROLINA
Piedmont Municipal Power Agency, SC, Electric Revenue:
5.5%, 1/01/12 (c) ........................................................... 2,810,000 AAA 2,966,461
Series 1991 A, 6.5%, 1/01/16 (c) ............................................ 2,570,000 AAA 2,977,114
Series 1991 A, ETM, 6.5%, 1/01/16** (c) ..................................... 430,000 AAA 498,116
Series 1993, 5.5%, 1/01/08 (c) .............................................. 1,075,000 AAA 1,139,758
Series 1993, ETM, 5.5%, 1/01/08** (c) ....................................... 840,000 AAA 899,052
Series 1993, ETM, 5.5%, 1/01/12** (c) ....................................... 2,190,000 AAA 2,311,939
TENNESSEE
Knox County, TN, Health & Educational Hospital Facilities Board,
Fort Sanders Alliance:
5.75%, 1/01/11 (c) ....................................................... 15,405,000 AAA 16,637,862
5.75%, 1/01/12 (c) ....................................................... 17,880,000 AAA 19,290,732
6.25%, 1/01/13 (c) ....................................................... 4,000,000 AAA 4,519,600
Knox County, TN, Health, Education and Housing Facilities Board:
5.75%, 1/01/14 (c) .......................................................... 2,000,000 AAA 2,149,180
Fort Sanders Alliance, 7.25%, 1/01/09 (c) ................................... 3,750,000 AAA 4,544,888
TEXAS
Austin, TX, Utility Systems Revenue Refunding, Series A, Zero Coupon,
11/15/08 (c) ................................................................ 3,460,000 AAA 1,997,423
Austin, TX, Combined Utility System Revenue, Zero Coupon,
11/15/09 (c) ................................................................ 5,020,000 AAA 2,722,697
Bexar County, TX, Health Facilities Development Corporation, Baptist
Health System:
Series 1997A, 6%, 11/15/11 (c) ........................................... 2,000,000 AAA 2,211,460
Series 1997, 6%, 11/15/12 (c) ............................................ 3,000,000 AAA 3,315,510
Brownsville, TX, Utility System Revenue, 6.25%, 9/01/10 (c) .................... 4,085,000 AAA 4,608,084
Cedar Hill, TX, Zero Coupon:
Series 1996, 8/15/09 ........................................................ 1,500,000 AAA 823,890
Series 1996, 8/15/10 ........................................................ 3,130,000 AAA 1,614,204
Dallas, TX, Housing Finance Corp., Single Family Mortgage Revenue,
Zero Coupon, 10/01/16 (c) ................................................... 6,535,000 AAA 934,701
Dallas-Fort Worth, TX, Airport Revenue:
7.75%, 11/01/03 (c) ......................................................... 1,000,000 AAA 1,176,060
7.8%, 11/01/05 (c) .......................................................... 2,000,000 AAA 2,398,760
7.8%, 11/01/06 (c) .......................................................... 2,025,000 AAA 2,431,053
7.375%, 11/01/08 (c) ........................................................ 4,500,000 AAA 5,252,265
7.375%, 11/01/10 (c) ........................................................ 3,500,000 AAA 4,074,245
Harris County, TX, Health Facilities Development:
6.25%, 5/15/08 (c) .......................................................... 2,785,000 AAA 3,135,158
6.25%, 5/15/09 (c) .......................................................... 2,965,000 AAA 3,338,798
Harris County, TX, General Obligation:
Capital Appreciation Bond, Zero Coupon, 10/01/06 (c) ........................ 9,035,000 AAA 5,894,795
Flood Control District, Zero Coupon, 10/01/00 (c) ........................... 1,000,000 AAA 879,300
Toll Road Authority, Toll Road Revenue, Subordinate Lien:
Series A, Zero Coupon, 8/15/05 (c) ....................................... 4,025,000 AAA 2,785,340
Series A, Zero Coupon, 8/15/06 (c) ....................................... 4,010,000 AAA 2,632,204
Unlimited Tax, Series A, Zero Coupon, 8/15/04 (c) ........................ 2,050,000 AAA 1,491,519
</TABLE>
The accompanying notes are an integral part of the financial statements
60
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston, TX, Water & Sewer System Authority:
Series C, Zero Coupon, 12/01/06 (c) ......................................... 14,575,000 AAA 9,434,543
Series C, Zero Coupon, 12/01/08 (c) ......................................... 19,000,000 AAA 10,944,380
Series C, Zero Coupon, 12/01/09 (c) ......................................... 14,750,000 AAA 7,982,110
Zero Coupon, 12/01/10 (c) ................................................... 5,000,000 AAA 2,539,800
Series 1991C, Zero Coupon, 12/01/12 (c) ..................................... 3,350,000 AAA 1,508,338
Hurst Euless Bedford, TX, Independent School District, Series 1994,
Zero Coupon, 8/15/09 (c) .................................................... 4,925,000 AAA 2,705,106
Lubbock, TX, Health Facilities Development Corp., Methodist Hospital:
Series B, 5.5%, 12/01/06 (c) ................................................ 3,945,000 AAA 4,070,806
Series B, 5.6%, 12/01/07 (c) ................................................ 2,415,000 AAA 2,500,781
Series B, 5.625%, 12/01/08 (c) .............................................. 4,400,000 AAA 4,541,504
Lubbock, TX, Health Facilities Development Corporation, Series B,
5.625%, 12/01/09 (c) ........................................................ 4,640,000 AAA 4,752,659
Montgomery County, TX, General Obligation, Library Refunding:
Zero Coupon, 9/01/03 (c) .................................................... 3,475,000 AAA 2,657,923
Zero Coupon, 9/01/04 (c) .................................................... 3,475,000 AAA 2,523,128
Zero Coupon, 9/01/05 (c) .................................................... 3,475,000 AAA 2,399,766
North Central Texas Health Facilities Development Corp., Presbyterian
Hospital, Prerefunded 12/01/97 at 102, 8.875%, 12/01/15*** (c) .............. 5,000,000 AAA 5,141,700
Northeast Hospital Authority, TX, Revenue, Series 1997, 6%,
5/15/10 (c) ................................................................. 2,180,000 AAA 2,396,300
Northwest Texas Independent School District, Capital Appreciation
Bonds, Series 1991, Zero Coupon, 8/15/10 (c) ................................ 3,690,000 AAA 1,903,007
San Antonio, TX, Electric and Gas, Revenue Refunding:
Series A, Zero Coupon, 2/01/05 (c) .......................................... 2,500,000 AAA 1,774,175
Series A, Zero Coupon, 2/01/05 (c) .......................................... 8,000,000 AAA 5,677,360
Series A, Zero Coupon, 2/01/06 (c) .......................................... 17,900,000 AAA 12,054,039
San Antonio, TX, Electric and Gas, Zero Coupon, 2/01/08 (c) .................... 8,115,000 AAA 4,870,785
San Antonio, TX, Hotel Revenue, Series 1996, 6%, 8/15/06 (c) ................... 2,000,000 AAA 2,202,020
San Antonio, TX, Series 1991 B, Zero Coupon, 2/01/09 (c) ....................... 4,400,000 AAA 2,483,360
Tarrant County, TX, Health Facilities Development Corp., Hospital
Refunding Revenue, Fort Worth Osteopathic Hospital:
6%, 5/15/11 (c) .......................................................... 4,615,000 AAA 5,124,727
6%, 5/15/21 (c) .......................................................... 6,235,000 AAA 6,792,097
Texas General Obligation:
Capital Appreciation Bond, Super Collider, Series C, Zero Coupon,
4/01/06 (c) .............................................................. 7,385,000 AAA 4,933,919
Superconductor Revenue, Series C, Zero Coupon, 4/01/05 (c) .................. 8,390,000 AAA 5,907,902
Texas Municipal Power Agency:
6.1%, 9/01/07 (c) ........................................................... 9,250,000 AAA 10,297,933
6.1%, 9/01/09 (c) ........................................................... 4,435,000 AAA 4,974,961
Texas Public Finance Authority, Building Authority:
Series B, 6.25%, 2/01/08 (c) ................................................ 5,190,000 AAA 5,860,444
Zero Coupon, 2/01/06 (c) .................................................... 13,915,000 AAA 9,370,500
</TABLE>
The accompanying notes are an integral part of the financial statements
61
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTAH
Associated Municipal Power System, UT, Hunter Project,
Refunding Revenue:
Zero Coupon, 7/01/00 (c) ................................................. 2,755,000 AAA 2,448,534
Zero Coupon, 7/01/02 (c) ................................................. 5,200,000 AAA 4,202,848
Zero Coupon, 7/01/04 (c) ................................................. 5,895,000 AAA 4,313,372
Zero Coupon, 7/01/05 (c) ................................................. 5,900,000 AAA 4,106,282
Zero Coupon, 7/01/06 (c) ................................................. 5,895,000 AAA 3,892,056
Zero Coupon, 7/01/07 (c) ................................................. 3,750,000 AAA 2,338,763
Intermountain Power Supply Agency, UT, Power Supply Revenue:
5%, 7/01/12 (c) ............................................................. 1,000,000 AAA 986,580
Series A, Zero Coupon, 7/01/02 (c) .......................................... 1,655,000 AAA 1,334,526
Series A, Zero Coupon, 7/01/03 (c) .......................................... 1,000,000 AAA 768,500
Series A, Zero Coupon, 7/01/04 (c) .......................................... 1,730,000 AAA 1,261,672
Series A, 6.5%, 7/01/08 (c) ................................................. 4,000,000 AAA 4,583,720
Series B, Zero Coupon, 7/01/02 (c) .......................................... 8,230,000 AAA 6,636,343
Intermountain Power Supply Agency, UT, Series 1993, 5.55%, 7/01/11 ............. 7,000,000 A 7,145,110
Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15** (c) ................ 1,800,000 AAA 2,603,826
VIRGINIA
Roanoke, VA, Industrial Development Authority, Roanoke Memorial
Hospital, Series B, 6.125%, 7/01/17 (c) ..................................... 5,500,000 AAA 6,115,670
Southeastern Public Service Authority, VA, Refunding Revenue, Series A,
5.25%, 7/01/10 (c) .......................................................... 7,380,000 AAA 7,672,027
Virginia Beach, VA, Development Authority, Virginia Beach General
Hospital Project:
6%, 2/15/11 (c) .......................................................... 1,595,000 AAA 1,767,212
5.125%, 2/15/18 (c) ...................................................... 3,000,000 AAA 2,927,580
Winchester County, VA, Industrial Development Authority, Hospital
Revenue, 6.0%, 1/01/15* (c) ................................................. 5,700,000 AAA 5,749,362
WASHINGTON
Clark County, WA, Public Utility District No. 1:
6%, 1/01/06 (c) ............................................................. 7,500,000 AAA 8,192,175
Series 1995, 6%, 1/01/08 (c) ................................................ 2,200,000 AAA 2,420,990
King County, WA, Public Hospital District #1, Valley Medical Center,
Series 1992, 5.5%, 9/01/17 (c) .............................................. 3,500,000 AAA 3,505,810
King & Snohomish Counties, WA, General Obligation, School District #417,
5.6%, 12/01/10 (c) .......................................................... 1,650,000 AAA 1,770,945
Snohomish County, WA, School District #6, 6.5%, 12/01/07 ....................... 3,325,000 A 3,798,380
Washington, General Obligation Series AT-5, Zero Coupon,
8/01/10 (c) ................................................................. 2,625,000 AAA 1,364,974
Washington Health Care Facilities Authority, Empire Health
Services-Spokane:
5.65%, 11/01/05 (c) ...................................................... 2,155,000 AAA 2,297,273
5.7%, 11/01/06 (c) ....................................................... 3,440,000 AAA 3,689,228
5.75%, 11/01/07 (c) ...................................................... 7,350,000 AAA 7,921,022
5.8%, 11/01/09 (c) ....................................................... 4,595,000 AAA 4,977,350
5.8%, 11/01/10 (c) ....................................................... 2,100,000 AAA 2,266,131
</TABLE>
The accompanying notes are an integral part of the financial statements
62
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Public Power Supply System, Revenue Refunding,
Nuclear Power Project #1:
6%, 7/01/08 (c) .......................................................... 5,000,000 AAA 5,481,350
Series A, 7%, 7/01/11 (c) ................................................ 3,830,000 AAA 4,178,224
Series B, 7.25%, 7/01/12 (c) ............................................. 10,895,000 AAA 11,955,737
Series 1989A, 7.5%, 7/01/15 .............................................. 1,500,000 AAA 1,615,875
Series A, 7.5%, 07/01/15 (c) ............................................. 1,595,000 AAA 1,718,214
Series A, Prerefunded 7/1/99 at 102, 7.5%, 07/01/15*** (c) ............... 2,405,000 AAA 2,590,786
Washington Public Power Supply System, Revenue Refunding,
Nuclear Project #2:
Series 1992A, Zero Coupon, 7/01/11 (c) ................................... 4,200,000 AAA 2,037,378
Series A, 7.25%, 7/01/03 (c) ............................................. 2,000,000 AAA 2,197,460
Series A, 5.7%, 7/01/08 (c) .............................................. 5,000,000 AAA 5,342,050
Series C, 7%, 7/01/01 (c) ................................................ 10,000,000 AAA 10,907,600
Series C, 7.375%, 7/01/11 (c) ............................................ 1,370,000 AAA 1,523,892
Washington Public Power Supply System, Revenue Refunding,
Nuclear Project #3:
7.5%, 7/01/08 (c) ........................................................ 4,000,000 AAA 4,883,400
Series 1989A, Zero Coupon, 7/01/10 (c) ................................... 5,860,000 AAA 3,022,295
Series A, Prerefunded 7/1/99 at 102, 7.25%, 7/01/16*** (c) ............... 3,630,000 AAA 3,895,208
Series A, Zero Coupon, 7/01/04 (c) ....................................... 3,625,000 AAA 2,643,676
Series A, Zero Coupon, 7/01/05 (c) ....................................... 4,125,000 AAA 2,860,069
Washington State Housing Finance, Series A, 7.1%, 12/01/17 ..................... 5,105,000 AAA 5,230,532
WEST VIRGINIA
West Virginia, School Building Authority Revenue, Series B, 6.75%,
7/01/10 (c) ................................................................. 4,000,000 AAA 4,343,400
WISCONSIN
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/01/04 (c) ............ 3,475,000 AAA 2,552,458
Wisconsin Health & Educational Facilities Authority:
6.1%, 8/15/09 (c) ........................................................... 2,000,000 AAA 2,217,820
Felician Healthcare Inc., Series B, 6.25%, 1/01/22 (c) ...................... 5,285,000 AAA 5,918,724
Hospital Sisters Services Inc. - Obligated Group, 5.375%,
6/01/18 (c) .............................................................. 4,800,000 AAA 4,708,656
St. Luke's Medical Center, 7.1%, 8/15/11 (c) ................................ 2,000,000 AAA 2,206,300
Villa St. Francis Inc., Series C, 6.25%, 1/01/22 (c) ........................ 9,230,000 AAA 10,336,769
Wheaton Franciscan Services, 6.1%, 8/15/08 (c) .............................. 4,580,000 AAA 5,100,151
Wisconsin Health & Educational Facilities Authority Aurora Medical:
5.75%, 11/15/06 (c) ......................................................... 2,000,000 AAA 2,148,120
5.75%, 11/15/07 (c) ......................................................... 1,500,000 AAA 1,618,125
6%, 11/15/08 (c) ............................................................ 4,085,000 AAA 4,507,185
6%, 11/15/09 (c) ............................................................ 4,330,000 AAA 4,820,026
Wisconsin Health & Educational Facilities Authority, SSM Healthcare:
Series 1992 AA, 6.4%, 6/01/08 (c) ........................................... 2,335,000 AAA 2,645,999
Series 1992 AA, 6.45%, 6/01/09 (c) .......................................... 2,485,000 AAA 2,857,502
Series 1992 AA, 6.45%, 6/01/10 (c) .......................................... 2,650,000 AAA 3,050,336
Series 1992 AA, 6.5%, 6/01/11 (c) ........................................... 2,820,000 AAA 3,232,002
Series 1992 AA, 6.5%, 6/01/12 (c) ........................................... 3,000,000 AAA 3,480,630
-------------
Total Long-Term Municipal Investments (Cost $1,533,349,712) .................... 1,674,354,483
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
63
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $1,542,449,712) (a) ........ 98.3 1,683,454,483
Other Assets and Liabilities, Net ........................... 1.7 28,553,685
----- -------------
Net Assets .................................................. 100.0 1,712,008,168
===== =============
</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. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
** 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 issues and to retire the bonds in full at the
earliest refunding date.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $1,542,746,371 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ........ $140,968,309
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ........ (260,197)
------------
Net unrealized appreciation ............................... $140,708,112
============
(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. Unrated securities (NR) and
securities rated by Scudder (SS&C) have been determined to be of
comparable quality to rated eligible securities.
(c) (Unaudited) Bond is insured by one of these companies: AMBAC, BIG, MBIA,
FGIC, FSA, PSFG or Capital Guaranty.
(d) At September 30, 1997, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.
At September 30, 1997, open futures contracts sold were as follows:
<TABLE>
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
U.S Treasury Bond ........ December, 1997 945 106,665,885 108,940,781
-----------
Total net unrealized depreciation on open futures contracts sold ....... 2,274,896
===========
</TABLE>
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $449,459,820 and $466,467,485,
respectively.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$126,793,957 and $181,012,552, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
64
<PAGE>
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 11.2%
- -------------------------------------------------------------------------------------------------------------------------------
6,505,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02%
to be repurchased at $6,506,088 on 10/01/97, collateralized
by a $6,626,000 U.S. Treasury Note, 4.75%, 9/30/98 (Cost $6,505,000) .................. 6,505,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 18.9%
- -------------------------------------------------------------------------------------------------------------------------------
11,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/01/97
(Cost $11,000,000) .................................................................... 10,998,307
-------------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 1.3%
- -------------------------------------------------------------------------------------------------------------------------------
3,000,000 U.S. Treasury STRIP (Principal only) 11/15/18 (Cost $717,527) ............................ 758,010
-------------
- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 4.3%
- -------------------------------------------------------------------------------------------------------------------------------
436,344 9%, 8/15/21 .............................................................................. 470,157
941,565 8.5%, 6/15/26 ............................................................................ 985,111
1,005,290 7.5%, 4/15/27 ............................................................................ 1,022,561
-------------
Total Government National Mortgage Association (Cost $2,445,149) ......................... 2,477,829
-------------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 1.7%
- -------------------------------------------------------------------------------------------------------------------------------
953,359 Federal Home Loan Mortgage Corp., 7.79% with various maturities to 9/01/24
(Cost $996,558) ....................................................................... 992,094
-------------
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 3.0%
- -------------------------------------------------------------------------------------------------------------------------------
250,000 Fage Dairy Industry SA, 9%, 2/01/07 ...................................................... 243,750
1,000,000 Hutchison Whampoa, Ltd., 7.5%, 8/01/27 ................................................... 984,750
500,000 Petroleos Mexicanos SA, 8.85%, 9/15/07 ................................................... 511,500
-------------
Total Foreign Bonds - U.S.$ Denominated (Cost $1,738,998) ................................ 1,740,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 8.7%
- -------------------------------------------------------------------------------------------------------------------------------
Credit Card Receivables 0.9%
500,000 Advanta Corp., Series 1997-1 A4, 7.65%, 5/25/27 .......................................... 514,375
-------------
Home Equity Loans 2.2%
500,000 Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/28 ................. 509,219
300,000 The Money Store Inc. Home Equity Loan Trust, Series 1996-C A4,
7.4%, 6/15/21 ......................................................................... 306,750
500,000 The Money Store Inc. Home Equity Series 1997-A A2, 6.56%, 12/15/09 ....................... 503,125
-------------
1,319,094
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
65
<PAGE>
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufactured Housing 5.6%
375,000 Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/28 ................... 386,895
330,062 Green Tree Financial Corp., Series 1997-A A1, 6.3%, 8/15/23 .............................. 330,577
500,000 Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/26 .............................. 513,280
500,000 Green Tree Financial Corp., Series 1997-1 B2, 7.76%, 3/15/28 ............................. 511,094
500,000 Green Tree Financial Corp., Series 1997-2 B2, 8.05%, 4/15/28 ............................. 520,391
1,000,000 Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/27 ............................ 1,009,492
-------------
3,271,729
-------------
Total Asset Backed (Cost $4,995,928) ..................................................... 5,105,198
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 49.5%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 1.8%
500,000 Rite Aid Corp., 7.7%, 2/15/27 ............................................................ 525,535
500,000 Tultex Corp., 9.625%, 4/15/07 ............................................................ 530,000
-------------
1,055,535
-------------
Consumer Staples 0.7%
400,000 Polymer Group, Inc., 9%, 7/01/07 ......................................................... 404,000
-------------
Health 1.7%
500,000 NBTY Inc., 8.625%, 9/15/07 ............................................................... 496,250
500,000 Tenet Healthcare Corp., 8.625%, 1/15/07 .................................................. 517,500
-------------
1,013,750
-------------
Communications 3.5%
500,000 Comcast Cellular, 9.5%, 5/01/07 .......................................................... 522,500
1,000,000 Rogers Cantel Inc., 8.3%, 10/01/07 ....................................................... 1,000,000
500,000 WorldCom, Inc., 7.75%, 4/01/07 ........................................................... 524,170
-------------
2,046,670
-------------
Financial 14.6%
1,000,000 First Industrial L.P., 7.6%, 5/15/07 ..................................................... 1,041,850
1,000,000 First Union Capital II, 7.85%, 1/01/27 ................................................... 1,008,240
1,000,000 General Motors Acceptance Corp., 6.869%, 8/15/07 ......................................... 1,013,438
1,000,000 Security Capital Industrial Trust, 7.625%, 7/01/17 ....................................... 1,020,000
500,000 Shurgard Storage Centers, Inc. (REIT), 7.5%, 4/25/04 ..................................... 518,320
1,000,000 Spieker Properties, Inc., 7.125%, 7/01/09 ................................................ 1,007,110
1,000,000 Susa Partnership L.P., 8.2%, 6/01/17 ..................................................... 1,056,250
500,000 Taubman Realty Group LP Medium Term Note, 8%, 7/30/01 .................................... 519,165
250,000 Taubman Realty Group LP Medium Term Note, 7%, 10/01/03 ................................... 252,930
1,000,000 US West Capital Funding Inc., 7.9%, 2/01/27 .............................................. 1,053,740
-------------
8,491,043
-------------
Media 6.5%
1,000,000 Harcourt General, Inc., 7.2%, 8/01/27 .................................................... 974,270
500,000 Hollinger International, 8.625%, 3/15/05 ................................................. 515,000
500,000 Outdoor Systems, Inc., 8.875%, 6/15/07 ................................................... 510,000
125,000 Tele-Communications, Inc., 8%, 8/01/05 ................................................... 130,390
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ........................................................ 1,147,590
520,000 Viacom Inc., 6.75%, 1/15/03 .............................................................. 509,106
-------------
3,786,356
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Service Industries 5.3%
500,000 Pierce Leahy Corp., 9.125%, 7/15/07 ...................................................... 523,750
1,000,000 Prime Hospitality Corp., 9.25%, 1/15/06 .................................................. 1,045,000
500,000 SC International Services, Inc., 9.25%, 9/01/07 .......................................... 508,750
1,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................................................... 1,008,750
-------------
3,086,250
-------------
Durables 0.4%
250,000 Tracor, Inc., 8.5%, 3/01/07 .............................................................. 256,250
-------------
Manufacturing 1.8%
500,000 Argo-Tech Corp., 8.625%, 10/01/07 ........................................................ 501,250
50,000 GFSI Inc., 9.625%, 3/01/07 ............................................................... 51,375
500,000 Mead Corp., 7.55%, 3/01/47 ............................................................... 519,600
-------------
1,072,225
-------------
Technology 2.8%
500,000 Amphenol Corp., 9.875%, 5/15/07 .......................................................... 532,500
100,000 Fairchild Semiconductor Corp., 10.125%, 3/15/07 .......................................... 107,500
1,000,000 International Business Machines Corp., 7%, 10/30/45 ...................................... 972,210
-------------
1,612,210
-------------
Energy 5.0%
500,000 Barrett Resources Corp., 7.55%, 2/01/07 .................................................. 511,250
500,000 Chesapeake Energy Corp., 8.5%, 3/15/12 ................................................... 487,500
250,000 Dawson Production Services, Inc., 9.375%, 2/01/07 ........................................ 260,625
250,000 Lomak Petroleum, Inc., 8.75%, 1/15/07 .................................................... 248,750
1,000,000 Lyondell Petrochemical Co., 7.55%, 2/15/26 ............................................... 1,003,760
400,000 Pride Petroleum Services, Inc., 9.375%, 5/01/07 .......................................... 428,000
-------------
2,939,885
-------------
Metals & Minerals 2.7%
500,000 AK Steel Corp., 9.125%, 12/15/06 ......................................................... 526,250
1,000,000 Potash Corp., 7.125%, 6/15/07 ............................................................ 1,019,600
-------------
1,545,850
-------------
Construction 0.4%
250,000 Nortek, Inc., 9.25%, 3/15/07 ............................................................. 253,750
-------------
Transportation 2.3%
300,000 Continental Airlines Inc. Series 1997-1B, 7.461%, 4/01/13 ................................ 313,371
500,000 Norfolk Southern Corp., 7.8%, 5/15/27 .................................................... 535,485
500,000 Allied Holdings, Inc., 8.625%, 10/01/07 .................................................. 506,875
1,355,731
-------------
Total Corporate Bonds (Cost $28,241,662) ................................................. 28,919,505
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $56,640,822) (a) ......................... 98.6 57,495,943
Other Assets and Liabilities, Net ......................................... 1.4 828,203
----- ----------
Net Assets ................................................................ 100.0 58,324,146
===== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
67
<PAGE>
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $56,640,822 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $ 905,465
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (50,344)
---------
Net unrealized appreciation ................................ $ 855,121
=========
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the period February 1, 1997 (commencement of operations)
through September 30, 1997, aggregated $33,747,629 and $1,303,851,
respectively. Purchases and sales of obligations of the U.S. Government
and Government agencies aggregated $7,091,422, and $637,484, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
68
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 7.9%
- -------------------------------------------------------------------------------------------------------------------------------
50,692,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at
6.125% to be repurchased at $50,700,624 on 10/01/97, collateralized by a
$39,775,000 U.S. Treasury Bond, 8.75%, 5/15/20 (Cost $50,692,000) ................... 50,692,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 6.9%
- -------------------------------------------------------------------------------------------------------------------------------
5,000,000 U.S. Treasury Bond, 6.25%, 8/15/23 ..................................................... 4,853,900
5,000,000 U.S. Treasury Note, 5.125%, 4/30/98 .................................................... 4,989,050
10,000,000 U.S. Treasury Note, 5.75%, 12/31/98 .................................................... 10,006,200
2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 .................................................... 2,504,300
3,000,000 U.S. Treasury Note, 6.75%, 5/31/99 ..................................................... 3,045,000
6,000,000 U.S. Treasury Note, 6.875%, 7/31/99 .................................................... 6,106,860
4,500,000 U.S. Treasury Note, 5.875%, 11/15/99 ................................................... 4,502,790
2,000,000 U.S. Treasury Note, 6.125%, 7/31/00 .................................................... 2,012,180
1,500,000 U.S. Treasury Note, 5.75%, 10/31/00 .................................................... 1,492,740
3,500,000 U.S. Treasury STRIP (Interest only), (6.38%***), 2/15/09 ............................... 1,712,550
10,000,000 U.S. Treasury STRIP (Principal only), (6.62%***), 11/15/18 ............................. 2,526,700
-----------
Total U. S. Treasury Obligations (Cost $43,022,393) .................................... 43,752,270
-----------
- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION** 1.6%
- -------------------------------------------------------------------------------------------------------------------------------
3,214,790 10% with various maturities to 2/15/25 ................................................. 3,580,349
6,503,131 8.5%, 11/15/25 ......................................................................... 6,807,933
-----------
Total Government National Mortgage Association (Cost $10,159,715) ...................... 10,388,282
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS** 6.0%
- -------------------------------------------------------------------------------------------------------------------------------
14,224,171 Federal National Mortgage Association, 6.5% with various maturities
to 3/01/26 .......................................................................... 13,869,957
24,646,080 Federal National Mortgage Association, 7% with various maturities
to 8/01/26 .......................................................................... 24,576,189
-----------
Total U. S. Government Agency Pass-Thrus (Cost $37,394,733) ............................ 38,446,146
-----------
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 1.6%
- -------------------------------------------------------------------------------------------------------------------------------
1,000,000 ABN-AMRO Bank NV, Subordinated note, 7.125%, 10/15/93 .................................. 982,330
6,000,000 Deutsche Bank, 7.5%, 4/25/09 ........................................................... 6,340,440
3,000,000 Province of Ontario Global, 6%, 2/21/06 ................................................ 2,901,480
-----------
Total Foreign Bonds - U. S. $ Denominated (Cost $9,817,851) ............................ 10,224,250
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
69
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 2.1%
- -----------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 1.1%
4,000,000 Ford Credit Automobile Trust Series 1996-A A4, 6.75%, 9/15/00 .......................... 4,045,000
3,000,000 Premier Auto Trust Asset Backed Certificate, Series 1996-3 A4, 6.75%, 11/06/00 ......... 3,029,040
-----------
7,074,040
-----------
Credit Card Receivables 1.0%
4,000,000 Chase Manhattan Credit Card Master Trust, Series 1996-4A, 6.73%, 2/15/03 ............... 4,043,720
2,000,000 Sears Credit Account Master Trust, Series 1995-4A, 6.25%, 1/15/03 ...................... 2,003,740
-----------
6,047,460
-----------
Total Asset Backed (Cost $12,997,645) .................................................. 13,121,500
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 12.4%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.6%
4,000,000 ITT Corp., 7.375%, 11/15/15 ............................................................ 3,874,920
-----------
Communications 0.9%
5,250,000 WorldCom, Inc., 7.75%, 4/01/27 ......................................................... 5,603,115
-----------
Financial 5.2%
5,850,000 Associates Corp. of North America, 6.625%, 5/15/01 ..................................... 5,899,140
4,000,000 Capital One Bank Medium Term Note, 5.95%, 2/15/01 ...................................... 3,919,520
1,000,000 General Electric Capital Services Inc., 7.5%, 8/21/35 .................................. 1,069,320
5,000,000 Highwoods/Forsyth L.P., 7%, 12/01/06 ................................................... 5,011,650
5,000,000 Meditrust Corp., 7%, 8/15/07 ........................................................... 4,977,900
4,000,000 Southern National Corp., 7.05%, 5/23/03 ................................................ 4,080,480
1,500,000 Spieker Properties, Inc., 7.875%, 12/01/16 ............................................. 1,524,915
4,500,000 US West Capital Funding Inc., 7.9%, 1/01/27 ............................................ 4,741,830
2,000,000 Wells Fargo & Co., 6.875%, 4/01/06 ..................................................... 2,014,260
-----------
33,239,015
-----------
Media 1.4%
4,000,000 Tele-Communications, Inc., 8%, 8/01/05 ................................................. 4,172,480
4,500,000 Time Warner Inc., 9.125%, 1/15/13 ...................................................... 5,164,155
-----------
9,336,635
-----------
Service Industries 1.3%
5,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ..................................................... 5,043,750
2,700,000 U.S. Filter Corp., 4.5%, 12/15/01 ...................................................... 3,199,500
-----------
8,243,250
-----------
Durables 1.5%
1,000,000 Ford Motor Co., 8.875%, 1/15/22 ........................................................ 1,196,760
2,000,000 Lockheed Martin Corp., 7.75%, 5/01/26 .................................................. 2,133,520
1,000,000 McDonnell Douglas Corp., 9.75%, 4/01/12 ................................................ 1,262,450
2,000,000 Northrop Grumman Corp., 7%, 3/01/06 .................................................... 2,036,520
3,100,000 Northrop Grumman Corp., 7.875%, 3/01/26 ................................................ 3,333,864
-----------
9,963,114
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
70
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Technology 0.3%
1,500,000 Loral Corp., 8.375%, 6/15/24 ........................................................... 1,703,640
-----------
Energy 0.7%
4,150,000 PanEnergy Corp., 7.375%, 9/15/03 ....................................................... 4,323,429
-----------
Transportation 0.5%
2,500,000 AMR Corp., 9.75%, 8/15/21 .............................................................. 3,131,575
-----------
Total Corporate Bonds (Cost $75,947,204) ............................................... 79,418,693
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 1.3%
- -------------------------------------------------------------------------------------------------------------------------------
Health 0.1%
Pharmaceuticals
290,000 Sandoz Capital BVI Ltd., 2%, 10/06/02 .................................................. 424,850
-----------
Financial 0.1%
Other Financial Companies
200,000 First Financial Management Corp., 5%, 12/15/99 ......................................... 352,500
-----------
Media 0.9%
Advertising
7,000,000 Interpublic Group of Companies Inc., 1.8%, 9/16/04 ..................................... 5,810,000
-----------
Service Industries 0.2%
Miscellaneous Commercial Services
1,000,000 ADT Operations Inc. Liquid Yield Option Note, 7/06/10 .................................. 1,113,750
260,000 Jardine Strategic Holdings Ltd., 7.5%, 5/07/49 (b) ..................................... 317,200
-----------
1,430,950
-----------
Total Convertible Bonds (Cost $6,812,228) .............................................. 8,018,300
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 1.0%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
Consumer Discretionary 0.5%
Department & Chain Stores
56,200 K Mart 7.75% ........................................................................... 3,287,700
-----------
Financial 0.3%
Consumer Finance 0.2%
33,100 Advanta Corp. 6.75% .................................................................... 1,026,100
-----------
Real Estate 0.1%
18,900 Security Capital Industrial Trust, 7% .................................................. 571,725
-----------
Manufacturing 0.2%
Containers & Paper 0.0%
2,100 International Paper Co. 5.25% .......................................................... 118,650
-----------
Industrial Specialty 0.1%
31,300 Cooper Industries, Inc. 6% ............................................................. 719,900
-----------
Office Equipment / Supplies 0.1%
4,700 Ikon Office Solutions, Inc., 5.04% ..................................................... 303,150
-----------
Total Convertible Preferred Stocks (Cost $5,656,472) ................................... 6,027,225
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
71
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 58.6%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 2.9%
Department & Chain Stores
66,800 J.C. Penney Co., Inc. .................................................................. 3,891,100
45,100 May Department Stores .................................................................. 2,457,950
55,000 Mercantile Stores, Inc. ................................................................ 3,461,563
88,900 Rite Aid Corp. ......................................................................... 4,928,394
73,200 Sears, Roebuck & Co. ................................................................... 4,167,825
-----------
18,906,832
-----------
Hotels & Casinos 0.0%
15,033 Homestead Village, Inc. Warrants (expire 10/29/97)* .................................... 122,143
-----------
Consumer Staples 4.8%
Consumer Electronic & Photographic Products 1.0%
95,900 Whirlpool Corp. ........................................................................ 6,359,357
-----------
Food & Beverage 2.8%
43,900 General Mills, Inc. .................................................................... 3,026,356
159,950 H.J. Heinz Co. ......................................................................... 7,387,691
35,200 Unilever NV (New York shares) .......................................................... 7,484,400
-----------
17,898,447
-----------
Package Goods / Cosmetics 1.0%
124,700 Kimberly-Clark Corp. ................................................................... 6,102,506
-----------
Health 3.8%
Pharmaceuticals
47,600 American Home Products Corp. ........................................................... 3,474,800
67,600 Baxter International Inc. .............................................................. 3,532,100
67,200 Bristol-Myers Squibb Co. ............................................................... 5,560,800
70,800 Schering-Plough Corp. .................................................................. 3,646,200
78,400 SmithKline Beecham PLC (ADR) ........................................................... 3,831,800
122,100 Zeneca Group PLC ....................................................................... 3,987,442
-----------
24,033,142
-----------
Communications 4.4%
Telephone / Communications
111,500 Alltel Corp. ........................................................................... 3,846,750
94,932 Bell Atlantic Corp. .................................................................... 7,636,093
83,200 BellSouth Corp. ........................................................................ 3,848,000
113,500 Frontier Corp. ......................................................................... 2,610,500
126,500 GTE Corp. .............................................................................. 5,739,938
79,400 Sprint Corp. ........................................................................... 3,970,000
100,000 Telecom Corp. of New Zealand ........................................................... 507,395
-----------
28,158,676
-----------
Financial 14.2%
Banks 6.7%
71,500 Banc One Corp. ......................................................................... 3,990,594
43,500 Bankers Trust New York Corp. ........................................................... 5,328,750
</TABLE>
The accompanying notes are an integral part of the financial statements
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
11,700 Centura Banks, Inc. .................................................................... 644,231
64,800 Chase Manhattan Corp. .................................................................. 7,646,400
52,800 CoreStates Financial Corp. ............................................................. 3,494,700
24,800 First American Corp. ................................................................... 1,212,100
12,300 First Tennessee National Corp. ......................................................... 701,100
44,100 First Union Corp. ...................................................................... 2,207,756
92,400 Firstar Corp. .......................................................................... 3,349,500
34,100 J.P. Morgan & Co., Inc. ................................................................ 3,874,613
67,600 KeyCorp ................................................................................ 4,301,050
35,500 Old Kent Financial Corp. ............................................................... 2,289,750
34,700 US Bancorp ............................................................................. 3,348,550
-----------
42,389,094
-----------
Insurance 2.4%
62,600 EXEL, Ltd. (ADR) ....................................................................... 3,728,613
73,300 Lincoln National Corp. ................................................................. 5,103,513
42,100 Mid Ocean, Ltd. ........................................................................ 2,668,088
72,400 Safeco Corp. ........................................................................... 3,837,200
-----------
15,337,414
-----------
Consumer Finance 0.5%
22,100 SLM Holding Corp. ...................................................................... 3,414,450
-----------
Other Financial Companies 0.3%
44,800 Federal National Mortgage Association .................................................. 2,105,600
-----------
Real Estate 4.3%
75,700 Arden Realty Group, Inc. ............................................................... 2,375,088
137,600 Equity Office Properties Trust (REIT) .................................................. 4,669,800
116,100 General Growth Properties, Inc. (REIT) ................................................. 4,295,700
66,600 Health Care Property Investment Inc. (REIT) ............................................ 2,580,750
61,700 Meditrust SBI (REIT) ................................................................... 2,560,550
101,600 Nationwide Health Properties Inc. (REIT) ............................................... 2,444,750
26,000 Omega Healthcare Investors (REIT) ...................................................... 936,000
243,962 Security Capital Atlantic Inc. ......................................................... 5,458,650
88,454 Security Capital Industrial Trust (REIT) ............................................... 2,062,084
22,593 Security Capital Industrial Trust Warrants (expire 9/18/98) ............................ 180,744
-----------
27,564,116
-----------
Durables 3.8%
Aerospace 1.2%
28,309 Lockheed Martin Corp. .................................................................. 3,018,447
70,100 Rockwell International Corp. ........................................................... 4,411,919
-----------
7,430,366
-----------
Automobiles 2.1%
93,400 Dana Corp. ............................................................................. 4,611,625
20,800 Eaton Corp. ............................................................................ 1,921,400
160,800 Ford Motor Co. ......................................................................... 7,276,200
-----------
13,809,225
-----------
Construction / Agricultural Equipment 0.5%
56,900 PACCAR, Inc. ........................................................................... 3,186,400
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
73
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufacturing 10.3%
Chemicals 2.7%
22,400 Akso Nobel N.V. (ADR) .................................................................. 1,918,000
22,800 Dow Chemical Co. ....................................................................... 2,067,675
19,400 E.I. du Pont de Nemours & Co. .......................................................... 1,194,313
63,600 Eastman Chemical Co. ................................................................... 3,943,200
121,400 Imperial Chemical Industries PLC (ADR) (New) ........................................... 8,027,575
-----------
17,150,763
-----------
Containers & Paper 0.5%
2,643 Boise Cascade Corp. .................................................................... 111,171
82,100 Westvaco Corp. ......................................................................... 2,960,731
-----------
3,071,902
-----------
Diversified Manufacturing 1.9%
82,600 Olin Corp. ............................................................................. 3,866,713
153,200 TRW Inc. ............................................................................... 8,406,850
-----------
12,273,563
-----------
Electrical Products 2.1%
123,600 Philips Electronics NV (New York shares) ............................................... 10,382,400
57,100 Thomas & Betts Corp. ................................................................... 3,119,088
-----------
13,501,488
-----------
Industrial Specialty 0.1%
16,100 Corning Inc. ........................................................................... 760,725
-----------
Office Equipment / Supplies 1.7%
126,000 Xerox Corp. ............................................................................ 10,607,625
-----------
Specialty Chemicals 1.3%
55,300 BetzDearborn Inc. ...................................................................... 3,781,138
101,100 Witco Corp. ............................................................................ 4,612,688
-----------
8,393,826
-----------
Technology 0.3%
Electronic Components / Distributors
40,100 AMP Inc. ............................................................................... 2,147,856
-----------
Energy 4.8%
Oil Companies 4.4%
28,600 Exxon Corp. ............................................................................ 1,832,188
93,300 Lyondell Petrochemical Co. ............................................................. 2,443,294
8,500 Pennzoil Co. ........................................................................... 677,344
60,000 Royal Dutch Petroleum Co. (New York shares) ............................................ 3,330,000
90,381 Societe Nationale Elf Aquitaine (ADR) .................................................. 6,027,283
93,800 Texaco Inc. ............................................................................ 5,762,838
70,201 Total SA (ADR) ......................................................................... 4,023,395
109,500 YPF S.A. "D" (ADR) ..................................................................... 4,037,813
-----------
28,134,155
-----------
Oil / Gas Transmission 0.4%
51,800 Williams Cos., Inc. .................................................................... 2,424,888
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
74
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Metals & Minerals 1.6%
Steel & Metals
114,435 Allegheny Teledyne Inc. ................................................................ 3,275,702
99,000 Freeport McMoRan Copper & Gold, Inc. "A" ............................................... 2,728,688
101,500 Oregon Steel Mills, Inc. ............................................................... 2,753,188
21,900 Phelps Dodge Corp. ..................................................................... 1,699,988
-----------
10,457,566
-----------
Construction 1.9%
Building Materials 0.3%
46,653 Martin Marietta Materials, Inc. ........................................................ 1,679,508
-----------
Forest Products 1.6%
51,800 Georgia Pacific Corp. .................................................................. 5,406,625
73,900 Louisiana-Pacific Corp. ................................................................ 1,847,500
48,700 Weyerhaeuser Co. ....................................................................... 2,891,563
-----------
10,145,688
-----------
Transportation 1.4%
Marine Transportation 0.6%
137,500 Knightsbridge Tankers Ltd. ............................................................. 3,892,969
-----------
Railroads 0.8%
59,900 CSX Corp. .............................................................................. 3,504,150
15,500 Canadian National Railway .............................................................. 805,668
14,300 Union Pacific Corp. .................................................................... 895,538
-----------
5,205,356
-----------
Utilities 4.4%
Electric Utilities 3.8%
71,400 CINergy Corp. .......................................................................... 2,387,437
20,700 CMS Energy Corp. ....................................................................... 765,900
110,289 Duke Energy Corp. ...................................................................... 5,452,412
63,000 PacifiCorp ............................................................................. 1,409,625
105,200 PG & E Corporation ..................................................................... 2,439,325
38,900 PowerGen PLC (ADR) ..................................................................... 1,915,825
216,500 TNP Enterprises Inc. ................................................................... 5,439,563
114,400 Unicom Corp. ........................................................................... 2,674,100
59,600 Wisconsin Energy Corp. ................................................................. 1,549,600
-----------
24,033,787
-----------
Natural Gas Distribution 0.6%
115,300 MCN Energy Group, Inc. ................................................................. 3,689,600
-----------
Total Common Stocks (Cost $260,773,738) ................................................ 374,389,033
-----------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $513,273,979) (a) .................... 99.4 634,477,699
Other Assets and Liabilities, Net ..................................... 0.6 3,878,558
----- -----------
Net Assets ............................................................ 100.0 638,356,257
===== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
75
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Non income producing security
** Effective maturities will be shorter due to prepayments.
*** (Unaudited) Bond equivalent yield to maturity; not a coupon rate.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $513,246,352 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ......................................... $ 121,979,635
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ....................................... (748,288)
-------------
Net unrealized appreciation ........................... $ 121,231,347
=============
(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $317,200 (.05% of net assets). Their values have been
estimated by the Board of Trustees in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation,
those estimated values may differ significantly from the values that would
have been used had a ready market for the securities existed, and the
difference could be material. The cost of these securities was $295,244 at
September 30, 1997. These securities may also have certain restrictions as
to resale.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the year ended September 30, 1997 aggregated $193,993,681
and $109,398,379, respectively. Purchases and sales of U.S. Government and
U.S. Government agencies' obligations aggregated $19,648,049 and
$18,561,811, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
76
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.1%
- -----------------------------------------------------------------------------------------------------------------
9,855,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/97 at 6.02% to be repurchased at $9,856,648 on
10/01/97, collateralized by a $8,374,000 U.S. Treasury
Bond, 9.125%, 5/15/09 (Cost $9,855,000) ..................................... 9,855,000
------------
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 2.0%
- -----------------------------------------------------------------------------------------------------------------
33,000,000 Associates Corp. of North America, Discount Note, 10/01/97 ..................... 33,000,000
35,000,000 General Electric Capital Corp., Discount Note, 10/03/97 ........................ 34,989,150
20,000,000 Norwest Financial Corp., Discount Note, 10/01/97 ............................... 20,000,000
44,000,000 Omnicom Finance Inc., Discount Note, 10/07/97 .................................. 43,958,787
------------
Total Commercial Paper (Cost $131,947,937) ..................................... 131,947,937
------------
- -----------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 0.4%
- -----------------------------------------------------------------------------------------------------------------
25,000,000 Fifth Third Bancorp., 5.52%, 10/09/97 (Cost $25,000,000) ....................... 24,999,576
------------
- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 4.3%
- -----------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.9%
Department & Chain Stores
12,550,000 Federated Department Stores, Inc., Debenture, 5%, 10/01/03 ..................... 16,911,125
34,500,000 Home Depot Inc., 3.25%, 10/01/01 ............................................... 42,262,500
------------
59,173,625
------------
Consumer Staples 0.5%
Miscellaneous
490,000 Ralston Purina Group, 7%, 8/01/00 .............................................. 33,013,750
------------
Health 0.1%
Pharmaceuticals
6,260,000 Sandoz Capital BVI Ltd., Debenture, 2%, 10/06/02 ............................... 9,170,900
------------
Communications 0.0%
Telephone / Communications
1,000,000 Compania de Telefonos de Chile, S.A., 4.5%, 1/15/03 ............................ 1,682,500
------------
Financial 1.5%
Banks 1.0%
102,590,000 Deutsche Bank Financial Inc., Convertible to Daimler Benz AG shares,
Zero Coupon, 2/12/17 ........................................................ 48,089,063
17,290,000 MBL International Finance Bermuda, 3%, 11/30/02 ................................ 18,846,100
------------
66,935,163
------------
Other Financial Companies 0.2%
5,200,000 First Financial Management Corp., Debenture, 5%, 12/15/99 ...................... 9,165,000
------------
Real Estate 0.3%
18,250,000 Security Capital Group, Inc., 6.5%, 3/29/16 (b) (c) ............................ 22,585,146
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
77
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Service Industries 0.8%
Miscellaneous Commercial Services 0.6%
25,000,000 ADT Operations Inc., Liquid Yield Option Note, Zero Coupon, 7/06/10 ............ 27,843,750
7,036,000 Jardine Strategic Holdings Ltd., 7.5%, 5/07/49 (b) ............................. 8,583,920
------------
36,427,670
------------
Miscellaneous Consumer Services 0.2%
14,000,000 CUC International Inc., 3%, 2/15/02 ............................................ 16,205,000
------------
Durables 0.2%
Automobiles
6,800,000 Magna International, Inc., 5%, 10/15/02 ........................................ 8,967,500
------------
Manufacturing 0.1%
Diversified Manufacturing
5,000,000 Thermo Electron Corp., 4.25%, 1/01/03 .......................................... 5,825,000
------------
Technology 0.2%
Electronic Components / Distributors 0.1%
5,700,000 HMT Technology Corp., 5.75%, 1/15/04 ........................................... 5,400,750
------------
EDP Peripherals 0.1%
5,500,000 Adaptec Inc., 4.75%, 2/01/04 ................................................... 6,215,000
------------
Total Convertible Bonds (Cost $226,034,527) .................................... 280,767,004
------------
- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 1.6%
- -----------------------------------------------------------------------------------------------------------------
Shares
- ---------------
Consumer Discretionary 0.8%
Department & Chain Stores
956,200 K Mart 7.75% ................................................................... 55,937,700
------------
Financial 0.2%
Consumer Finance 0.1%
129,000 Advanta Corp. 6.75% ............................................................ 3,999,000
------------
Real Estate 0.1%
321,500 Security Capital Industrial Trust "B", 7% ...................................... 9,725,375
------------
Manufacturing 0.4%
Containers & Paper 0.1%
50,200 International Paper Co. 5.25% .................................................. 2,836,300
------------
Industrial Specialty 0.2%
652,400 Cooper Industries, Inc. 6% ..................................................... 15,005,200
------------
Office Equipment / Supplies 0.1%
102,800 Ikon Office Solutions, Inc., 5.04% ............................................. 6,630,600
------------
Metals & Minerals 0.2%
Precious Metals
500,000 Freeport McMoRan Copper & Gold, Inc., Cum. $1.25 ............................... 13,843,750
------------
Total Convertible Preferred Stocks (Cost $96,396,839) .......................... 107,977,925
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
78
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.1%
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Consumer Discretionary 4.5%
Department & Chain Stores
767,200 J.C. Penney Co., Inc. .......................................................... 44,689,400
782,700 May Department Stores .......................................................... 42,657,150
861,450 Mercantile Stores, Inc. ........................................................ 54,217,509
1,589,100 Rite Aid Corp. ................................................................. 88,095,731
1,257,200 Sears, Roebuck & Co. ........................................................... 71,581,825
------------
301,241,615
------------
Consumer Staples 7.8%
Consumer Electronic & Photographic Products 1.7%
1,656,000 Whirlpool Corp. ................................................................ 109,813,500
------------
Food & Beverage 4.5%
598,400 General Mills, Inc. ............................................................ 41,252,200
2,720,200 H.J. Heinz Co. ................................................................. 125,639,237
105,000 Unilever NV .................................................................... 22,412,944
515,200 Unilever NV (New York shares) .................................................. 109,544,400
------------
298,848,781
------------
Package Goods / Cosmetics 1.6%
2,154,000 Kimberly-Clark Corp. ........................................................... 105,411,375
------------
Health 5.8%
Pharmaceuticals
772,800 American Home Products Corp. ................................................... 56,414,400
1,166,300 Baxter International Inc. ...................................................... 60,939,175
1,154,000 Bristol-Myers Squibb Co. ....................................................... 95,493,500
1,208,800 Schering-Plough Corp. .......................................................... 62,253,200
1,322,600 SmithKline Beecham PLC (ADR) ................................................... 64,642,075
1,446,900 Zeneca Group PLC ............................................................... 47,251,676
------------
386,994,026
------------
Communications 7.2%
Telephone / Communications
1,896,300 Alltel Corp. ................................................................... 65,422,350
1,648,840 Bell Atlantic Corp. ............................................................ 132,628,567
1,424,000 BellSouth Corp. ................................................................ 65,860,000
1,976,900 Frontier Corp. ................................................................. 45,468,700
2,126,300 GTE Corp. ...................................................................... 96,480,862
1,164,600 Sprint Corp. ................................................................... 58,230,000
2,036,000 Telecom Corp. of New Zealand ................................................... 10,330,556
------------
474,421,035
------------
Financial 19.5%
Banks 10.2%
1,215,500 Banc One Corp. ................................................................. 67,840,094
251,000 BankAmerica Corp. .............................................................. 18,401,437
670,300 Bankers Trust New York Corp. ................................................... 82,111,750
1,119,000 Chase Manhattan Corp. .......................................................... 132,042,000
</TABLE>
The accompanying notes are an integral part of the financial statements
79
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
983,800 CoreStates Financial Corp. ..................................................... 65,115,262
299,400 First Chicago NBD Corp. ........................................................ 22,529,850
755,100 First Union Corp. .............................................................. 37,802,194
574,800 J.P. Morgan & Co., Inc. ........................................................ 65,311,650
980,200 KeyCorp ........................................................................ 62,365,225
1,098,600 NationsBank Corp. .............................................................. 67,975,875
643,500 US Bancorp ..................................................................... 62,097,750
------------
683,593,087
------------
Insurance 3.8%
979,100 EXEL Ltd. (ADR) ................................................................ 58,317,644
1,110,200 Lincoln National Corp. ......................................................... 77,297,675
754,300 Mid Ocean Limited .............................................................. 47,803,763
1,248,400 Safeco Corp. ................................................................... 66,165,200
------------
249,584,282
------------
Consumer Finance 0.9%
381,200 SLM Holding Corp. .............................................................. 58,895,400
------------
Other Financial Companies 0.6%
789,400 Federal National Mortgage Association .......................................... 37,101,800
------------
Real Estate 4.0%
245,800 Avalon Properties, Inc. (REIT) ................................................. 7,312,550
386,200 Camden Property Trust (REIT) ................................................... 11,827,375
2,004,900 General Growth Properties, Inc. (REIT) (d) ..................................... 74,181,300
409,800 Health Care Property Investment Inc. (REIT) .................................... 15,879,750
31,100 Mark Centers Trust (REIT) ...................................................... 293,506
457,900 Meditrust SBI (REIT) ........................................................... 19,002,850
680,800 Nationwide Health Properties Inc. (REIT) ....................................... 16,381,750
71,200 Post Properties Inc. (REIT) .................................................... 2,830,200
17,398 Security Capital Group, Inc. (b) (c) ........................................... 24,843,660
1,485,172 Security Capital Industrial Trust (REIT) ....................................... 34,623,072
88,318 Security Capital Industrial Trust Warrants (expire 9/1/98)* .................... 706,544
2,688,521 Security Capital US Realty (REIT) .............................................. 40,058,963
150,000 Spieker Properties, Inc. ....................................................... 6,084,375
102,100 Vornado Realty Trust (REIT) .................................................... 8,672,119
------------
262,698,014
------------
Durables 6.4%
Aerospace 1.9%
445,323 Lockheed Martin Corp. .......................................................... 47,482,565
1,195,100 Rockwell International Corp. (New) ............................................. 75,216,606
------------
122,699,171
------------
Automobiles 3.7%
1,609,000 Dana Corp. ..................................................................... 79,444,375
444,100 Eaton Corp. .................................................................... 41,023,737
2,798,000 Ford Motor Co. ................................................................. 126,609,500
------------
247,077,612
------------
Construction / Agricultural Equipment 0.8%
996,800 PACCAR, Inc. ................................................................... 55,820,800
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
80
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufacturing 18.1%
Chemicals 5.3%
474,115 Akzo-Nobel NV .................................................................. 81,024,326
518,300 Dow Chemical Co. ............................................................... 47,003,331
328,100 E.I. du Pont de Nemours & Co. .................................................. 20,198,656
945,000 Eastman Chemical Co. ........................................................... 58,590,000
8,662,000 Imperial Chemical Industries PLC ............................................... 140,710,473
------------
347,526,786
------------
Containers & Paper 0.7%
49,581 Boise Cascade Corp. ............................................................ 2,085,501
1,200,000 Westvaco Corp. ................................................................. 43,275,000
------------
45,360,501
------------
Diversified Manufacturing 3.2%
1,404,600 Olin Corp. ..................................................................... 65,752,837
2,654,000 TRW Inc. ....................................................................... 145,638,250
------------
211,391,087
------------
Electrical Products 3.8%
1,863,400 Philips Electronics NV ......................................................... 157,678,790
428,300 Philips Electronics NV (New York shares) ....................................... 35,977,200
1,014,600 Thomas & Betts Corp. ........................................................... 55,422,525
------------
249,078,515
------------
Machinery / Components / Controls 0.4%
925,000 S.K.F. AB "B" (Free) ........................................................... 26,942,339
------------
Office Equipment / Supplies 2.7%
2,152,900 Xerox Corp. .................................................................... 181,247,269
------------
Specialty Chemicals 2.0%
204,800 ARCO Chemical Co. .............................................................. 9,318,400
709,000 BetzDearborn Inc. .............................................................. 48,477,875
1,649,900 Witco Corp. .................................................................... 75,276,688
------------
133,072,963
------------
Technology 0.6%
Electronic Components / Distributors
673,000 AMP Inc. ....................................................................... 36,047,562
------------
Energy 8.6%
Oil Companies 8.0%
494,800 Exxon Corp. .................................................................... 31,698,125
1,254,000 Lyondell Petrochemical Co. ..................................................... 32,839,125
461,000 Pennzoil Co. ................................................................... 36,735,937
1,058,800 Royal Dutch Petroleum Co. (New York shares) .................................... 58,763,400
759,800 Societe Nationale Elf Aquitaine ................................................ 101,417,646
1,620,400 Texaco Inc. .................................................................... 99,553,325
558,448 Total SA "B" ................................................................... 63,905,990
569,496 Total SA (ADR) ................................................................. 32,639,240
1,844,200 YPF S.A. "D" (ADR) ............................................................. 68,004,875
------------
525,557,663
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
81
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Oil / Gas Transmission 0.6%
899,000 Williams Cos., Inc. ............................................................ 42,084,438
-------------
Metals & Minerals 1.9%
Steel & Metals
2,081,910 Allegheny Teledyne Inc. ........................................................ 59,594,674
579,010 Freeport McMoRan Copper & Gold, Inc. "A" ....................................... 15,958,963
1,879,100 J & L Specialty Steel, Inc. .................................................... 25,250,406
297,500 Phelps Dodge Corp. ............................................................. 23,093,438
-------------
123,897,481
-------------
Construction 2.7%
Building Materials 0.4%
774,955 Martin Marietta Materials, Inc. ................................................ 27,898,380
-------------
Forest Products 2.3%
817,000 Georgia Pacific Corp. .......................................................... 85,274,375
512,200 Louisiana-Pacific Corp. ........................................................ 12,805,000
851,600 Weyerhaeuser Co. ............................................................... 50,563,750
-------------
148,643,125
-------------
Transportation 1.6%
Railroads
1,032,900 CSX Corp. ...................................................................... 60,424,650
295,950 Canadian National Railway Co. .................................................. 15,383,063
141,100 Norfolk Southern Corp. ......................................................... 14,568,575
241,900 Union Pacific Corp. ............................................................ 15,148,988
-------------
105,525,276
-------------
Utilities 6.4%
Electric Utilities
1,241,200 CINergy Corp. .................................................................. 41,502,625
261,200 CMS Energy Corp. ............................................................... 9,664,400
1,819,120 Duke Energy Corp. .............................................................. 89,932,745
1,054,200 Long Island Lighting Co. ....................................................... 27,013,875
1,080,200 PacifiCorp ..................................................................... 24,169,475
1,951,600 PG & E Corporation ............................................................. 45,252,725
5,986,000 PowerGen PLC ................................................................... 73,753,689
670,603 PowerGen PLC (ADR) ............................................................. 33,027,198
2,176,300 Unicom Corp. ................................................................... 50,871,014
952,800 Wisconsin Energy Corp. ......................................................... 24,772,800
-------------
419,960,546
-------------
Total Common Stocks (Cost $3,954,215,554) ...................................... 6,018,434,429
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $4,443,449,857) (a) ...................... 99.5 6,573,981,871
Other Assets and Liabilities, Net ......................................... 0.5 32,031,026
------ --------------
Net Assets ................................................................ 100.0 6,606,012,897
====== ==============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $4,440,901,206 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $2,140,784,862
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... (7,704,197)
--------------
Net unrealized appreciation .............................. $2,133,080,665
==============
(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $56,012,726 (0.85% of net assets). Their values have
been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent uncertainty
of valuation, those estimated values may differ significantly from the
values that would have been used had a ready market for the securities
existed, and the difference could be material. The cost of these
securities at September 30, 1997 was $44,449,203. These securities may
also have certain restrictions as to resale.
(c) Restricted Securities -- securities which have not been registered with
the Securities and Exchange Commission under the Securities Act of 1933.
Information concerning such restricted securities at September 30, 1997 is
as follows:
Security Acquisition Date Cost ($)
-------- ---------------- --------
Security Capital Group, Inc. 4/19/96 18,250,000
Security Capital Group, Inc., 6.5%, 3/29/16 4/19/96 18,250,000
(d) Affiliated Issuer (See Notes to Financial Statements)
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$2,283,895,347 and $1,713,417,767, respectively.
- --------------------------------------------------------------------------------
Transactions in written call options on securities during the year ended
September 30, 1997 were:
Contracts Premiums Received ($)
--------- ---------------------
Outstanding at September 30, 1996 400 19,199
Contracts written -- --
Contracts expired (400) (19,199)
--------------------------------------
Outstanding at September 30, 1997 -- --
- --------------------------------------------------------------------------------
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
83
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 3.1%
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
1,179,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $1,179,197 on 10/01/97, collateralized by a $1,150,000
U.S. Treasury Bond, 6.75%, 8/15/26 (Cost $1,179,000) 1,179,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY 0.2%
- -------------------------------------------------------------------------------------------------------------------------------
65,000 U.S. Treasury Bill, 5.12%, 10/02/97 (Cost $64,991) 64,995
-----------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 92.9%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------
Consumer Discretionary 4.9%
Apparel & Shoes 0.1%
100 Fruit of the Loom, Inc. "A"* .............................................................. 2,813
100 Liz Claiborne Inc. ........................................................................ 5,494
200 Nike, Inc. "B" ............................................................................ 10,600
2,000 Stride Rite Corp. ......................................................................... 27,125
-----------
46,032
-----------
Department & Chain Stores 4.1%
600 CVS Corp. ................................................................................. 34,115
100 Charming Shoppes Inc.* .................................................................... 616
1,500 Dayton Hudson Corp. ....................................................................... 89,906
100 Dillard's Inc. ............................................................................ 4,381
100 Federated Department Stores, Inc.* ........................................................ 4,313
1,200 Gap Inc. .................................................................................. 60,075
3,000 Home Depot, Inc. .......................................................................... 156,365
4,300 J.C. Penney Co., Inc. ..................................................................... 250,475
400 K mart Corp. .............................................................................. 5,600
2,500 Limited Inc. .............................................................................. 61,094
300 Longs Drug Stores, Inc. ................................................................... 8,006
200 Lowe's Companies, Inc. .................................................................... 7,775
2,100 May Department Stores ..................................................................... 114,440
100 Mercantile Stores, Inc. ................................................................... 6,294
200 Nordstrom, Inc. ........................................................................... 12,750
500 Costco Companies, Inc. .................................................................... 18,813
1,100 Rite Aid Corp. ............................................................................ 60,981
2,900 Sears, Roebuck & Co. ...................................................................... 165,119
900 TJX Companies, Inc. (New) ................................................................. 27,506
11,300 Wal-Mart Stores Inc. ...................................................................... 413,863
2,700 Walgreen Co. .............................................................................. 69,188
100 Woolworth Corp.* .......................................................................... 2,213
-----------
1,573,888
-----------
Home Furnishings 0.2%
600 Newell Companies Inc. ..................................................................... 24,000
1,300 Rubbermaid, Inc. .......................................................................... 33,231
</TABLE>
The accompanying notes are an integral part of the financial statements
84
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
400 Tupperware Corp. .......................................................................... 11,250
-----------
68,481
-----------
Hotels & Casinos 0.1%
200 HFS, Inc.* ................................................................................ 14,888
100 Harrah's Entertainment, Inc.* ............................................................. 2,244
300 Hilton Hotels Corp. ....................................................................... 10,106
100 ITT Corp.* ................................................................................ 6,775
100 Marriott International, Inc. .............................................................. 7,106
-----------
41,119
-----------
Recreational Products 0.2%
700 Brunswick Corp. ........................................................................... 24,675
250 Hasbro, Inc. .............................................................................. 7,031
1,400 Mattel Inc. ............................................................................... 46,375
-----------
78,081
-----------
Restaurants 0.1%
100 Darden Restaurants Inc. ................................................................... 1,156
900 McDonald's Corp. .......................................................................... 42,863
100 Wendy's International, Inc. ............................................................... 2,125
-----------
46,144
-----------
Specialty Retail 0.1%
100 AutoZone, Inc.* ........................................................................... 3,000
100 Circuit City Stores Inc. .................................................................. 4,031
100 Pep Boys - Manny, Moe & Jack .............................................................. 2,725
800 Tandy Corp. ............................................................................... 26,900
100 Toys "R" Us Inc.* ......................................................................... 3,550
-----------
40,206
-----------
Consumer Staples 8.6%
Alcohol 0.4%
2,400 Anheuser-Busch Companies, Inc. ............................................................ 108,290
800 Seagram Co., Ltd. ......................................................................... 28,200
-----------
136,490
-----------
Consumer Electronic & Photographic Products 0.4%
1,300 Eastman Kodak Co. ......................................................................... 84,419
1,100 Maytag Corp. .............................................................................. 37,538
500 Whirlpool Corp. ........................................................................... 33,156
-----------
155,113
-----------
Consumer Specialties 0.3%
100 American Greeting Corp., "A" .............................................................. 3,688
3,600 Jostens, Inc. ............................................................................. 97,650
-----------
101,338
-----------
Farming 0.0%
105 Archer-Daniels-Midland Co. ................................................................ 2,513
100 Pioneer Hi-Bred International, Inc. ....................................................... 9,100
-----------
11,613
-----------
Food & Beverage 4.3%
100 Albertson's Inc. .......................................................................... 3,488
</TABLE>
The accompanying notes are an integral part of the financial statements
85
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
200 American Stores Co. ....................................................................... 4,875
100 CPC International Inc. .................................................................... 9,263
1,800 Campbell Soup Co. ......................................................................... 88,200
8,100 Coca-Cola Co., Inc. (b) ................................................................... 493,594
600 ConAgra Inc. .............................................................................. 39,600
1,700 General Mills, Inc. ....................................................................... 117,194
100 Giant Food, Inc. "A" ...................................................................... 3,256
2,300 H.J. Heinz Co. ............................................................................ 106,231
100 Hershey Foods Corp. ....................................................................... 5,650
1,700 Kellogg Co. ............................................................................... 71,613
200 Kroger Co. ................................................................................ 6,038
7,400 PepsiCo, Inc. ............................................................................. 300,163
1,300 Quaker Oats Co. ........................................................................... 65,488
200 Ralston Purina Group ...................................................................... 17,700
700 SUPERVALU, Inc. ........................................................................... 27,475
1,000 Unilever NV (New York shares) ............................................................. 212,625
100 William Wrigley Jr. Co. ................................................................... 7,531
1,700 Winn-Dixie Stores, Inc. ................................................................... 60,244
-----------
1,640,228
-----------
Package Goods / Cosmetics 3.0%
1,200 Avon Products Inc. ........................................................................ 74,400
800 Clorox Co. ................................................................................ 59,300
2,100 Colgate-Palmolive Co. ..................................................................... 146,334
2,800 Gillette Co. .............................................................................. 241,675
1,300 International Flavors & Fragrances, Inc. .................................................. 63,700
1,400 Kimberly-Clark Corp. ...................................................................... 68,513
7,400 Procter & Gamble Co. ...................................................................... 511,063
-----------
1,164,985
-----------
Textiles 0.2%
200 Springs Industries, Inc. "A" .............................................................. 10,500
600 VF Corporation ............................................................................ 55,575
-----------
66,075
-----------
Health 10.3%
Biotechnology 0.2%
100 Alza Corp. "A" ............................................................................ 2,900
200 Amgen Inc. ................................................................................ 9,588
1,000 Guidant Corp. ............................................................................. 56,000
-----------
68,488
-----------
Health Industry Services 0.2%
1,300 HEALTHSOUTH Corp. ......................................................................... 34,694
100 Humana, Inc.* ............................................................................. 2,381
200 Shared Medical Systems Corp. .............................................................. 10,575
600 United Healthcare Corp. ................................................................... 30,000
-----------
77,650
-----------
Hospital Management 0.1%
400 Columbia/HCA Healthcare Corp. ............................................................. 11,500
100 Manor Care, Inc. .......................................................................... 3,325
</TABLE>
The accompanying notes are an integral part of the financial statements
86
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
200 Tenet Healthcare Corp.* ................................................................... 5,825
-----------
20,650
-----------
Medical Supply & Specialty 0.7%
1,500 Bausch & Lomb, Inc. ....................................................................... 60,750
200 Becton, Dickinson & Co. ................................................................... 9,575
100 Biomet Inc. ............................................................................... 2,400
900 Boston Scientific Corp.* .................................................................. 49,669
700 C.R. Bard, Inc. ........................................................................... 23,756
100 Mallinckrodt, Inc. ........................................................................ 3,600
2,400 Medtronic Inc. ............................................................................ 112,800
100 St. Jude Medical, Inc.* ................................................................... 3,506
400 U.S. Surgical Corp. ....................................................................... 11,675
-----------
277,731
-----------
Pharmaceuticals 9.1%
4,400 Abbott Laboratories ....................................................................... 281,325
100 Allergan, Inc. ............................................................................ 3,619
3,800 American Home Products Corp. .............................................................. 277,400
3,200 Baxter International Inc. ................................................................. 167,200
5,900 Bristol-Myers Squibb Co. .................................................................. 488,225
3,100 Eli Lilly & Co. ........................................................................... 373,356
4,300 Johnson & Johnson ......................................................................... 247,788
6,600 Merck & Co. Inc. .......................................................................... 659,588
6,400 Pfizer, Inc. .............................................................................. 384,400
3,700 Pharmacia & Upjohn, Inc. .................................................................. 135,050
4,000 Schering-Plough Corp. ..................................................................... 206,000
1,800 Warner-Lambert Co. ........................................................................ 242,888
-----------
3,466,839
-----------
Communications 5.8%
Cellular Telephone 0.0%
100 AirTouch Communications, Inc.* ............................................................ 3,544
-----------
Telephone / Communications 5.8%
1,100 Alltel Corp. .............................................................................. 37,950
10,100 American Telephone & Telegraph Co. ........................................................ 447,556
2,200 Ameritech Corp. ........................................................................... 146,300
5,104 Bell Atlantic Corp. ....................................................................... 410,553
3,500 BellSouth Corp. ........................................................................... 161,875
2,100 Frontier Corp. ............................................................................ 48,300
3,300 GTE Corp. ................................................................................. 149,738
100 MCI Communications Corp. .................................................................. 2,938
3,419 SBC Communicatons, Inc. ................................................................... 209,841
100 Sprint Corp. .............................................................................. 5,000
9,900 US West Inc.* ............................................................................. 381,150
5,500 WorldCom, Inc.* ........................................................................... 194,563
-----------
2,195,764
-----------
Financial 14.0%
Banks 8.2%
3,800 Banc One Corp. ............................................................................ 212,088
1,900 Bank of New York Co., Inc. ................................................................ 91,200
</TABLE>
The accompanying notes are an integral part of the financial statements
87
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3,300 BankAmerica Corp. ......................................................................... 241,931
1,000 BankBoston Corp. .......................................................................... 88,438
900 Barnett Banks, Inc. ....................................................................... 63,675
2,500 Chase Manhattan Corp. ..................................................................... 295,000
2,300 Citicorp .................................................................................. 308,056
500 Comerica Inc. ............................................................................. 39,469
2,200 CoreStates Financial Corp. ................................................................ 145,613
150 Fifth Third Bancorp. ...................................................................... 9,806
1,500 First Chicago NBD Corp. ................................................................... 112,875
3,100 First Union Corp. ......................................................................... 155,194
1,800 Fleet Financial Group, Inc. ............................................................... 118,013
100 H.F. Ahmanson & Co. ....................................................................... 5,681
1,400 J.P. Morgan & Co., Inc. ................................................................... 159,075
1,500 KeyCorp ................................................................................... 95,438
2,300 MBNA Corp. ................................................................................ 93,150
2,600 Mellon Bank Corp. ......................................................................... 142,350
1,900 National City Corp. ....................................................................... 116,969
2,700 NationsBank Corp. ......................................................................... 167,063
1,400 Norwest Corp. ............................................................................. 85,750
3,100 PNC Bank Corp. ............................................................................ 151,319
100 SunTrust Banks, Inc. ...................................................................... 6,794
902 US Bancorp ................................................................................ 87,043
900 Wachovia Corp. ............................................................................ 64,800
460 Washington Mutual, Inc. ................................................................... 32,085
100 Wells Fargo & Co. ......................................................................... 27,500
-----------
3,116,375
-----------
Insurance 3.1%
100 Aetna Inc. ................................................................................ 8,144
1,600 Allstate Corp. ............................................................................ 128,600
1,900 American General Corp. .................................................................... 98,563
2,300 American International Group, Inc. ........................................................ 237,331
1,550 Aon Corp. ................................................................................. 81,956
200 Chubb Corp. ............................................................................... 14,213
300 Cigna Corp. ............................................................................... 55,875
800 Conseco Inc. .............................................................................. 39,050
100 General Re Corp. .......................................................................... 19,850
200 Hartford Financial Services Group Inc. .................................................... 17,213
200 Jefferson Pilot Corp. ..................................................................... 15,800
1,000 Lincoln National Corp. .................................................................... 69,625
200 MGIC Investment Corp. ..................................................................... 11,463
2,400 Marsh & McLennan Companies, Inc. .......................................................... 183,900
1,200 Providian Financial Corp. ................................................................. 47,625
800 Safeco Corp. .............................................................................. 42,400
600 St. Paul Companies, Inc. .................................................................. 48,938
450 SunAmerica, Inc. .......................................................................... 17,634
200 Torchmark Corp. ........................................................................... 7,850
100 Transamerica Corp. ........................................................................ 9,950
200 UNUM Corp. ................................................................................ 9,125
</TABLE>
The accompanying notes are an integral part of the financial statements
88
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
100 USF&G Corp. ............................................................................... 2,294
-----------
1,167,399
-----------
Consumer Finance 0.1%
600 Beneficial Corp. .......................................................................... 45,713
-----------
Other Financial Companies 2.6%
2,600 American Express Credit Corp. ............................................................. 212,875
2,600 Federal Home Loan Mortgage Corp. .......................................................... 91,650
5,300 Federal National Mortgage Association ..................................................... 249,100
100 Green Tree Financial Corp. ................................................................ 4,700
400 Household International, Inc. ............................................................. 45,275
2,895 Morgan Stanley, Dean Witter Discover Co. .................................................. 156,511
100 Salomon Inc. .............................................................................. 7,519
3,400 Travelers Group, Inc. ..................................................................... 232,050
-----------
999,680
-----------
Media 1.5%
Advertising 0.0%
150 Interpublic Group of Companies Inc. ....................................................... 7,697
-----------
Broadcasting & Entertainment 1.0%
100 Clear Channel Communications, Inc.* ....................................................... 6,488
2,700 Time Warner Inc. .......................................................................... 146,306
100 U.S. West Media Group ..................................................................... 2,231
100 Viacom Inc. "B"* .......................................................................... 3,163
3,000 Walt Disney Co. ........................................................................... 241,875
-----------
400,063
-----------
Cable Television 0.2%
1,400 Comcast Corp. "A" ......................................................................... 36,050
1,527 Tele-Communications Inc. "A" (New)* ....................................................... 31,304
-----------
67,354
-----------
Print Media 0.3%
600 Gannett Co., Inc. ......................................................................... 64,763
100 Harcourt General, Inc. .................................................................... 4,956
200 Knight-Ridder, Inc. ....................................................................... 10,925
100 New York Times Co. "A" .................................................................... 5,250
100 Times Mirror Co. "A" ...................................................................... 5,494
300 Tribune Co. ............................................................................... 15,994
-----------
107,382
-----------
Service Industries 3.0%
EDP Services 0.1%
300 Automatic Data Processing, Inc. ........................................................... 15,000
600 First Data Corp. .......................................................................... 22,538
500 NextLevel Systems, Inc. ................................................................... 8,375
-----------
45,913
-----------
Environmental Services 0.6%
2,100 Browning Ferris Industries ................................................................ 79,931
4,000 Waste Management Inc. ..................................................................... 139,750
-----------
219,681
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
89
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Investment 0.5%
1,050 Charles Schwab Corp. ...................................................................... 37,538
1,900 Merrill Lynch & Co., Inc. ................................................................. 140,956
-----------
178,494
-----------
Miscellaneous Commercial Services 0.0%
100 Cognizant Corp. ........................................................................... 4,075
100 Ecolab, Inc. .............................................................................. 4,856
100 Safety-Kleen Corp. ........................................................................ 2,394
100 Sysco Corp. ............................................................................... 3,694
-----------
15,019
-----------
Miscellaneous Consumer Services 0.1%
300 CUC International Inc. .................................................................... 9,300
800 H & R Block Inc. .......................................................................... 30,900
100 Service Corp. International ............................................................... 3,219
-----------
43,419
-----------
Printing / Publishing 1.7%
5,100 Deluxe Corp. .............................................................................. 171,169
300 Dow Jones & Co., Inc. ..................................................................... 14,025
7,500 Dun & Bradstreet Corp. .................................................................... 212,813
400 Equifax Inc. .............................................................................. 12,575
500 John H. Harland Co. ....................................................................... 11,531
1,600 McGraw-Hill Inc. .......................................................................... 108,300
3,300 Moore Corp., Ltd. ......................................................................... 62,700
1,100 R.R. Donnelley & Sons Co. ................................................................. 39,256
-----------
632,369
-----------
Durables 5.9%
Aerospace 1.5%
2,000 AlliedSignal Inc. ......................................................................... 85,000
4,150 Boeing Co. ................................................................................ 225,916
700 Lockheed Martin Corp. ..................................................................... 74,638
300 Northrop Grumman Corp. .................................................................... 36,413
800 Rockwell International Corp. .............................................................. 50,350
1,100 United Technologies Corp. ................................................................. 89,100
-----------
561,417
-----------
Automobiles 2.5%
5,500 Chrysler Corp. ............................................................................ 202,469
200 Cummins Engine Co., Inc. .................................................................. 15,613
600 Dana Corp. ................................................................................ 29,625
400 Eaton Corp. ............................................................................... 36,950
100 Echlin, Inc. .............................................................................. 3,506
7,900 Ford Motor Co. ............................................................................ 357,475
3,700 General Motors Corp. ...................................................................... 247,669
2,100 Genuine Parts Co. ......................................................................... 64,706
100 Navistar International Corp.* ............................................................. 2,763
-----------
960,776
-----------
Construction / Agricultural Equipment 0.5%
100 Case Corp. ................................................................................ 6,663
</TABLE>
The accompanying notes are an integral part of the financial statements
90
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
2,400 Caterpillar Inc. .......................................................................... 129,450
1,300 Deere & Co. ............................................................................... 69,875
-----------
205,988
-----------
Leasing Companies 0.0%
100 Ryder System, Inc. ........................................................................ 3,594
-----------
Telecommunications Equipment 1.3%
250 Andrew Corp. .............................................................................. 6,547
500 DSC Communications Corp.* ................................................................. 13,469
3,200 Lucent Technologies Inc. .................................................................. 260,400
1,700 Northern Telecom Ltd. ..................................................................... 176,694
100 Scientific-Atlanta, Inc. .................................................................. 2,263
1,000 Tellabs, Inc.* ............................................................................ 51,500
-----------
510,873
-----------
Tires 0.1%
100 Cooper Tire & Rubber Co. .................................................................. 2,656
600 Goodyear Tire & Rubber Co. ................................................................ 41,250
-----------
43,906
-----------
Manufacturing 10.4%
Chemicals 2.4%
200 B.F. Goodrich Co., Inc. ................................................................... 9,050
2,700 Dow Chemical Co. .......................................................................... 244,856
6,300 E.I. du Pont de Nemours & Co. ............................................................. 387,844
800 Eastman Chemical Co. ...................................................................... 49,600
100 Engelhard Corp. ........................................................................... 2,156
100 Great Lakes Chemicals Corp. ............................................................... 4,931
500 Hercules, Inc. ............................................................................ 24,875
3,000 Monsanto Co. .............................................................................. 117,000
400 Morton International, Inc. ................................................................ 14,200
100 Praxair Inc. .............................................................................. 5,119
400 Rohm & Haas Co. ........................................................................... 38,375
100 Sigma-Aldrich Corp. ....................................................................... 3,294
100 Union Carbide Corp. ....................................................................... 4,869
100 W.R. Grace & Co. (New) .................................................................... 7,363
-----------
913,532
-----------
Containers & Paper 0.5%
100 Champion International Corp. .............................................................. 6,094
300 Crown Cork & Seal Co. Inc. ................................................................ 13,838
300 Fort James Corp. .......................................................................... 13,744
1,400 International Paper Co. ................................................................... 77,088
200 Stone Container Corp. ..................................................................... 3,113
100 Temple-Inland, Inc. ....................................................................... 6,400
900 Union Camp Corp. .......................................................................... 55,519
400 Westvaco Corp. ............................................................................ 14,425
-----------
190,221
-----------
Diversified Manufacturing 5.1%
200 Aeroquip-Vickers Inc. ..................................................................... 9,800
1,200 Cooper Industries, Inc. ................................................................... 64,875
</TABLE>
The accompanying notes are an integral part of the financial statements
91
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
300 Dover Corp. ............................................................................... 20,363
1,500 Dresser Industries Inc. ................................................................... 64,500
18,000 General Electric Co. ...................................................................... 1,225,125
600 Honeywell, Inc. ........................................................................... 40,313
100 ITT Industries Inc. ....................................................................... 3,319
2,000 Minnesota Mining & Manufacturing Co. ...................................................... 185,000
500 National Service Industries, Inc. ......................................................... 21,969
100 TRW Inc. .................................................................................. 5,488
1,100 Tenneco, Inc. ............................................................................. 52,663
700 Textron, Inc. ............................................................................. 45,500
100 Thermo Electron Corp. ..................................................................... 4,000
1,500 Tyco International Ltd. (New) ............................................................. 123,094
3,000 Westinghouse Electric Corp. ............................................................... 81,188
100 Whitman Corp. ............................................................................. 2,725
-----------
1,949,922
-----------
Electrical Products 0.5%
2,600 Emerson Electric Co. ...................................................................... 149,825
100 Raychem Corp. ............................................................................. 8,450
400 Thomas & Betts Corp. ...................................................................... 21,850
-----------
180,125
-----------
Hand Tools 0.2%
100 Black & Decker Corp. ...................................................................... 3,725
100 Briggs & Stratton Corp. ................................................................... 4,944
300 Snap-On, Inc. ............................................................................. 13,819
900 Stanley Works ............................................................................. 38,700
-----------
61,188
-----------
Industrial Specialty 0.5%
500 Avery Dennison Corp. ...................................................................... 20,000
1,400 Corning Inc. .............................................................................. 66,150
1,000 PPG Industries, Inc. ...................................................................... 62,688
1,200 Pall Corp. ................................................................................ 25,875
200 Sherwin-Williams Co. ...................................................................... 5,888
-----------
180,601
-----------
Machinery / Components / Controls 0.3%
500 General Signal Corp. ...................................................................... 21,625
100 Harnischfeger Industries, Inc. ............................................................ 4,275
800 Illinois Tool Works Inc. .................................................................. 40,000
450 Ingersoll-Rand Co. ........................................................................ 19,378
600 Parker-Hannifin Group ..................................................................... 27,000
400 Timken Co. ................................................................................ 16,025
-----------
128,303
-----------
Office Equipment / Supplies 0.7%
1,300 Pitney Bowes, Inc. ........................................................................ 108,144
1,800 Xerox Corp. ............................................................................... 151,538
-----------
259,682
-----------
Specialty Chemicals 0.2%
500 Air Products & Chemicals, Inc. ............................................................ 41,469
</TABLE>
The accompanying notes are an integral part of the financial statements
92
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
900 Nalco Chemical Co. ........................................................................ 36,056
-----------
77,525
-----------
Technology 12.2%
Computer Software 3.2%
400 Adobe Systems Inc. ........................................................................ 20,150
300 Autodesk, Inc. ............................................................................ 13,613
900 Bay Networks Inc.* ........................................................................ 34,763
1,800 Computer Associates International, Inc. ................................................... 129,263
6,300 Microsoft Corp.* .......................................................................... 833,569
4,500 Oracle Systems Corp. ...................................................................... 163,969
200 Parametric Technology Corp.* .............................................................. 8,825
-----------
1,204,152
-----------
Diverse Electronic Products 0.9%
1,300 Applied Materials, Inc. ................................................................... 123,825
200 Harris Corp. .............................................................................. 9,150
3,100 Motorola Inc. ............................................................................. 222,813
-----------
355,788
-----------
EDP Peripherals 0.2%
1,200 EMC Corp. ................................................................................. 70,050
200 Seagate Technology, Inc.* ................................................................. 7,225
-----------
77,275
-----------
Electronic Components / Distributors 0.2%
1,600 AMP Inc. .................................................................................. 85,700
-----------
Electronic Data Processing 3.9%
100 Apple Computer, Inc.* ..................................................................... 2,169
100 Ceridian Corp.* ........................................................................... 3,700
4,015 Compaq Computer Corp. ..................................................................... 300,121
100 Data General Corp.* ....................................................................... 2,663
2,000 Dell Computer Corp. ....................................................................... 193,750
400 Digital Equipment Corp.* .................................................................. 17,325
5,000 Hewlett-Packard Co. ....................................................................... 347,813
5,100 International Business Machines Corp. ..................................................... 540,281
300 Silicon Graphics Inc.* .................................................................... 7,875
1,300 Sun Microsystems, Inc.* ................................................................... 60,856
100 Unisys Corp.* ............................................................................. 1,531
-----------
1,478,084
-----------
Military Electronics 0.2%
100 Computer Sciences Corp.* .................................................................. 7,075
1,400 EG&G, Inc. ................................................................................ 28,963
100 General Dynamics Corp. .................................................................... 8,713
300 Raytheon Co. .............................................................................. 17,738
-----------
62,489
-----------
Office / Plant Automation 0.9%
1,800 3Com Corp.* ............................................................................... 92,250
400 Cabletron Systems Inc.* ................................................................... 12,800
3,300 Cisco Systems, Inc.* ...................................................................... 241,106
</TABLE>
The accompanying notes are an integral part of the financial statements
93
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
300 Novell Inc.* .............................................................................. 2,691
-----------
348,847
-----------
Precision Instruments 0.0%
200 Perkin-Elmer Corp. ........................................................................ 14,613
-----------
Semiconductors 2.7%
300 Advanced Micro Devices Inc.* .............................................................. 9,769
25 General Semiconductor, Inc. ............................................................... 322
8,400 Intel Corp. ............................................................................... 775,425
800 LSI Logic Corp.* .......................................................................... 25,700
1,200 Micron Technology Inc. .................................................................... 41,625
600 National Semiconductor Corp.* ............................................................. 24,600
1,200 Texas Instruments Inc. .................................................................... 162,150
-----------
1,039,591
-----------
Energy 8.9%
Engineering 0.0%
100 Fluor Corp. ............................................................................... 5,363
100 Foster Wheeler Corp. ...................................................................... 4,394
-----------
9,757
-----------
Oil & Gas Production 0.4%
100 Burlington Resources, Inc. ................................................................ 5,131
100 Coastal Corp. ............................................................................. 6,125
149 Enserch Exploration Partners Ltd.* ........................................................ 1,341
200 Kerr-McGee Corp. .......................................................................... 13,763
44 Monterey Resources, Inc. .................................................................. 924
4,500 Occidental Petroleum Corp. ................................................................ 116,719
100 Oryx Energy Co. ........................................................................... 2,544
100 Santa Fe Energy Resources, Inc. ........................................................... 1,250
100 Union Pacific Resources Group ............................................................. 2,619
-----------
150,416
-----------
Oil Companies 7.4%
100 Amerada Hess Corp. ........................................................................ 6,169
3,100 Amoco Corp. ............................................................................... 298,763
100 Ashland Inc. .............................................................................. 5,438
3,200 Atlantic Richfield Co. .................................................................... 273,400
3,300 Chevron Corp. ............................................................................. 274,519
12,900 Exxon Corp. ............................................................................... 826,406
3,600 Mobil Corp. ............................................................................... 266,400
1,400 Phillips Petroleum Co. .................................................................... 72,275
10,400 Royal Dutch Petroleum Co. (New York shares) ............................................... 577,200
400 Sun Co., Inc. ............................................................................. 17,525
3,200 Texaco Inc. ............................................................................... 196,600
400 USX Marathon Group ........................................................................ 14,875
100 Unocal Corp. .............................................................................. 4,325
-----------
2,833,895
-----------
Oil / Gas Transmission 0.1%
200 Enron Corp. ............................................................................... 7,700
100 Sonat, Inc. ............................................................................... 5,088
</TABLE>
The accompanying notes are an integral part of the financial statements
94
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
100 Williams Cos., Inc. ....................................................................... 4,681
-----------
17,469
-----------
Oilfield Services / Equipment 1.0%
800 Baker Hughes, Inc. ........................................................................ 35,000
1,600 Halliburton Co. ........................................................................... 83,200
300 Rowan Companies, Inc. ..................................................................... 10,688
2,800 Schlumberger Ltd. ......................................................................... 235,725
-----------
364,613
-----------
Metals & Minerals 0.9%
Precious Metals 0.3%
100 Barrick Gold Corp. ........................................................................ 2,475
100 Battle Mountain Gold Co. "A" .............................................................. 719
100 Echo Bay Mines, Ltd. ...................................................................... 569
3,100 Freeport McMoRan Copper & Gold, Inc. "B" .................................................. 89,319
100 Homestake Mining Co. ...................................................................... 1,531
143 Newmont Mining Corp. ...................................................................... 6,426
100 Placer Dome Inc. .......................................................................... 1,913
-----------
102,952
-----------
Steel & Metals 0.6%
100 Alcan Aluminium Ltd. ...................................................................... 3,475
1,500 Allegheny Teledyne Inc. ................................................................... 42,938
400 Aluminum Co. of America ................................................................... 32,800
100 Asarco, Inc. .............................................................................. 3,200
100 Bethlehem Steel Corp. ..................................................................... 1,031
900 Cyprus Amax Minerals Co. .................................................................. 21,600
100 Inco Ltd. ................................................................................. 2,506
100 Nucor Corp. ............................................................................... 5,269
200 Phelps Dodge Corp. ........................................................................ 15,525
800 Reynolds Metals Co. ....................................................................... 56,650
600 USX-US Steel Group, Inc. .................................................................. 20,850
1,000 Worthington Industries, Inc. .............................................................. 20,250
-----------
226,094
-----------
Construction 0.7%
Building Products 0.2%
400 Armstrong World Industries, Inc. .......................................................... 26,825
1,000 Masco Corp. ............................................................................... 45,813
-----------
72,638
-----------
Forest Products 0.5%
400 Georgia Pacific Corp. ..................................................................... 41,750
100 Louisiana-Pacific Corp. ................................................................... 2,500
800 Potlatch Corp. ............................................................................ 40,250
1,500 Weyerhaeuser Co. .......................................................................... 89,063
-----------
173,563
-----------
Homebuilding 0.0%
200 Kaufman & Broad Home Corp. ................................................................ 4,338
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
95
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Transportation 0.9%
Air Freight 0.0%
100 Federal Express Corp.* .................................................................... 8,000
-----------
Airlines 0.1%
100 AMR Corp.* ................................................................................ 11,069
100 Delta Air Lines, Inc. ..................................................................... 9,419
100 Southwest Airlines Co. .................................................................... 3,194
400 US Airways Group, Inc.* ................................................................... 16,550
-----------
40,232
-----------
Railroads 0.8%
200 Burlington Northern Santa Fe .............................................................. 19,325
1,000 CSX Corp. ................................................................................. 58,500
900 Norfolk Southern Corp. .................................................................... 92,925
1,900 Union Pacific Corp. ....................................................................... 118,988
-----------
289,738
-----------
Trucking 0.0%
200 Caliber System, Inc. ...................................................................... 10,850
-----------
Miscellaneous 0.0%
400 Laidlaw, Inc. ............................................................................. 5,990
-----------
Utilities 4.9%
Electric Utilities 4.4%
300 American Electric Power Co. ............................................................... 13,650
100 Baltimore Gas & Electric Co. .............................................................. 2,775
100 CINergy Corp. ............................................................................. 3,344
100 Carolina Power & Light Co. ................................................................ 3,594
12,400 Central & South West Corp. ................................................................ 275,125
3,700 Consolidated Edison Co. of New York, Inc. ................................................. 125,800
3,400 DTE Energy Co. ............................................................................ 103,488
2,700 Dominion Resources Inc. ................................................................... 102,263
204 Duke Energy Corp. ......................................................................... 10,085
100 Edison International ...................................................................... 2,525
1,400 Entergy Corp. ............................................................................. 36,488
100 FPL Group, Inc. ........................................................................... 5,125
100 GPU, Inc. ................................................................................. 3,588
6,012 Houston Industries Inc. ................................................................... 130,761
100 Niagara Mohawk Power Corp. ................................................................ 956
200 Northern States Power Co. ................................................................. 9,950
1,100 Ohio Edison Co. ........................................................................... 25,781
9,500 PP&L Resources, Inc. ...................................................................... 207,813
100 PacifiCorp ................................................................................ 2,238
100 PG & E Corporation ........................................................................ 2,319
11,300 Peco Energy Co. ........................................................................... 264,844
9,000 Public Service Enterprise Group ........................................................... 231,750
2,000 Southern Company .......................................................................... 45,125
222 Texas Utilities Co., Inc. ................................................................. 7,992
1,600 Unicom Corp. .............................................................................. 37,400
700 Union Electric Co. ........................................................................ 26,906
-----------
1,681,685
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
96
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Natural Gas Distribution 0.5%
200 Consolidated Natural Gas Corp. ............................................................ 11,638
1,300 Eastern Enterprises ....................................................................... 48,506
100 NICOR, Inc. ............................................................................... 3,750
100 ONEOK Inc. ................................................................................ 3,263
1,900 Pacific Enterprises ....................................................................... 64,363
1,600 Peoples Energy Corp. ...................................................................... 60,300
191,820
-----------
Total Common Stocks (Cost $31,668,935) .................................................... 35,405,259
-----------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $32,912,926) (a) 96.2 36,649,254
Other Assets and Liabilities, Net 3.8 1,435,819
------ -----------
Net Assets 100.0 38,085,073
====== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $32,933,269 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $ 3,825,138
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (109,153)
-----------
Net unrealized appreciation ................................. $ 3,715,985
============
(b) At September 30, 1997, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.
At September 30, 1997, open futures contracts purchased were as follows:
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
---------- --------- -------------- ---------
S&P 500 Index ... December, 1997 5 2,377,911 2,387,250
---------
Total net unrealized appreciation on open futures contracts
purchased ................................................... 9,339
=========
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $6,641,537 and $4,263,626, respectively.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of operations)
through September 30, 1997, aggregated $33,666,582 and $2,094,504,
respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
97
<PAGE>
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 4.7%
- -------------------------------------------------------------------------------------------------------------------------------
57,322,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125%
to be repurchased at $57,331,753 on 10/01/97, collateralized by a $44,975,000
U.S. Treasury Bond, 8.75%, 5/15/20 (Cost $57,322,000) .................................. 57,322,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 95.2%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------
Consumer Discretionary 9.0%
Apparel & Shoes 1.2%
270,000 Nike, Inc. "B" ............................................................................ 14,310,000
-----------
Department & Chain Stores 5.7%
320,000 Gap Inc. .................................................................................. 16,020,000
540,000 Home Depot, Inc. .......................................................................... 28,147,500
360,000 Costco Companies, Inc. .................................................................... 13,545,000
500,000 Walgreen Co. .............................................................................. 12,812,500
-----------
70,525,000
-----------
Hotels & Casinos 1.0%
400,000 Mirage Resorts Inc.* ...................................................................... 12,050,000
-----------
Specialty Retail 1.1%
320,000 Tiffany & Co. ............................................................................. 13,600,000
-----------
Consumer Staples 3.6%
Alcohol 1.2%
330,000 Anheuser-Busch Companies, Inc. ............................................................ 14,891,250
-----------
Food & Beverage 1.1%
300,000 H.J. Heinz Co. ............................................................................ 13,856,250
-----------
Package Goods / Cosmetics 1.3%
230,000 Procter & Gamble Co. ...................................................................... 15,884,375
-----------
Health 8.8%
Medical Supply & Specialty 1.2%
308,000 Becton, Dickinson & Co. ................................................................... 14,745,500
-----------
Pharmaceuticals 7.6%
140,000 American Home Products Corp. .............................................................. 10,220,000
180,000 Johnson & Johnson ......................................................................... 10,372,500
100,000 Merck & Co. Inc. .......................................................................... 9,993,750
197,100 Novartis AG (ADR) ......................................................................... 15,176,700
278,000 Pfizer, Inc. .............................................................................. 16,697,375
200,000 Schering-Plough Corp. ..................................................................... 10,300,000
150,000 Warner-Lambert Co. ........................................................................ 20,240,625
-----------
93,000,950
-----------
Financial 20.1%
Banks 4.5%
350,600 BankAmerica Corp. ......................................................................... 25,703,363
155,000 Citicorp .................................................................................. 20,760,313
80,000 J.P. Morgan & Co., Inc. ................................................................... 9,090,000
-----------
55,553,676
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
98
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Insurance 8.3%
270,000 American International Group, Inc. ........................................................ 27,860,625
375,000 Conseco Inc. .............................................................................. 18,304,688
520,000 EXEL, Ltd. (ADR) .......................................................................... 30,972,500
331,100 Hartford Life, Inc. "A" ................................................................... 12,726,656
96,000 MBIA Inc. ................................................................................. 12,042,000
-----------
101,906,469
-----------
Consumer Finance 1.5%
301,700 Associates First Capital Corp. ............................................................ 18,780,825
-----------
Other Financial Companies 5.8%
409,900 American Express Credit Corp. ............................................................. 33,560,563
410,000 Federal National Mortgage Association ..................................................... 19,270,000
270,000 Travelers Group, Inc. ..................................................................... 18,427,500
-----------
71,258,063
-----------
Media 2.2%
Advertising 1.2%
200,000 Omnicom Group, Inc. ....................................................................... 14,550,000
-----------
Cable Television 1.0%
420,000 Tele-Comm Liberty Media Group "A"* ........................................................ 12,573,750
-----------
Service Industries 4.6%
Investment 3.7%
294,500 Franklin Resources Inc. ................................................................... 27,425,313
240,000 Merrill Lynch & Co., Inc. ................................................................. 17,805,000
-----------
45,230,313
-----------
Miscellaneous Commercial Services 0.9%
291,000 Manpower, Inc. ............................................................................ 11,494,500
-----------
Durables 3.7%
Aerospace 2.7%
235,000 Rockwell International Corp. (New) ........................................................ 14,790,313
230,000 United Technologies Corp. ................................................................. 18,630,000
-----------
33,420,313
-----------
Telecommunications Equipment 1.0%
365,000 Ascend Communications, Inc.* .............................................................. 11,816,875
-----------
Manufacturing 11.9%
Chemicals 3.0%
280,000 E.I. du Pont de Nemours & Co. ............................................................. 17,237,500
195,700 Praxair Inc. .............................................................................. 10,017,394
290,000 Sigma-Aldrich Corp. ....................................................................... 9,551,875
-----------
36,806,769
-----------
Diversified Manufacturing 4.5%
325,000 Dresser Industries Inc. ................................................................... 13,975,000
190,000 General Electric Co. ...................................................................... 12,931,875
240,000 TRW Inc. .................................................................................. 13,170,000
240,000 Textron, Inc. ............................................................................. 15,600,000
-----------
55,676,875
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
99
<PAGE>
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Electrical Products 1.6%
75,000 ABB AB (ADR) .............................................................................. 10,612,500
166,000 Emerson Electric Co. ...................................................................... 9,565,750
-----------
20,178,250
-----------
Machinery / Components / Controls 2.8%
300,000 Ingersoll-Rand Co. ........................................................................ 12,918,750
475,500 Parker-Hannifin Group ..................................................................... 21,397,500
-----------
34,316,250
-----------
Technology 16.1%
Diverse Electronic Products 6.0%
270,000 Applied Materials, Inc.* .................................................................. 25,717,500
360,000 General Motors Corp. "H" .................................................................. 23,805,000
170,000 KLA Tencor Corp.* ......................................................................... 11,485,625
240,000 Teradyne Inc.* ............................................................................ 12,915,000
-----------
73,923,125
-----------
Electronic Data Processing 7.6%
480,000 Compaq Computer Corp.* .................................................................... 35,880,000
265,000 Hewlett-Packard Co. ....................................................................... 18,434,063
160,000 International Business Machines Corp. ..................................................... 16,950,000
460,000 Sun Microsystems, Inc.* ................................................................... 21,533,750
-----------
92,797,813
-----------
Semiconductors 2.5%
330,000 Intel Corp. ............................................................................... 30,463,125
-----------
Energy 13.4%
Oil Companies 8.5%
125,000 Amoco Corp. ............................................................................... 12,046,875
200,000 Atlantic Richfield Co. .................................................................... 17,087,500
350,000 Exxon Corp. ............................................................................... 22,421,875
180,000 Mobil Corp. ............................................................................... 13,320,000
254,800 Repsol SA (ADR) ........................................................................... 11,051,950
520,000 Royal Dutch Petroleum Co. (New York shares) ............................................... 28,860,000
-----------
104,788,200
-----------
Oil / Gas Transmission 1.2%
220,000 Enron Corp. ............................................................................... 8,470,000
130,000 Williams Cos., Inc. ....................................................................... 6,085,625
-----------
14,555,625
-----------
Oilfield Services / Equipment 3.7%
240,000 Diamond Offshore Drilling, Inc. ........................................................... 13,245,000
280,000 Santa Fe International Corp. .............................................................. 13,020,000
225,000 Schlumberger Ltd. ......................................................................... 18,942,188
-----------
45,207,188
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
100
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Transportation 1.3%
Airlines 0.9%
100,000 AMR Corp.* ................................................................................ 11,068,750
--------------
Railroads 0.4%
146,900 Wisconsin Central Transportation Co.* ..................................................... 4,673,256
--------------
Utilities 0.5%
Electric Utilities
350,000 Eastern Utilities Association ............................................................. 6,978,121
--------------
Total Common Stocks (Cost $717,371,809) ................................................... 1,170,881,456
--------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $774,693,809) (a) ....................... 99.9 1,228,203,456
Other Assets and Liabilities, Net ........................................ 0.1 176,498
------ --------------
Net Assets ............................................................... 100.0 1,228,379,954
====== ==============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $774,693,809 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $464,300,492
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (10,790,845)
------------
Net unrealized appreciation ................................. $453,509,647
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$376,002,590 and $394,567,870, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
101
<PAGE>
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 5.8%
- -------------------------------------------------------------------------------------------------------------------------------
2,911,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at
6.02% to be repurchased at $2,911,487 on 10/01/97, collateralized by a $2,753,000
U.S. Treasury Note, 8.5%, 2/15/00 (Cost $2,911,000) ............................. 2,911,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 96.5%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -------------
<C> <S> <C>
Consumer Discretionary 7.2%
Apparel & Shoes 0.6%
17,600 Brown Group, Inc. .................................................................. 320,100
-------------
Home Furnishings 5.5%
6,900 Bush Industries, Inc. "A" .......................................................... 191,044
7,200 Ethan Allen Interiors Inc. ......................................................... 223,200
11,100 Interface, Inc. .................................................................... 323,288
11,800 La-Z-Boy Inc. ...................................................................... 436,600
17,900 Mikasa, Inc. ....................................................................... 248,363
15,800 Oneida Ltd. ........................................................................ 560,900
7,500 Thomas Industries, Inc. ............................................................ 225,000
14,200 Toro Co. ........................................................................... 562,675
-------------
2,771,070
-------------
Hotels & Casinos 0.4%
8,100 Prime Hospitality Corp.* ........................................................... 182,756
Specialty Retail 0.7% -------------
2,600 Eagle Hardware & Garden, Inc.* ..................................................... 51,188
2,300 Getty Petroleum Marketing Co.* ..................................................... 12,506
2,400 Inacom Corp.* ...................................................................... 89,250
7,400 Zale Corp.* ........................................................................ 191,938
-------------
344,882
-------------
Consumer Staples 4.4%
Consumer Electronic & Photographic Products 0.2%
2,700 Harman International Industries, Inc. .............................................. 135,169
Food & Beverage 2.1% -------------
11,400 Michael Foods, Inc. ................................................................ 292,125
19,700 Nash-Finch Co. ..................................................................... 467,875
18,000 Ruddick Corp. ...................................................................... 290,250
-------------
1,050,250
-------------
Textiles 2.1%
22,950 Guilford Mills, Inc. ............................................................... 596,700
12,800 Kellwood Company ................................................................... 453,600
-------------
1,050,300
-------------
Health 2.3%
Health Industry Services 0.3%
8,900 Rotech Medical Corp.* .............................................................. 171,325
-------------
Medical Supply & Specialty 2.0%
19,000 Bindley Western Industries, Inc. ................................................... 530,812
</TABLE>
The accompanying notes are an integral part of the financial statements
102
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,000 West Co., Inc. ..................................................................... 462,000
-------------
992,812
-------------
Financial 17.1%
Banks 9.3%
11,000 ALBANK Financial Corp. ............................................................. 464,750
10,200 Banknorth Group, Inc. .............................................................. 557,175
15,100 Chittenden Corp. ................................................................... 581,350
200 Colonial BancGroup, Inc. ........................................................... 5,750
4,100 Commerce Bancorp, Inc. ............................................................. 159,387
900 Community First Bankshares, Inc. ................................................... 43,650
8,000 FirstBank Puerto Rico .............................................................. 260,000
13,600 Heritage Financial Services, Inc. .................................................. 273,700
2,305 Provident Bankshares Corp. ......................................................... 131,385
4,500 RCSB Financial, Inc. ............................................................... 245,250
12,600 Riggs National Corp. ............................................................... 296,888
12,900 Susquehanna Bancshares, Inc. ....................................................... 396,675
6,300 US Bancorp, Inc. ................................................................... 406,350
16,900 UST Corporation .................................................................... 430,950
7,500 Vermont Financial Services Corp. ................................................... 405,000
-------------
4,658,260
-------------
Insurance 6.8%
800 Allied Group, Inc. ................................................................. 40,650
9,200 American Annuity Group, Inc. ....................................................... 197,800
14,700 American Heritage Life Investment Corp. ............................................ 588,000
600 First American Financial Co. ....................................................... 36,000
16,400 Guaranty National Corp. ............................................................ 556,575
12,600 Harleysville Group, Inc. ........................................................... 529,200
32,300 Hilb, Rogal & Hamilton Co. ......................................................... 593,513
3,100 Life Re Corp. ...................................................................... 163,525
2,300 MMI Companies, Inc. ................................................................ 60,663
7,200 Nymagic, Inc. ...................................................................... 187,200
9,400 Selective Insurance Group, Inc. .................................................... 484,100
-------------
3,437,226
-------------
Consumer Finance 0.3%
9,100 Aames Financial Corp. .............................................................. 147,306
-------------
Other Financial Companies 0.7%
30,300 Cash America International, Inc. ................................................... 340,875
-------------
Media 1.5%
Advertising
1,110 Grey Advertising, Inc. ............................................................. 381,840
14,700 True North Communications, Inc. .................................................... 364,744
-------------
746,584
-------------
Service Industries 7.3%
Environmental Services 1.7%
21,700 Dames & Moore, Inc. ................................................................ 284,812
8,300 Mine Safety Appliance Co. .......................................................... 581,000
-------------
865,812
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
103
<PAGE>
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Investment 2.4%
7,100 Interra Financial, Inc. ............................................................ 426,444
8,000 Jefferies Group, Inc. .............................................................. 584,000
23,400 Phoenix Duff & Phelps Corp. ........................................................ 181,350
-------------
1,191,794
-------------
Miscellaneous Commercial Services 1.6%
16,200 ABM Industries, Inc. ............................................................... 428,287
15,600 McGrath Rentcorp ................................................................... 356,850
-------------
785,137
-------------
Printing / Publishing 1.6%
9,200 Bowne & Co., Inc. .................................................................. 323,150
10,900 Merrill Corp. ...................................................................... 501,400
-------------
824,550
-------------
Durables 5.3%
Aerospace 1.6%
7,100 AAR Corp. .......................................................................... 236,962
31,400 Kaman Corp. "A" .................................................................... 576,975
-------------
813,937
-------------
Automobiles 3.1%
4,000 A.O. Smith Corp. ................................................................... 158,500
5,500 Coachmen Industries, Inc. .......................................................... 104,500
20,400 Excel Industries Inc. .............................................................. 406,725
10,300 Exide Corp. ........................................................................ 233,681
26,500 Intermet Corp. ..................................................................... 463,750
15,700 Simpson Industries, Inc. ........................................................... 181,531
-------------
1,548,687
-------------
Construction / Agricultural Equipment 0.6%
8,400 The Manitowoc Company, Inc. ........................................................ 299,775
-------------
Manufacturing 21.1%
Chemicals 1.8%
900 Mississippi Chemical Corp. ......................................................... 17,550
7,600 NCH Corp. .......................................................................... 539,600
13,200 Stepan Co. ......................................................................... 352,275
-------------
909,425
-------------
Containers & Paper 0.5%
2,000 Chesapeake Corp. ................................................................... 72,500
2,100 Clarcor, Inc. ...................................................................... 60,112
3,550 Mosinee Paper Corp. ................................................................ 120,256
-------------
252,868
-------------
Diversified Manufacturing 2.9%
23,500 Cascade Corp. ...................................................................... 464,125
10,200 Robbins & Myers, Inc. .............................................................. 392,700
9,000 Scotsman Industries, Inc. .......................................................... 231,750
4,400 Tredegar Industries, Inc. .......................................................... 309,100
3,100 Valmont Industries ................................................................. 66,069
-------------
1,463,744
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
104
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Electrical Products 0.8%
8,300 C&D Technologies, Inc. ............................................................. 380,762
-------------
Hand Tools 1.0%
13,300 L.S. Starrett Corp. ................................................................ 488,775
-------------
Industrial Specialty 6.6%
14,000 Albany International Corp. "A" ..................................................... 351,750
9,600 Apogee Enterprises, Inc. ........................................................... 235,200
5,500 Applied Power, Inc. "A" ............................................................ 346,156
20,300 Barnes Group, Inc. ................................................................. 574,744
3,500 Electro Scientific Industries, Inc.* ............................................... 213,500
9,200 FSI International, Inc.* ........................................................... 192,050
5,300 Flowserve Corp. .................................................................... 158,337
17,700 Lawson Products, Inc. .............................................................. 522,150
25,300 Spartech Corp. ..................................................................... 379,500
11,800 W.H. Brady Co. "A" ................................................................. 368,750
-------------
3,342,137
-------------
Machinery / Components / Controls 4.3%
22,600 Amcast Industrial Corp. ............................................................ 553,700
14,100 Columbus McKinnon Corp. ............................................................ 370,125
6,200 DT Industries, Inc. ................................................................ 204,600
15,700 Graco, Inc. ........................................................................ 561,275
12,200 Tennant Company .................................................................... 451,400
-------------
2,141,100
-------------
Office Equipment / Supplies 0.6%
13,300 Hunt Manufacturing Co. ............................................................. 304,238
-------------
Wholesale Distributors 2.6%
13,900 A.M. Castle & Co. .................................................................. 361,400
18,400 Applied Industrial Technology, Inc. ................................................ 633,650
10,250 Hughes Supply, Inc. ................................................................ 309,422
-------------
1,304,472
-------------
Technology 10.2%
Computer Software 0.7%
10,000 MTS Systems Corp. .................................................................. 365,000
-------------
Diverse Electronic Products 1.4%
5,500 Cohu, Inc. ......................................................................... 295,625
10,700 Cubic Corp. ........................................................................ 403,925
-------------
699,550
-------------
Edp Peripherals 1.7%
5,400 Black Box Corp.* ................................................................... 236,250
25,100 Gerber Scientific, Inc. ............................................................ 607,106
-------------
843,356
-------------
Electronic Components / Distributors 4.0%
5,500 CTS Corp. .......................................................................... 522,500
8,700 Hutchinson Technology, Inc.* ....................................................... 291,994
6,962 MicroAge Inc.* ..................................................................... 201,898
15,600 Park Electrochemical Corp. ......................................................... 452,400
</TABLE>
The accompanying notes are an integral part of the financial statements
105
<PAGE>
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,200 Technitrol, Inc. ................................................................... 565,338
-------------
2,034,130
-------------
Military Electronics 0.7%
10,500 Watkins-Johnson Co. ................................................................ 351,750
-------------
Precision Instruments 1.0%
15,900 Innovex, Inc. ...................................................................... 512,775
-------------
Semiconductors 0.7%
1,800 Burr-Brown Corp.* .................................................................. 60,075
16,900 Chips & Technologies, Inc.* ........................................................ 270,400
-------------
330,475
-------------
Energy 1.7%
Oil & Gas Production 1.2%
12,700 Lomak Petroleum, Inc. .............................................................. 245,269
19,700 Plains Resources, Inc.* ............................................................ 354,600
-------------
599,869
-------------
Oil Companies 0.3%
5,500 Holly Corp. ........................................................................ 143,000
-------------
Oilfield Services / Equipment 0.2%
5,600 Getty Realty Corp. ................................................................. 98,350
-------------
Metals & Minerals 5.3%
Steel & Metals
21,400 Brush Wellman, Inc. ................................................................ 549,712
10,400 Chaparral Steel Co. ................................................................ 159,250
13,200 Cleveland-Cliffs, Inc. ............................................................. 575,850
6,700 Commercial Metals Co. .............................................................. 213,981
14,400 Oregon Metallurgical Corp. ......................................................... 360,900
15,100 Quanex Corp. ....................................................................... 529,444
10,400 RMI Titanium Co.* .................................................................. 260,000
-------------
2,649,137
-------------
Construction 6.5%
Building Materials 4.5%
8,100 Ameron International Corp. ......................................................... 528,525
65,800 Fedders Corp. ...................................................................... 394,800
6,400 Florida Rock Industries, Inc. ...................................................... 380,800
11,000 Lone Star Industries, Inc. ......................................................... 594,000
4,400 Medusa Corp. ....................................................................... 209,550
3,300 Southdown, Inc. .................................................................... 180,263
-------------
2,287,938
-------------
Building Products 0.8%
11,000 Zurn Industries, Inc. .............................................................. 380,875
-------------
Homebuilding 0.2%
2,800 Skyline Corp. ...................................................................... 83,650
-------------
Miscellaneous 1.0%
22,400 Granite Construction, Inc. ......................................................... 518,000
-------------
Transportation 1.1%
Airlines 0.6%
9,600 Alaska Air Group Inc.* ............................................................. 315,600
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
106
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Trucking 0.5%
8,000 USFreightways Corp. ................................................................ 269,000
-------------
Utilities 5.5%
Electric Utilities 2.1%
10,400 Black Hills Corp. .................................................................. 304,850
21,100 Northwestern Public Service Co. .................................................... 389,031
19,700 Public Service Co. of New Mexico ................................................... 380,456
-------------
1,074,337
-------------
Natural Gas Distribution 3.0%
7,700 Eastern Enterprises ................................................................ 287,306
12,400 Energen Corp. ...................................................................... 440,975
21,500 Laclede Gas Co. .................................................................... 524,063
7,100 Northwest Natural Gas Co. .......................................................... 182,825
2,400 ONEOK Inc. ......................................................................... 78,300
-------------
1,513,469
-------------
Water Supply 0.4%
3,600 California Water Service Co. ....................................................... 177,975
-------------
Total Common Stocks (Cost $40,880,238) ............................................. 48,514,364
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $43,791,238) (a) ....................... 102.3 51,425,364
Other Assets and Liabilities, Net ....................................... (2.3) (1,153,891)
------ -------------
Net Assets .............................................................. 100.0 50,271,473
====== =============
</TABLE>
* Non-income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $43,791,238 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................ $ 7,693,178
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value .......................................... (59,052)
-------------
Net unrealized appreciation ......................... $ 7,634,126
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of
operations) through September 30, 1997, aggregated $41,389,500 and
$752,516, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
107
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) (c) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 11.1%
- -------------------------------------------------------------------------------------------------------------------------------
UNITED STATES
16,489,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02% to be
repurchased at $16,491,757 on 10/01/97, collateralized by a $11,868,000 U.S. Treasury
Bond 9.875%, 11/15/15 (Cost $16,489,000) ........................................ 16,489,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
BONDS 5.8%
- -------------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 2.0%
GBP 1,627,000 United Kingdom Treasury Bond, 8.5%, 7/16/07 ........................................ 2,995,714
-------------
UNITED STATES 3.8%
5,600,000 U.S. Treasury Bond, 6.375%, 8/15/27 ................................................ 5,575,472
-------------
Total Bonds (Cost $8,261,551) ...................................................... 8,571,186
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 0.0%
- -------------------------------------------------------------------------------------------------------------------------------
GHANA
13,000 Ashanti Capital Corp., 5.5%, 3/15/03 (Cost $13,000) ................................ 10,465
-------------
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK 0.3%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- -------------
KOREA
7,919 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (b)
(Cost $294,732) ................................................................. 324,463
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 85.0%
- -------------------------------------------------------------------------------------------------------------------------------
ARGENTINA 0.9%
34,800 YPF S.A. "D" (ADR) (Petroleum company) ............................................. 1,283,250
-------------
AUSTRALIA 2.3%
68,600 Broken Hill Proprietary Co. Ltd. (Petroleum, minerals and steel) ................... 800,235
493,058 Foster's Brewing Group Ltd. (Leading brewery) ...................................... 1,040,875
166,200 Woodside Petroleum Ltd. (Major oil and gas producer) ............................... 1,588,145
-------------
3,429,255
-------------
AUSTRIA 0.4%
14,100 Flughafen Wien AG (Operator of terminals and facilities at Vienna
International Airport) .......................................................... 582,950
-------------
BERMUDA 1.4%
30,520 EXEL Ltd. (ADR) (Provider of liability insurance) .................................. 1,817,848
3,450 Mid Ocean Limited (Property and casualty insurance company) ........................ 218,644
-------------
2,036,492
-------------
BRAZIL 3.1%
38,650 Aracruz Celulose S.A. (ADR) (Producer of eucalyptus kraft pulp) .................... 794,741
1,410,000 Companhia Cervejaria Brahma (pfd.) (Leading beer producer and distributor) ......... 1,087,536
55,200 Companhia Vale do Rio Doce (pfd.) (Diverse mining and industrial complex) .......... 1,345,297
</TABLE>
The accompanying notes are an integral part of the financial statements
108
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
25,800 Unibanco Uniao de Bancos Brasileiros SA (ADR) (Major bank) ......................... 944,925
42,140 Usinas Siderurgicas de Minas Gerais S/A (pfd.) (Non-coated flat products and
electrolyte galvanized products) ................................................ 460,422
-------------
4,632,921
-------------
CANADA 1.3%
16,200 Canadian National Railway Co. (Operator of one of Canada's two
principal railroads) ............................................................ 842,053
35,850 Canadian Pacific Ltd. (Ord.) (Transportation and natural resource conglomerate) .... 1,062,040
-------------
1,904,093
-------------
FRANCE 4.2%
17,830 AXA SA (Insurance group providing insurance, finance and real estate services) ..... 1,195,979
41,897 Assurances Generales de France (Health, life, fire, accident and special risk
insurance) ...................................................................... 1,659,357
29,607 Michelin "B" (Leading tire manufacturer) ........................................... 1,681,564
25,766 Schneider SA (Manufacturer of electronic components and automated
manufacturing systems) .......................................................... 1,626,252
-------------
6,163,152
-------------
GERMANY 16.8%
6,206 Allianz AG (Multi-line insurance company) .......................................... 1,497,272
40,107 BASF AG (Leading international chemical producer) .................................. 1,448,160
43,320 Bayer AG (Leading chemical producer) ............................................... 1,724,758
38,346 Bayerische Vereinsbank AG (Commercial bank) ........................................ 2,230,945
40,686 Commerzbank AG (Worldwide multi-service bank) ...................................... 1,466,764
17,300 Daimler-Benz AG (Automobile and truck manufacturer) ................................ 1,427,511
23,505 Deutsche Telekom AG (Telecommunication services) ................................... 454,948
20,566 Deutsche Telekom AG (ADR) .......................................................... 392,039
56,300 Hoechst AG (Chemical producer) ..................................................... 2,498,045
4,286 Mannesmann AG (Bearer) (Diversified construction and technology company) ........... 2,042,396
5,250 Munich Reinsurance AG (Insurance company) .......................................... 1,173,633
1,730 Munich Reinsurance AG (Registered) ................................................. 582,558
56,882 RWE AG (pfd.) (Producer and marketer of petroleum and chemical products) ........... 2,313,009
4,455 SAP AG (pfd.) (Computer software manufacturer) ..................................... 1,190,051
8,860 Schering AG (Pharmaceutical and chemical producer) ................................. 929,900
12,350 Siemens AG (Leading electrical engineering and electronics company) ................ 834,190
30,723 VEBA AG (Electric utility, distributor of oil and chemicals) ....................... 1,795,269
2,060 VIAG AG (Provider of electrical power and natural gas services, aluminum
products, chemicals, ceramics and glass) ........................................ 921,955
-------------
24,923,403
-------------
GHANA 0.4%
52,418 Ashanti Goldfields Co., Ltd. (ADS) (Leading gold producer) ......................... 576,598
-------------
HONG KONG 1.5%
136,000 Hutchison Whampoa, Ltd. (Container terminal and real estate company) ............... 1,335,746
351,000 Kerry Properties, Ltd. (Real estate company) ....................................... 830,098
-------------
2,165,844
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
109
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
JAPAN 8.7%
56,000 Bridgestone Corp. (Leading automobile tire manufacturer) ........................... 1,345,095
46,000 Canon Inc. (Leading producer of visual image and information equipment) ............ 1,344,929
144,000 Daiwa Securities Co., Ltd. (Brokerage and other financial services) ................ 882,594
6,000 Jafco Co. Ltd. (Venture capital company) ........................................... 263,387
68,000 Matsushita Electric Industrial Co., Ltd. (Leading manufacturer of consumer
electronic products) ............................................................ 1,227,813
95,000 Minebea Co., Ltd. (Manufacturer of bearings, electronic equipment,
machinery parts) ................................................................ 1,054,375
3,400 Nichiei Co., Ltd. (Finance company for small- and medium-sized firms) .............. 323,850
105,000 Nomura Securities Co., Ltd. (Financial advisor, securities broker and underwriter) . 1,365,387
10,300 SMC Corp. (Leading maker of pneumatic equipment) ................................... 981,074
2,700 Shohkoh Fund & Co., Ltd. (Finance company for small- and medium-sized firms) ....... 753,634
10,000 Sony Corp. (Consumer electronic products manufacturer) ............................. 944,217
128,000 Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) .......... 266,103
101,000 Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and copper
mining company) ................................................................. 540,407
99,000 The Nichido Fire & Marine Insurance Co., Ltd. (Property and casualty insurance
company) ........................................................................ 647,782
83,000 Tokio Marine & Fire Insurance Co., Ltd. (Property and casualty insurance
company) ........................................................................ 996,811
-------------
12,937,458
-------------
KOREA 0.3%
6,190 Samsung Display Devices Company (Leading manufacturer of CRT and
picture tubes) .................................................................. 299,691
131 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (b) ................. 12,663
7,970 Yukong, Ltd. (Korea's leading oil refiner) ......................................... 148,077
-------------
460,431
-------------
NETHERLANDS 2.7%
19,599 AEGON Insurance Group NV (Insurance company) ....................................... 1,569,811
32,107 ING Groep NV (Insurance and financial services) .................................... 1,474,589
11,800 Philips Electronics NV (Leading manufacturer of electrical equipment) .............. 998,503
-------------
4,042,903
-------------
NEW ZEALAND 0.4%
108,700 Telecom Corp. of New Zealand (Telecommunication services) .......................... 551,538
-------------
SOUTH AFRICA 1.4%
24,465 Anglo American Platinum Corp. Ltd. (ADR) (Leading platinum producer) ............... 425,079
82,460 Sasol Ltd. (Coal mining and processing, crude oil exploration and refining,
petrochemical production) ....................................................... 1,136,800
16,577 South African Breweries (Brewery) .................................................. 481,073
-------------
2,042,952
-------------
SWEDEN 3.4%
54,600 AGA AB "B" (Free) (Producer and distributor of industrial and medical gases) ....... 877,918
54,626 Astra AB "A" (Free) (Pharmaceutical company) ....................................... 1,007,926
58,965 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ............................. 1,717,465
33,252 Skandia Foersaekrings AB (Free) (Financial conglomerate) ........................... 1,485,658
-------------
5,088,967
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
110
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND 10.3%
1,132 ABB AG (Manufacturer of electrical equipment) ...................................... 1,667,064
10,877 Ciba Specialty Chemical (Registered)* (Manufacturer of chemical products for
plastics, coatings, fibers and fabrics) ......................................... 1,050,683
1,865 Clariant AG (Registered) (Manufacturer of color chemicals) ......................... 1,500,206
14,558 Credit Suisse Group (Registered} (Provider of bank services, management services
and life insurance) ............................................................. 1,966,756
1,605 Holderbank Financiere Glaris AG (Bearer) (Cement producer) ......................... 1,522,791
1,257 Nestle SA (Registered) (Food manufacturer) ......................................... 1,750,899
727 Novartis AG (Bearer) (Pharmaceutical company) ...................................... 1,119,615
702 Novartis AG (Registered) ........................................................... 1,076,287
886 Swiss Reinsurance (Registered) (Life, accident and health insurance company) ....... 1,328,543
5,154 Zurich Group (Registered) (Insurance) .............................................. 2,243,026
-------------
15,225,870
-------------
UNITED KINGDOM 9.5%
95,476 BOC Group PLC (Producer of industrial gases) ....................................... 1,707,682
228,933 Carlton Communications PLC (Television post production products and services) ...... 1,894,736
276,300 General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) .............................. 1,737,798
224,915 Lonrho PLC (Widely diversified industrial holding company) ......................... 418,942
164,400 National Grid Group PLC* (Electric transmission system in England and Wales) ....... 752,698
38,900 Norwich Union PLC* (Multi-line insurance company) .................................. 210,786
77,602 PowerGen PLC (Electric utility) .................................................... 956,137
110,454 Rio Tinto PLC (Mining and finance company) ......................................... 1,763,479
57,941 Reuters Holdings PLC (International news agency) ................................... 686,795
228,900 Shell Transport & Trading PLC (Part owner of Royal Dutch Shell Co.) ................ 1,674,082
105,820 SmithKline Beecham PLC (Manufacturer of ethical drugs and healthcare products) ..... 1,032,469
41,800 Unilever PLC (Manufacturer of consumer goods, food and personal care
products) ....................................................................... 1,220,811
-------------
14,056,415
-------------
UNITED STATES 16.0%
25,800 Advanced Micro Devices Inc.* (Manufacturer of semiconductors and
integrated circuits) ............................................................ 840,113
22,000 Autoliv Inc. (Manufacturer of automobile safety bags) .............................. 935,000
5,600 Biogen Inc.* (Biotechnology research and development) .............................. 181,650
26,900 Boeing Co. (Manufacturer of jet airplanes) ......................................... 1,464,369
10,200 Boston Scientific Corp.* (Developer and producer of medical devices) ............... 562,913
16,750 Charles Schwab Corp. (Discount brokerage services.) ................................ 598,813
11,000 Chiron Corp. (Developer of therapeutic and diagnostic products) .................... 248,875
46,700 Electronic Data Systems Corp. (Provider of information technology services) ........ 1,657,850
29,410 Enron Corp. (Major natural gas pipeline system) .................................... 1,132,285
23,300 First Data Corp. (Credit-card processing services) ................................. 875,206
15,200 Guidant Corp. (Developer and manufacturer of products used in minimally
invasive surgery) ............................................................... 851,200
23,500 International Business Machines Corp. (Principal manufacturer and servicer of
business and computing machines) ................................................ 2,489,531
18,110 MBIA Inc. (Insurer of municipal bonds) ............................................. 2,271,673
31,100 National Semiconductor Corp. (Manufacturer of integrated circuits and transistors).. 1,275,100
</TABLE>
The accompanying notes are an integral part of the financial statements
111
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,200 Newmont Mining Corp. (International gold exploration and mining company) ........... 638,113
22,200 Parametric Technology Corp.* (Mechanical design software producer) ................. 979,575
19,500 Praxair Inc. (Producer of industrial gases and specialized coatings) ............... 998,156
28,300 Sabre Group Holdings Inc.* (Travel reservation system provider) .................... 1,013,494
32,400 Stillwater Mining Co.* (Exploration and development of mines in Montana
producing platinum, palladium and associated metals) ............................ 690,525
21,500 Tele-Communications International, Inc. "A"* (Telecommunication and broadband
cable television services) 352,063
17,200 Toys "R" Us Inc.* (Discount toy supermarts) ........................................ 610,600
29,800 UNUM Corp. (Provider of disability, health and life insurance and group pension
products) ....................................................................... 1,359,625
43,800 US Airways Group, Inc.* (Major airline) ............................................ 1,812,225
-------------
23,838,954
-------------
Total Common Stocks (Cost $103,984,653) ............................................ 125,943,446
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $129,042,936) (a) ...................... 102.2 151,338,560
Other Assets and Liabilities, Net ....................................... (2.2) (3,309,187)
------ -------------
Net Assets .............................................................. 100.0 148,029,373
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $129,256,538 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................. $ 25,789,866
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (3,707,844)
-------------
Net unrealized appreciation .......................... $ 22,082,022
=============
(b) Securities valued in good faith by the Valuation Committee of the Board
of Trustees amounted to $337,126 (0.23% of net assets). Their values
have been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready
market for the securities existed, and the difference could be material.
The cost of these securities at September 30, 1997 was $301,565. These
securities may also have certain restrictions as to resale.
(c) Principal amount is stated U.S. Dollars, unless otherwise specificed.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997 aggregated
$69,664,433 and $31,753,087, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
Currency Abbreviations
GBP British Pound
The accompanying notes are an integral part of the financial statements
112
<PAGE>
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 6.9%
- -------------------------------------------------------------------------------------------------------------------------------
1,404,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/97 at 6.02% to be repurchased at $1,404,235 on
10/01/97, collateralized by a $1,446,000
U.S. Treasury Bond, 6.25%, 8/15/23 (Cost $1,404,000) ............................ 1,404,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 3.4%
- -------------------------------------------------------------------------------------------------------------------------------
HONG KONG 1.4%
250,000 Hysan Development Finance Co., Ltd., 6.75%, 6/01/00 ................................ 282,500
-------------
JAPAN 1.3%
250,000 MBL International Finance Bermuda, 3%, 11/30/02 .................................... 272,500
-------------
UNITED KINGDOM 0.7%
GBP 60,000 Royal & Sun Alliance Insurance Group PLC, 7.25%, 11/30/08 .......................... 146,353
-------------
Total Convertible Bonds (Cost $678,726) ............................................ 701,353
-------------
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK 2.2%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- -------------
AUSTRIA
11,070 Bank Austria AG (Commercial and corporate banking and financial services)
(Cost $362,988) ................................................................. 441,607
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 88.8%
- -------------------------------------------------------------------------------------------------------------------------------
AUSTRALIA 2.8%
22,342 Commonwealth Bank of Australia (Bank) .............................................. 276,184
135,122 Foster's Brewing Group, Ltd. (Leading brewery) ..................................... 285,251
-------------
561,435
-------------
CANADA 3.3%
9,500 BCE, Inc. (Telecommunication services) ............................................. 284,182
20,200 Moore Corp. Ltd. (Manufacturer of business communication products) ................. 381,408
-------------
665,590
-------------
FINLAND 3.9%
81,040 Merita Ltd. "B" (Financial services group) ......................................... 376,791
44,130 Metsa-Serla Oy "B" (Manufacturer of papers, corrugated and paper board, soft and
hardwood pulp) .................................................................. 406,190
-------------
782,981
-------------
FRANCE 10.2%
745 Bongrain SA (Manufacturer of cheese and other dairy products) ...................... 278,739
3,590 Dexia France (Municipal and local development financing) ........................... 340,032
5,076 Havas SA (Advertising, publishing and broadcasting conglomerate) ................... 344,502
7,830 Scor SA (Property, casualty and life reinsurance company) .......................... 338,220
2,615 Societe Nationale Elf Aquitaine (Petroleum company) ................................ 349,049
11,212 Sommer-Allibert (Manufacturer of plastic products for automotive industry) ......... 425,162
-------------
2,075,704
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
113
<PAGE>
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
GERMANY 10.6%
12,098 BHF-Bank AG (Universal banking services) ........................................... 392,323
6,520 Bayer AG (Leading chemical producer) ............................................... 259,590
200 Dyckerhoff AG (Producer of cement, ready-mixed concrete and
finishing products) ............................................................. 71,309
852 Dyckerhoff AG (pfd.) ............................................................... 304,260
6,220 Hochtief AG (Construction and civil engineering services) .......................... 284,079
5,715 Moebel Walther AG (pfd) (Furniture retailer) ....................................... 283,009
6,500 RWE AG (Producer and marketer of petroleum and chemical products) .................. 314,709
1,056 Thyssen AG (Manufacturer of capital goods and steel products) ...................... 246,228
-------------
2,155,507
-------------
IRELAND 2.3%
52,536 Allied Irish Bank PLC (Bank) ....................................................... 462,874
-------------
ITALY 4.3%
54,000 Banca Commerciale Italiana SpA (Commercial bank) ................................... 155,128
11,400 La Rinascente SpA (Department store chain) ......................................... 87,419
89,000 La Rinascente SpA di Risparmio ..................................................... 323,716
78,000 Telecom Italia SpA (Telecommunications, electronics, network construction) ......... 303,358
-------------
869,621
-------------
JAPAN 9.3%
83 East Japan Railway Co. (Railroad operator) ......................................... 389,100
30,000 Matsushita Electric Works, Inc. (Leading maker of building materials and
lighting equipment) ............................................................. 313,082
71,000 Mitsubishi Rayon Co., Ltd. (Producer of acrylic and polyester fibers) .............. 228,757
4,400 Nintendo Co., Ltd. (Game equipment manufacturer) ................................... 411,811
27,000 Nippon Meat Packers, Inc. (Leading meat processor) ................................. 357,808
91,000 Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) .......... 189,183
-------------
1,889,741
-------------
MALAYSIA 0.8%
102,000 Guinness Anchor (Brewery) .......................................................... 157,201
-------------
NETHERLANDS 7.5%
2,900 DSM NV (Plastics producer) ......................................................... 283,282
9,530 KLM Royal Dutch Air Lines NV (World-wide full service airline) ..................... 332,815
9,510 Koninklijke Nedlloyd Groep NV (Container shipping and transportation) .............. 318,736
7,100 Koninklijke PTT Nederland (Telecommunication services) ............................. 278,991
5,480 Royal Dutch Petroleum Co. (Owner of 6% of Royal Dutch/Shell Group) ................. 306,754
-------------
1,520,578
-------------
NEW ZEALAND 2.2%
87,800 Air New Zealand Ltd. "B" (Scheduled commercial airline) ............................ 226,121
43,300 Telecom Corp. of New Zealand (Telecommunication services) .......................... 219,701
-------------
445,822
-------------
SPAIN 6.0%
17,200 Autopistas del Mare Nostrum SA (Builder and operator of toll motorways) ............ 278,850
13,100 Banco Bilbao Vizcaya SA (Commercial bank) .......................................... 403,259
8,900 Compania Telefonica Nacional de Espana S.A. (Telecommunication services) ........... 279,634
20,000 Iberdrola SA (Electric utility) .................................................... 245,863
-------------
1,207,606
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
114
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SWEDEN 6.9%
10,050 AssiDoman AB (Forestry group) ...................................................... 343,058
9,740 OM Gruppen AB (Free) (Operator of financial exchanges and
clearing organizations) ......................................................... 331,834
12,540 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ............................. 365,251
15,250 Svedala Industri AB (Manufacturer of machinery for construction, mineral processing
and materials handling) ......................................................... 355,750
-------------
1,395,893
-------------
SWITZERLAND 6.7%
255 Clariant AG (Registered) (Manufacturer of color chemicals) ......................... 205,122
236 Georg Fischer AG (Bearer) (Manufacturer of automotive products and piping
systems) ........................................................................ 363,451
7,413 Sika Finanz AG (Manufacturer of water management products and systems) ............. 394,986
412 Winterthur Schweizerische Versicherungs-Gesellschaft "B"(Multi-line insurance
company) ........................................................................... 402,511
-------------
1,366,070
-------------
UNITED KINGDOM 12.0%
94,780 Albright & Wilson PLC (Manufacturer of phosphates,susrfactants and
specialty chemicals) ............................................................ 254,498
57,010 Courtaulds Textiles PLC (Producer of clothing, fabrics and home furnishings) ....... 329,145
74,610 Dorling Kindersley Holdings PLC (Book publisher) ................................... 347,735
31,229 Energy Group PLC (Electricity generation and distribution) ......................... 327,863
49,480 General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) .............................. 311,206
32,100 Harrisons & Crosfield PLC (Manufacturer of chemicals, timber products, pet food,
flour, breakfast cereals and other consumer products) ........................... 63,674
581 Railtrack Group PLC (Operator of most of British railway infrastructure) ........... 8,412
31,300 Rank Group PLC (Diversified leisure services: hotels, amusement machines,
restaurants, film and television) ............................................... 183,738
23,629 Royal & Sun Alliance Insurance Group PLC (Multi-line insurance
holding company) ................................................................ 222,777
68,250 Tomkins PLC (Manufacturer of fluid controls, industrial products, garden
and leisure products) ........................................................... 383,120
-------------
2,432,168
-------------
Total Common Stocks (Cost $16,657,754) ............................................. 17,988,791
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PURCHASED OPTIONS 0.4%
- -------------------------------------------------------------------------------------------------------------------------------
Principal
Amount
- -------------
<S> <C> <C>
FRF 1,719,000 Put on French Francs, strike price 5.73 FRF, expires 12/18/97 ...................... 10,366
FRF 6,515,000 Put on French Francs, strike price 6.07 FRF, expires 12/16/97 ...................... 8,144
DEM 510,000 Put on Deutsche Marks, strike price 1.7 DEM, expires 12/18/97 ...................... 11,189
DEM 1,930,000 Put on Deutsche Marks, strike price 1.81 DEM, expires 12/16/97 ..................... 7,720
JPY 92,800,000 Put on Japanese Yen, strike price 116 JPY, expires 11/20/97 ........................ 29,527
GBP 651,466 Put on British Pounds, strike price .6515 GBP, expires 2/11/98 ..................... 7,622
GBP 194,805 Put on British Pounds, strike price .6494 GBP, expires 12/18/97 .................... 1,116
-------------
Total Purchased Options (Cost $69,986) ............................................. 75,684
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
115
<PAGE>
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $19,173,454) (a) ....................... 101.7 20,611,435
Other Assets and Liabilities, Net ....................................... (1.7) (352,373)
------ -------------
Net Assets .............................................................. 100.0 20,259,062
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $19,189,089 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................. $ 1,772,122
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (349,776)
-------------
Net unrealized appreciation .......................... $ 1,422,346
=============
(b) Principal amount is stated U.S. Dollars, unless otherwise specificed.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of
operations) through September 30, 1997, aggregated $20,963,300 and
$3,455,984, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
Currency Abbreviations
FRF French Francs
DEM Deutsche Marks
GBP British Pound
JPY Japanese Yen
The accompanying notes are an integral part of the financial statements
116
<PAGE>
AARP DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Money Market 13.6%
- -------------------------------------------------------------------------------------------------------------------------------
5,904,485 AARP High Quality Money Fund (Cost $5,904,485) ..................................... 5,904,485
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income 60.9%
- -------------------------------------------------------------------------------------------------------------------------------
858,612 AARP Bond Fund for Income .......................................................... 13,050,907
883,992 AARP GNMA and U.S. Treasury Fund ................................................... 13,401,317
-------------
Total Fixed Income (Cost $26,016,430) .............................................. 26,452,224
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Equity 25.6%
- -------------------------------------------------------------------------------------------------------------------------------
205,649 AARP Global Growth Fund ............................................................ 3,956,680
85,076 AARP Growth and Income Fund ........................................................ 4,953,126
122,492 AARP U.S. Stock Index Fund ......................................................... 2,203,628
-------------
Total Equity (Cost $9,714,654) ..................................................... 11,113,434
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $41,635,569) (a) ....................... 100.1 43,470,143
Other Assets and Liabilities, Net ....................................... (0.1) (23,725)
------ -------------
Net Assets .............................................................. 100.0 43,446,418
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $41,635,569 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost .............................................. $1,834,574
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ --
-------------
Net unrealized appreciation ........................... $1,834,574
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the period February 1, 1997 (commencement of operations)
to September 30, 1997, aggregated $36,584,675 and $897,867, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
117
<PAGE>
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Money Market 1.0%
- -------------------------------------------------------------------------------------------------------------------------------
603,912 AARP High Quality Money Fund (Cost $603,912) ....................................... 603,912
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income 35.5%
- -------------------------------------------------------------------------------------------------------------------------------
722,677 AARP Bond Fund for Income .......................................................... 10,984,684
723,016 AARP GNMA and U.S. Treasury Fund ................................................... 10,960,917
-------------
Total Fixed Income (Cost $21,691,978) .............................................. 21,945,601
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Equity 63.6%
- -------------------------------------------------------------------------------------------------------------------------------
42,447 AARP Capital Growth Fund ........................................................... 2,455,106
322,951 AARP Global Growth Fund ............................................................ 6,213,584
257,671 AARP Growth and Income Fund ........................................................ 15,001,622
254,687 AARP International Stock Fund ...................................................... 4,421,367
221,737 AARP Small Company Stock Fund ...................................................... 4,441,387
375,938 AARP U.S. Stock Index Fund ......................................................... 6,763,123
-------------
Total Equity (Cost $35,603,426) .................................................... 39,296,189
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $57,899,316) (a) ....................... 100.1 61,845,702
Other Assets and Liabilities, Net ....................................... (0.1) (48,884)
------ -------------
Net Assets .............................................................. 100.0 61,796,818
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $57,900,360 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................... $3,945,342
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................. --
-------------
Net unrealized appreciation ............................ $3,945,342
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the period beginning February 1, 1997 (commencement of
operations) to September 30, 1997, aggregated $58,780,646 and $1,567,375,
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.
The accompanying notes are an integral part of the financial statements
118
<PAGE>
F I N A N C I A L S T A T E M E N T S
Financial Statements are records of the financial status
of an organization. They are prepared by management and
must conform to Generally Accepted Accounting Principles
(GAAP), which are standards established by the Financial
Accounting Standards Board (FASB), the Securities and
Exchange Commission (SEC), and various committees of the
American Institute of Certified Public Accountants
(AICPA).
The AARP Investment Program's Financial Statements
consist of three different financial statements for each
AARP Mutual Fund: Statements of Assets and Liabilities,
Statements of Operations, and Statements of Changes in
Net Assets. The Notes to Financial Statements explain
the significant accounting policies that financial
statements reflect.
119
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
The Statements of Assets and Liabilities show the AARP
Investment Program's assets.
Assets include:
o Investments at value: The market value of the AARP
Mutual Fund's holdings on the last day of the
fiscal year;
o Cash: The actual amount of the uninvested assets
held in each AARP Mutual Fund;
o Receivables: Money owed to an AARP Mutual Fund.
Sources of receivables include:
o Investments sold: For which the cash will be
paid to the Fund on a later settlement date;
o Fund shares sold: Proceeds that the Fund will
receive from shares sold to shareholders;
o Dividends and interest earned on the AARP
Mutual Funds securities but not yet paid to
the Fund;
o Expense reimbursements due from the Fund
manager.
o Daily variation margin on open futures contract:
Payments due to/from the broker that reflect the
change in value from the previous day of any
futures contract held in an AARP Mutual Fund's
portfolio (this figure could show up as an asset or
a liability).
Liabilities include amounts owed for:
o Investments purchased for the AARP Mutual Fund's
portfolio but that are not yet paid for;
o Fund shares redeemed but not yet paid to
shareholders;
o Dividends declared but not yet paid to
shareholders;
o Management fees and shareholder servicing fees
incurred but unpaid at fiscal year end;
o Administrative expenses incurred but unpaid at
fiscal year end;
o Other accrued expenses incurred but unpaid at
fiscal year end.
The section Net Assets Consist Of includes the
following:
o Undistributed (overdistributed) net investment
income: An AARP Mutual Fund's accumulated
investment income less expenses and less
distributions paid from net investment income;
120
<PAGE>
o Unrealized appreciation (or depreciation) on
investments: Represents the current value of
investments held less their cost;
o Accumulated net realized capital gain (loss): An
AARP Mutual Fund's accumulated realized gains and
losses from sales of investments, minus
distributions paid from net realized gains;
o Paid-in capital: Represents the dollars invested by
shareholders, minus the amount of money redeemed
since each fund began operations.
The Statement of Assets and Liabilities also shows the
net asset value (NAV) for each AARP Mutual Fund. Net
asset value is calculated by taking a fund's total
assets (securities, cash, etc.), deducting liabilities,
and then dividing this amount by the total number of
shares outstanding.
STATEMENTS OF OPERATIONS
The Statements of Operations includes investment income
from interest and dividends and the various expenses
associated with the operation of the AARP Mutual Funds
for the period ended September 30, 1997. The Statements
of Operations also shows net gains and losses for
various categories of investments, both realized and
unrealized gains and losses for securities sold and in
each AARP Mutual Fund's portfolio. The bottom line tells
you whether each AARP Mutual Fund's net assets have
increased or decreased as a result of fund operations.
STATEMENTS OF CHANGES
The Statements of Changes compares increases and
decreases from each AARP Mutual Fund's operations and
shareholder transactions with those of the previous
year. Most of the terms used in the Statements of
Changes are identical to those that are used in the
other two statements. The categories in the sections
Fund Shares Transaction include:
o Proceeds from the sale of shares: The amount
received by selling new shares to shareholders;
o Net asset value of shares issued due to reinvested
dividends and distributions;
o Cost of shares redeemed (or sold): The amount paid
to shareholders from the exchange or redemption of
shares.
121
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP High AARP High AARP GNMA AARP High
Quality Quality Tax Free and U.S. Quality
September 30, 1997 Money Fund Money Fund Treasury Fund Bond Fund
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
Investments, at value (for cost, see accom-
panying lists of investment portfolios) .. $ 469,756,371 $ 103,670,313 $ 4,748,261,020 $ 448,865,382
Cash ........................................ 244 123,586 651 479
Receivable on investments sold .............. -- -- -- 256,069
Investment income receivable ................ 3,373,222 562,596 36,836,345 6,866,968
Receivable on Fund shares sold .............. 899,351 109,045 713,650 53,672
Daily variation margin on futures
contracts ................................ -- -- -- --
Reimbursement from Fund Manager ............. -- -- -- --
Deferred organization expenses .............. -- -- -- --
Other assets ................................ 10,193 2,858 120,992 39,230
------------- -------------- --------------- --------------
Total assets ................................ 474,039,381 104,468,398 4,785,932,658 456,081,800
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------------------------------------------------------------
Investments purchased ....................... -- 1,509,060 187,140,625 --
Fund shares redeemed ........................ 2,239,130 214,719 1,696,937 191,278
Dividends payable ........................... 144,537 48,414 10,425,046 669,462
Unrealized depreciation on forward
currency exchange contracts .............. -- -- -- --
Management fee payable ...................... 149,303 32,489 1,517,280 176,377
Other payables and accrued expenses ......... 195,544 49,823 1,172,310 175,165
------------- -------------- --------------- --------------
Total liabilities ........................... 2,728,514 1,854,505 201,952,198 1,212,282
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................... $ 471,310,867 $ 102,613,893 $ 4,583,980,460 $ 454,869,518
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed)
net investment income .................... $ -- $ -- $ -- $ 176,290
Net unrealized appreciation (depreciation) on:
Investments .............................. (120,463) -- 83,544,632 6,424,227
Futures contracts ........................ -- -- -- --
Written options .......................... -- -- -- --
Foreign currency related transactions .... -- -- -- --
Accumulated net realized capital gain (loss) (136,136) (836,922) (323,254,674) (10,524,044)
Paid-in capital ............................. 471,567,466 103,450,815 4,823,690,502 458,793,045
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................... $ 471,310,867 $ 102,613,893 $ 4,583,980,460 $ 454,869,518
- -----------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding* .. 471,432,488 102,619,379 302,304,535 28,196,489
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and
redemption price per share ............... $1.00 $1.00 $15.16 $16.13
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unlimited number of shares authorized, $.01 par value, except the AARP
High Quality Tax Free Money Fund, which has a $.001 par value.
The accompanying notes are an integral part of the financial statements
122
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP Insured AARP Bond AARP Balanced AARP Growth AARP U.S.
Tax Free General Fund for Stock and Bond and Income Stock Index
Bond Fund Income Fund Fund Fund
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
$ 1,683,454,483 $ 57,495,943 $ 634,477,699 $ 6,573,981,871 $ 36,649,254
218,560 1,429 7,264 1,690 122
12,980,844 25,607 1,418,573 27,239,065 1,291,793
20,297,706 575,279 3,527,445 18,166,923 57,781
280,081 244,005 593,571 2,741,932 68,509
324,844 -- -- -- 1,271
-- 111,787 -- -- 86,150
-- 12,137 11,890 -- 14,743
31,162 -- 6,720 74,337 --
---------------- -------------- -------------- ---------------- -------------
1,717,587,680 58,466,187 640,043,162 6,622,205,818 38,169,623
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
1,424,850 -- 858,877 10,271,423 --
484,021 10,676 312,782 1,779,871 7,145
2,722,669 76,713 -- -- --
-- -- -- -- --
664,141 -- 257,599 2,495,173 --
283,831 54,652 257,647 1,646,454 77,405
---------------- -------------- -------------- ---------------- -------------
5,579,512 142,041 1,686,905 16,192,921 84,550
- --------------------------------------------------------------------------------------------------------------------------
$ 1,712,008,168 $ 58,324,146 $ 638,356,257 $ 6,606,012,897 $ 38,085,073
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $ 225,657 $ 3,321,388 $ 6,274
141,004,771 855,121 121,203,720 2,130,532,014 3,736,328
(2,274,896) -- -- -- 9,339
-- -- -- -- --
-- -- 131 12,921 --
(23,167,336) 39,320 25,974,502 517,023,954 208,407
1,596,445,629 57,429,705 490,952,247 3,955,122,620 34,124,725
- --------------------------------------------------------------------------------------------------------------------------
$ 1,712,008,168 $ 58,324,146 $ 638,356,257 $ 6,606,012,897 $ 38,085,073
- --------------------------------------------------------------------------------------------------------------------------
92,944,577 3,836,332 29,829,626 113,474,683 2,117,187
- --------------------------------------------------------------------------------------------------------------------------
$18.42 $15.20 $21.40 $58.22 $17.99
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
123
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
AARP Capital AARP Small
Growth Company
September 30, 1997 Fund Stock Fund
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investments, at value (for cost, see accompanying
lists of investment portfolios) .............. $1,228,203,456 $51,425,364
Cash ............................................ 363 42,863
Receivable on investments sold .................. -- --
Investment income receivable .................... 1,137,338 39,250
Receivable on Fund shares sold .................. 234,479 581,717
Daily variation margin on futures
contracts .................................... -- --
Reimbursement from Fund Manager ................. -- --
Deferred organization expenses .................. -- 11,291
Other assets .................................... 13,675 --
-------------- -----------
Total assets .................................... 1,229,589,311 52,100,485
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Investments purchased ........................... -- 1,648,527
Fund shares redeemed ............................ 255,633 14,414
Dividends payable ............................... -- --
Unrealized depreciation on forward currency
exchange contracts ........................... -- --
Management fee payable .......................... 600,966 --
Other payables and accrued expenses ............. 352,758 166,071
-------------- -----------
Total liabilities ............................... 1,209,357 1,829,012
- --------------------------------------------------------------------------------
Net assets at value ............................. $1,228,379,954 $50,271,473
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Undistributed (overdistributed)
net investment income ........................ $ 6,420,037 $ 71,236
Net unrealized appreciation (depreciation) on:
Investments .................................. 453,509,647 7,634,126
Futures contracts ............................ -- --
Written options .............................. -- --
Foreign currency related transactions ........ -- --
Accumulated net realized capital gain (loss) .... 90,878,235 243,255
Paid-in capital ................................. 677,572,035 42,322,856
- --------------------------------------------------------------------------------
Net assets at value ............................. $1,228,379,954 $50,271,473
- --------------------------------------------------------------------------------
Shares of beneficial interest outstanding* ...... 21,237,515 2,510,889
- --------------------------------------------------------------------------------
Net asset value, offering and redemption
price per share .............................. $57.84 $20.02
- --------------------------------------------------------------------------------
* Unlimited number of shares authorized, $.01 par value, except the AARP
High Quality Tax Free Money Fund, which has a $.001 par value.
The accompanying notes are an integral part of the financial statements
124
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AARP Global AARP AARP Diversified AARP Diversified
Growth International Income Growth
Fund Stock Fund Portfolio Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 151,338,560 $ 20,611,435 $43,470,143 $61,845,702
851 101,747 -- --
192,871 -- 143,860 209,786
395,359 70,659 163,695 115,643
103,204 34,586 41,640 42,023
-- -- -- --
-- 21,309 -- --
9,150 11,291 -- --
1,366 -- -- --
------------- ------------ ----------- -----------
152,041,361 20,851,027 43,819,338 62,213,154
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,511,603 476,638 307,431 325,338
5,759 35,068 23,188 90,998
-- -- 42,301
248,684 -- -- --
81,713 -- -- --
164,229 80,259 -- --
------------- ------------ ----------- -----------
4,011,988 591,965 372,920 416,336
- --------------------------------------------------------------------------------
$ 148,029,373 $ 20,259,062 $43,446,418 $61,796,818
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 1,144,886 $ 155,031 $ 10,717 $ 645,438
22,295,624 1,437,981 1,834,574 3,946,386
-- -- -- --
-- -- -- --
(263,417) (650) -- --
2,678,448 192,102 44,276 82,133
122,173,832 18,474,598 41,556,851 57,122,861
- --------------------------------------------------------------------------------
$ 148,029,373 $ 20,259,062 $43,446,418 $61,796,818
- --------------------------------------------------------------------------------
7,693,438 1,166,775 2,721,909 3,551,018
- --------------------------------------------------------------------------------
$19.24 $17.36 $15.96 $17.40
- --------------------------------------------------------------------------------
<PAGE>
The accompanying notes are an integral part of the financial statements
125
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP High AARP High AARP GNMA AARP High
Quality Quality Tax Free and U.S. Quality
Year Ended September 30, 1997 Money Fund Money Fund Treasury Fund Bond Fund
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------------------
Income:
Interest ............................................. $25,123,665 $ 3,832,142 $ 336,987,461 $ 32,421,813
Dividends ............................................ -- -- -- --
----------- ------------ ------------- ------------
25,123,665 3,832,142 336,987,461 32,421,813
Less foreign taxes withheld .......................... -- -- -- --
----------- ------------ ------------- ------------
25,123,665 3,832,142 336,987,461 32,421,813
- ------------------------------------------------------------------------------------------------------------------------
Expenses:
Management fee ....................................... 1,760,550 410,859 19,228,620 2,287,683
Services to shareholders ............................. 1,901,981 303,908 8,799,290 1,710,593
Trustees' fees and expenses .......................... 26,370 26,792 27,352 27,329
Shareholder communications ........................... 210,593 47,166 1,206,689 230,319
Legal ................................................ 6,018 5,608 6,468 4,737
Auditing ............................................. 27,600 27,300 67,550 50,450
Custodian and accounting fees ........................ 90,351 49,951 926,047 117,428
Registration expenses ................................ 89,506 20,781 48,002 22,583
Amortization of organization expenses ................ -- -- -- --
Other ................................................ 19,775 12,699 94,621 12,545
----------- ------------ ------------- ------------
Total expenses before reductions ........................ 4,132,744 905,064 30,404,639 4,463,667
Expense reductions ...................................... -- -- -- --
----------- ------------ ------------- ------------
Expenses, net ........................................... 4,132,744 905,064 30,404,639 4,463,667
- ------------------------------------------------------------------------------------------------------------------------
Net investment income ................................... 20,990,921 2,927,078 306,582,822 27,958,146
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ........................................ -- -- (7,559,113) (1,765,263)
Futures contracts .................................. -- -- -- 87,958
Written options .................................... -- -- -- --
Foreign currency related transactions .............. -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ........................................ 14,657 -- 85,972,174 10,994,171
Futures contracts .................................. -- -- -- --
Written options .................................... -- -- -- --
Foreign currency related transactions .............. -- -- -- --
----------- ------------ ------------- ------------
Net gain (loss) on investments .......................... 14,657 -- 78,413,061 9,316,866
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............................ $21,005,578 $ 2,927,078 $ 384,995,883 $ 37,275,012
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) These Funds commenced operations on February 1, 1997.
The accompanying notes are an integral part of the financial statements
126
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AARP Insured AARP Bond AARP Balanced AARP Growth AARP U.S.
Tax Free General Fund for Stock and Bond and Income Stock Index
Bond Fund Income (a) Fund Fund Fund (a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 95,025,384 $ 1,266,014 $ 14,345,542 $ 13,747,932 $ 42,549
-- -- 9,426,256 151,415,232 293,963
- ------------- ----------- ------------- --------------- -----------
95,025,384 1,266,014 23,771,798 165,163,164 336,512
-- -- (144,958) (2,846,162) (2,256)
- ------------- ----------- ------------- --------------- -----------
95,025,384 1,266,014 23,626,840 162,317,002 334,256
- --------------------------------------------------------------------------------
8,224,295 97,012 2,455,813 25,101,044 38,841
2,183,399 62,868 1,686,291 9,412,190 88,085
26,678 16,790 26,346 26,366 16,790
361,629 4,299 204,092 1,102,590 3,232
6,256 5,051 5,124 5,842 5,805
60,000 1,250 35,265 49,000 850
365,524 36,507 159,277 1,096,126 140,260
42,435 48,110 81,464 487,327 29,371
-- 1,709 8,895 -- 2,105
36,514 1,109 10,277 81,869 773
- ------------- ----------- ------------- --------------- -----------
11,306,730 274,705 4,672,844 37,362,354 326,112
-- (274,705) -- -- (258,156)
- ------------- ----------- ------------- --------------- -----------
11,306,730 -- 4,672,844 37,362,354 67,956
- --------------------------------------------------------------------------------
83,718,654 1,266,014 18,953,996 124,954,648 266,300
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,742,633 32,537 27,061,995 533,200,232 96,857
(7,405,850) -- -- -- 111,552
-- -- -- 19,199 --
-- -- 3,212 (401,887) --
62,123,142 855,121 79,619,157 1,168,998,909 3,736,328
(382,821) -- -- -- 9,339
-- -- -- 801 --
-- -- (32) 23,307 --
- ------------- ----------- ------------- --------------- -----------
58,077,104 887,658 106,684,332 1,701,840,561 3,954,076
- --------------------------------------------------------------------------------
$ 141,795,758 $ 2,153,672 $ 125,638,328 $ 1,826,795,209 $ 4,220,376
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
127
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP Capital AARP Small
Growth Company
Year Ended September 30, 1997 Fund Stock Fund(a)
<S> <C> <C>
- ----------------------------------------------------------------------------------------
INVESTMENT INCOME
- ----------------------------------------------------------------------------------------
Income:
Interest ............................................. $ 1,668,235 $ 65,563
Dividends ............................................ 14,708,887 229,959
Income distributions from Underlying Funds ........... -- --
------------- -----------
16,377,122 295,522
Less foreign taxes withheld .......................... (233,281) --
------------- -----------
16,143,841 295,522
- ----------------------------------------------------------------------------------------
Expenses:
Management fee ....................................... 6,053,108 111,376
Services to shareholders ............................. 2,380,402 140,358
Trustees' fees and expenses .......................... 26,349 18,680
Shareholder communications ........................... 316,503 6,111
Legal ................................................ 4,220 5,082
Auditing ............................................. 46,700 850
Custodian and accounting fees ........................ 183,513 66,854
Registration expenses ................................ 97,064 32,127
Amortization of organization expenses ................ -- 1,709
Other ................................................ 19,841 1,017
------------- -----------
Total expenses before reductions ........................ 9,127,700 384,164
Expense reductions ...................................... -- (143,398)
------------- -----------
Expenses, net ........................................... 9,127,700 240,766
- ----------------------------------------------------------------------------------------
Net investment income ................................... 7,016,141 54,756
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ........................................ 100,378,671 243,254
Futures contracts .................................. -- --
Written options .................................... -- --
Foreign currency related transactions .............. 603 --
Net unrealized appreciation (depreciation) on:
Investments ........................................ 279,281,659 7,634,126
Futures contracts .................................. -- --
Written options .................................... -- --
Foreign currency related transactions .............. (74) --
------------- -----------
Net gain (loss) on investments .......................... 379,660,859 7,877,380
- ----------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... $ 386,677,000 $ 7,932,136
- ----------------------------------------------------------------------------------------
</TABLE>
(a) These Funds commenced operations on February 1, 1997.
The accompanying notes are an integral part of the financial statements
128
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AARP Global AARP AARP Diversified AARP Diversified
Growth International Income Growth
Fund Stock Fund (a) Portfolio (a) Portfolio (a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 736,082 $ 54,626 $ -- $ --
1,997,850 241,257 -- --
-- -- 880,498 645,438
------------- ------------ ----------- -----------
2,733,932 295,883 880,498 645,438
(177,801) (23,212) -- --
------------- ------------ ----------- -----------
2,556,131 272,671 880,498 645,438
- --------------------------------------------------------------------------------
932,182 59,143 -- --
711,119 69,681 -- --
26,344 16,790 -- --
74,352 5,674 -- --
5,845 5,382 -- --
29,700 2,250 -- --
191,931 99,557 -- --
43,416 22,796 -- --
2,571 1,709 -- --
3,826 1,676 -- --
------------- ------------ ----------- -----------
2,021,286 284,658 -- --
(74,953) (168,204) -- --
------------- ------------ ----------- -----------
1,946,333 116,454 -- --
- --------------------------------------------------------------------------------
609,798 156,217 880,498 645,438
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,609,572 176,596 44,276 82,133
-- -- -- --
-- -- -- --
672,452 (1,496) -- --
21,313,398 1,437,981 1,834,574 3,946,386
-- -- -- --
-- -- -- --
(250,944) (650) -- --
------------- ------------ ----------- -----------
24,344,478 1,612,431 1,878,850 4,028,519
- --------------------------------------------------------------------------------
$ 24,954,276 $ 1,768,648 $ 2,759,348 $ 4,673,957
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
129
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP High AARP High
Quality Quality Tax Free
Money Fund Money Fund
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------------------------
Years Ended Years Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 20,990,921 $ 17,543,476 $ 2,927,078 $ 3,191,255
Net realized gain (loss) from:
Investments ................................ -- 2,595 -- 1,553
Futures contracts .......................... -- -- -- --
Written options ............................ -- -- -- --
Foreign currency related transactions ...... -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ................................ 14,657 355,595 -- --
Futures contracts .......................... -- -- -- --
Written options ............................ -- -- -- --
Foreign currency related transactions ........ -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations ............................. 21,005,578 17,901,666 2,927,078 3,192,808
------------- ------------- ------------- -------------
Distributions to shareholders:
Net investment income ........................ (20,990,921) (17,543,476) (2,927,078) (3,191,255)
Net realized gains ............................. -- -- -- --
------------- ------------- ------------- -------------
Total distributions ............................ (20,990,921) (17,543,476) (2,927,078) (3,191,255)
------------- ------------- ------------- -------------
Fund share transactions:
Proceeds from sale of shares ................. 586,180,766 370,605,211 28,579,750 30,976,787
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 18,980,197 15,692,224 2,345,700 2,545,162
Cost of shares redeemed ........................ (545,990,946) (358,425,484) (39,576,285) (42,004,745)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from Fund
share transactions .......................... 59,170,017 27,871,951 (8,650,835) (8,482,796)
------------- ------------- ------------- -------------
Increase (decrease) in net assets .............. 59,184,674 28,230,141 (8,650,835) (8,481,243)
Net assets at beginning of period .............. 412,126,193 383,896,052 111,264,728 119,745,971
- -----------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 471,310,867 $ 412,126,193 $ 102,613,893 $ 111,264,728
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- -----------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 412,261,312 384,389,361 111,270,214 119,753,010
------------- ------------- ------------- -------------
Shares sold .................................. 586,181,925 370,605,211 28,579,750 30,976,787
Shares issued to shareholders in
reinvestment of distributions .............. 18,980,197 15,692,224 2,345,700 2,545,162
Shares redeemed .............................. (545,990,946) (358,425,484) (39,576,285) (42,004,745)
------------- ------------- ------------- -------------
Net increase (decrease) in Fund shares ......... 59,171,176 27,871,951 (8,650,835) (8,482,796)
------------- ------------- ------------- -------------
Shares outstanding at end of period ............ 471,432,488 412,261,312 102,619,379 111,270,214
- -----------------------------------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on
February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ -- $ -- $ -- $ --
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
130
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
AARP GNMA AARP High AARP Insured AARP Bond
and U.S. Quality Tax Free General Fund for
Treasury Fund Bond Fund Bond Fund Income
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended Years Ended Period Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996 1997(a)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
<C> <C> <C> <C> <C> <C> <C>
$ 306,582,822 $ 334,151,619 $ 27,958,146 $ 30,375,516 $ 83,718,654 $ 86,584,408 $ 1,266,014
(7,559,113) 23,690,016 (1,765,263) (2,756,840) 3,742,633 15,073,015 32,537
-- -- 87,958 4,190,615 (7,405,850) 3,404,797 --
-- -- -- (214,688) -- -- --
-- -- -- -- -- -- --
85,972,174 (117,084,004) 10,994,171 (7,844,325) 62,123,142 (1,155,352) 855,121
-- -- -- -- (382,821) (1,262,186) --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
384,995,883 240,757,631 37,275,012 23,750,278 141,795,758 102,644,682 2,153,672
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(306,582,822) (334,151,619) (27,958,146) (30,375,516) (83,718,654) (86,584,408) (1,266,014)
-- -- -- -- (8,693,174) -- --
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(306,582,822) (334,151,619) (27,958,146) (30,375,516) (92,411,828) (86,584,408) (1,266,014)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
305,492,609 346,027,868 38,051,215 64,115,868 103,693,632 124,978,818 59,830,356
175,180,674 193,739,502 19,402,825 21,458,457 55,906,529 52,441,004 959,174
(879,545,728) (793,984,012) (123,806,554) (100,466,218) (252,388,145) (245,115,196) (3,354,542)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(398,872,445) (254,216,642) (66,352,514) (14,891,893) (92,787,984) (67,695,374) 57,434,988
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(320,459,384) (347,610,630) (57,035,648) (21,517,131) (43,404,054) (51,635,100) 58,322,646
4,904,439,844 5,252,050,474 511,905,166 533,422,297 1,755,412,222 1,807,047,322 1,500
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,583,980,460 $ 4,904,439,844 $ 454,869,518 $ 511,905,166 $ 1,712,008,168 $ 1,755,412,222 $ 58,324,146
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
328,879,292 345,829,087 32,366,706 33,312,382 98,088,821 101,872,699 100
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
20,334,844 22,947,708 2,386,782 4,006,214 5,746,587 6,963,608 3,995,177
11,645,941 12,859,585 1,215,401 1,341,850 3,094,529 2,918,782 63,663
(58,555,542) (52,757,088) (7,772,400) (6,293,740) (13,985,360) (13,666,268) (222,608)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(26,574,757) (16,949,795) (4,170,217) (945,676) (5,144,244) (3,783,878) 3,836,232
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
302,304,535 328,879,292 28,196,489 32,366,706 92,944,577 98,088,821 3,836,332
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
$ -- $ -- $ 176,290 $ 176,290 $ -- $ -- $ --
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
131
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP Balanced AARP Growth AARP U.S.
Stock and Bond and Income Stock Index
Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended Period Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 (a)
------------- ------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 18,953,996 $ 13,198,291 $ 124,954,648 $ 105,747,332 $ 266,300
Net realized gain (loss) from:
Investments ................................ 27,061,995 4,984,143 533,200,232 161,815,047 96,857
Futures contracts .......................... -- 34,436 -- -- 111,552
Written options ............................ -- -- 19,199 -- --
Foreign currency related transactions ...... 3,212 334,451 (401,887) (411,014) --
Net unrealized appreciation (depreciation) on:
Investments ................................ 79,619,157 20,509,469 1,168,998,909 381,330,506 3,736,328
Futures contracts .......................... -- 3,391 -- -- 9,339
Written options ............................ -- -- 801 (801) --
Foreign currency related transactions ...... (32) (159,786) 23,307 (16,214) --
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in net assets
resulting from operations ................... 125,638,328 38,904,395 1,826,795,209 648,464,856 4,220,376
------------- ------------- --------------- --------------- ------------
Distributions to shareholders:
Net investment income ........................ (19,390,434) (12,975,460) (126,615,982) (102,016,492) (277,755)
Net realized gains ........................... (5,003,640) (3,378,368) (167,523,016) (67,064,704) --
------------- ------------- --------------- --------------- ------------
Total distributions ............................ (24,394,074) (16,353,828) (294,138,998) (169,081,196) (277,755)
------------- ------------- --------------- --------------- ------------
Fund share transactions:
Proceeds from sale of shares ................. 193,384,596 164,077,214 1,183,350,802 960,952,133 36,277,789
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 22,371,689 14,941,233 268,600,153 153,099,566 242,587
Cost of shares redeemed ...................... (81,824,221) (45,596,030) (597,577,667) (380,970,538) (2,379,424)
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in net assets from
Fund share transactions ..................... 133,932,064 133,422,417 854,373,288 733,081,161 34,140,952
------------- ------------- --------------- --------------- ------------
Increase (decrease) in net assets .............. 235,176,318 155,972,984 2,387,029,499 1,212,464,821 38,083,573
Net assets at beginning of period .............. 403,179,939 247,206,955 4,218,983,398 3,006,518,577 1,500
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 638,356,257 $ 403,179,939 $ 6,606,012,897 $ 4,218,983,398 $ 38,085,073
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 22,865,594 15,074,610 96,018,596 78,371,684 100
------------- ------------- --------------- --------------- ------------
Shares sold .................................. 10,047,891 9,582,056 23,887,562 23,131,229 2,243,958
Shares issued to shareholders in
reinvestment of distributions .............. 1,156,073 873,110 5,612,664 3,734,230 14,065
Shares redeemed .............................. (4,239,932) (2,664,182) (12,044,139) (9,218,547) (140,936)
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in Fund shares ......... 6,964,032 7,790,984 17,456,087 17,646,912 2,117,087
------------- ------------- --------------- --------------- ------------
Shares outstanding at end of period ............ 29,829,626 22,865,594 113,474,683 96,018,596 2,117,187
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ 225,657 $ 535,899 $ 3,321,388 $ 7,239,912 $ 6,274
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
132
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
AARP Capital AARP Small AARP Global AARP
Growth Company Growth International
Fund Stock Fund Fund Stock Fund
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Years Ended Period Ended Years Ended Period Ended
September 30, September 30, September 30, September 30,
1997 1996 1997(a) 1997 1996 1997 (a)
- --------------- ------------- ------------ ------------- ------------ ------------
<C> <C> <C> <C> <C> <C>
$ 7,016,141 $ 7,892,107 $ 54,756 $ 609,798 $ 325,474 $ 156,217
100,378,671 71,644,200 243,254 2,609,572 (33,467) 176,596
-- -- -- -- -- --
-- -- -- -- -- --
603 (38,602) -- 672,452 (36,843) (1,496)
279,281,659 32,512,381 7,634,126 21,313,398 982,226 1,437,981
-- -- -- -- -- --
-- -- -- -- -- --
(74) 4,863 -- (250,944) (336) (650)
- --------------- ------------- ------------ ------------- ------------ ------------
386,677,000 112,014,949 7,932,136 24,954,276 1,237,054 1,768,648
- --------------- ------------- ------------ ------------- ------------ ------------
(7,776,073) (7,038,882) -- (336,444) -- --
(75,674,469) (9,204,690) -- -- -- --
- --------------- ------------- ------------ ------------- ------------ ------------
(83,450,542) (16,243,572) -- (336,444) -- --
- --------------- ------------- ------------ ------------- ------------ ------------
155,757,996 133,269,510 45,455,488 67,490,929 82,274,150 20,394,042
79,684,673 15,425,567 -- 321,411 -- --
(136,425,886) (110,338,687) (3,117,651) (22,052,777) (5,860,726) (1,905,128)
- --------------- ------------- ------------ ------------- ------------ ------------
99,016,783 38,356,390 42,337,837 45,759,563 76,413,424 18,488,914
- --------------- ------------- ------------ ------------- ------------ ------------
402,243,241 134,127,767 50,269,973 70,377,395 77,650,478 20,257,562
826,136,713 692,008,946 1,500 77,651,978 1,500 1,500
- ---------------------------------------------------------------------------------------------
$ 1,228,379,954 $ 826,136,713 $ 50,271,473 $ 148,029,373 $ 77,651,978 $ 20,259,062
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
19,005,749 18,041,977 100 5,012,508 100 100
- --------------- ------------- ------------ ------------- ------------ ------------
3,214,860 3,299,011 2,689,583 3,954,573 5,395,570 1,283,093
1,860,053 400,664 -- 19,853 -- --
(2,843,147) (2,735,903) (178,794) (1,293,496) (383,162) (116,418)
- --------------- ------------- ------------ ------------- ------------ ------------
2,231,766 963,772 2,510,789 2,680,930 5,012,408 1,166,675
- --------------- ------------- ------------ ------------- ------------ ------------
21,237,515 19,005,749 2,510,889 7,693,438 5,012,508 1,166,775
- ---------------------------------------------------------------------------------------------
<FN>
$ 6,420,037 $ 7,179,969 $ 71,236 $ 1,144,886 $ 288,631 $ 155,031
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
133
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP AARP
Diversified Diversified
Income Portfolio Growth Portfolio
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------
Period Ended Period Ended
September 30, September 30,
1997(a) 1997(a)
------------ ------------
<S> <C> <C>
Operations:
Net investment income ........................ $ 880,498 $ 645,438
Net realized gain (loss) from:
Investments ................................ 44,276 82,133
Futures contracts .......................... -- --
Written options ............................ -- --
Foreign currency related transactions ...... -- --
Net unrealized appreciation (depreciation) on:
Investments ................................ 1,834,574 3,946,386
Futures contracts .......................... -- --
Written options ............................ -- --
Foreign currency related transactions ........ -- --
------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. 2,759,348 4,673,957
------------ ------------
Distributions to shareholders:
Net investment income ........................ (869,781) --
Net realized gains ........................... -- --
------------ ------------
Total distributions ............................ (869,781) --
------------ ------------
Fund share transactions:
Proceeds from sale of shares ................. 45,476,743 60,765,788
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 671,013 --
Cost of shares redeemed ........................ (4,640,905) (3,692,927)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions .......................... 41,506,851 57,072,861
------------ ------------
Increase (decrease) in net assets .............. 43,396,418 61,746,818
Net assets at beginning of period .............. 50,000 50,000
- ------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 43,446,418 $ 61,796,818
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 3,333 3,333
------------ ------------
Shares sold .................................. 2,973,907 3,770,457
Shares issued to shareholders in
reinvestment of distributions ............. 42,898 --
Shares redeemed .............................. (298,229) (222,772)
------------ ------------
Net increase (decrease) in Fund shares ......... 2,718,576 3,547,685
------------ ------------
Shares outstanding at end of period ............ 2,721,909 3,551,018
- ------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on
February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ 10,717 $ 645,438
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
134
<PAGE>
F I N A N C I A L H I G H L I G H T S
This section shows you the statistical per share income
and ratio(s) information from operations dividends paid
to shareholders, total returns, expense ratios of the
AARP Mutual Funds, and other information. It is designed
to help you understand how the fund performed and allows
you to compare this year's performance and expenses to
those of prior years.
135
<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>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $1.000 $1.000 $1.000 $1.000 $1.000
------------------------------------------
Net investment income ................................... .046 .045 .049 .028 .021
Distributions from net investment income ................ (.046) (.045) (.049) (.028) (.021)
------------------------------------------
Net asset value, end of period ............................. $1.000 $1.000 $1.000 $1.000 $1.000
------------------------------------------
Total Return (%) ........................................... 4.72 4.62 4.99 2.84 2.13
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 471 412 384 333 254
Ratio of operating expenses to average net assets (%) ...... .91 .96 .98 1.13 1.31
Ratio of net investment income to average net assets (%) ... 4.63 4.54 4.89 2.89 2.12
</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>
Years Ended September 30,
--------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------
Net investment income ................................... .028 .028 .029 .017 .016
Distributions from net investment income ................ (.028) (.028) (.029) (.017) (.016)
--------------------------------------------
Net asset value, end of period ............................. $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------
Total Return (%) ........................................... 2.80 2.80 2.99 1.76(a) 1.62(a)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 103 111 120 129 134
Ratio of operating expenses, net to average net assets (%) . .85 .85 .87 .90 .93
Ratio of operating expenses before expense reductions,
to average net assets (%) ............................... .85 .85 .87 .91 1.15
Ratio of net investment income to average net assets (%) ... 2.76 2.77 2.94 1.75 1.60
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
136
<PAGE>
- --------------------------------------------------------------------------------
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>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $14.91 $15.19 $14.73 $15.96 $16.19
------------------------------------------
Income from investment operations:
Net investment income ................................... .98 .99 1.01 .93 1.15
Net realized and unrealized gain (loss) on investments .. .25 (.28) .46 (1.23) (.23)
------------------------------------------
Total from investment operations ........................... 1.23 .71 1.47 (.30) .92
------------------------------------------
Less distributions:
Net investment income ................................... (.98) (.99) (.98) (.93) (1.15)
Tax return of capital ................................... -- -- (.03) -- --
------------------------------------------
Total distributions ........................................ (.98) (.99) (1.01) (.93) (1.15)
------------------------------------------
Net asset value, end of period ............................. $15.16 $14.91 $15.19 $14.73 $15.96
------------------------------------------
Total Return (%) ........................................... 8.49 4.79 10.31 (1.90) 5.89
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 4,584 4,904 5,252 5,585 6,712
Ratio of operating expenses to average net assets (%) ...... .65 .64 .67 .66 .70
Ratio of net investment income to average net assets (%) ... 6.51 6.55 6.77 6.09 7.15
Portfolio turnover rate (%) ................................ 86.76 83.44 70.35 114.54 105.49
</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>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $15.82 $16.01 $15.05 $17.19 $16.44
------------------------------------------
Income from investment operations:
Net investment income ................................... .93 .92 .94 .85 .93
Net realized and unrealized gain (loss) on investments .. .31 (.19) .95 (1.76) .93
------------------------------------------
Total from investment operations ........................... 1.24 .73 1.89 (.91) 1.86
------------------------------------------
Less distributions:
Net investment income ................................... (.93) (.92) (.93) (.85) (.93)
Net realized gains on investments ....................... -- -- -- -- (.18)
In excess of net realized gains on investments .......... -- -- -- (.38) --
------------------------------------------
Total distributions ........................................ (.93) (.92) (.93) (1.23) (1.11)
------------------------------------------
Net asset value, end of period ............................. $16.13 $15.82 $16.01 $15.05 $17.19
------------------------------------------
Total Return (%) ........................................... 8.15 4.59 12.98 (5.55) 11.88
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 455 512 533 568 604
Ratio of operating expenses to average net assets (%) ...... .93 .91 .95 .95 1.01
Ratio of net investment income to average net assets (%) ... 5.84 5.76 6.13 5.31 5.64
Portfolio turnover rate (%) ................................ 83.26 169.96 201.07 63.75 100.98
</TABLE>
137
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
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>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $17.90 $17.74 $16.93 $19.00 $17.88
------------------------------------------
Income from investment operations:
Net investment income ................................... .88 .87 .87 .86 .90
Net realized and unrealized gain (loss) on investments .. .61 .16 .81 (1.67) 1.55
------------------------------------------
Total from investment operations ........................... 1.49 1.03 1.68 (.81) 2.45
------------------------------------------
Less distributions:
Net investment income ................................... (.88) (.87) (.87) (.86) (.90)
Net realized gains on investments ....................... (.09) -- -- (.34) (.43)
In excess of net realized gains on investments .......... -- -- -- (.06) --
------------------------------------------
Total distributions ........................................ (.97) (.87) (.87) (1.26) (1.33)
------------------------------------------
Net asset value, end of period ............................. $18.42 $17.90 $17.74 $16.93 $19.00
------------------------------------------
Total Return (%) ........................................... 8.57 5.88 10.21 (4.48) 14.31
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 1,712 1,755 1,807 1,914 2,087
Ratio of operating expenses to average net assets (%) ...... .66 .66 .69 .68 .72
Ratio of net investment income to average net assets (%) ... 4.87 4.83 5.06 4.80 4.90
Portfolio turnover rate (%) ................................ 7.61 18.69 17.45 38.39 47.96
</TABLE>
- --------------------------------------------------------------------------------
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
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, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ................................... $15.00
------
Income from investment operations:
Net investment income ............................................... .69
Net realized and unrealized gain (loss) on investments .............. .20
------
Total from investment operations ....................................... .89
------
Less distributions from net investment income .......................... (.69)
------
Net asset value, end of period ......................................... $15.20
------
Total Return (%) (b) ................................................... 6.06(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................................. 58
Ratio of operating expenses, net to average net assets (%) ............. -- (d)
Ratio of operating expenses before expense reductions, to average
net assets (%) ...................................................... 1.53(d)
Ratio of net investment income to average net assets (%) ............... 7.03(d)
Portfolio turnover rate (%) ............................................ 13.69(d)
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized
(d) Annualized
138
<PAGE>
- --------------------------------------------------------------------------------
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>
For the Period
Years Ended September 30, February 1, 1994(b)
-------------------------- To September 30,
1997(a) 1996 1995 1994
-------------------------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $17.63 $16.40 $14.64 $15.00
-----------------------------------------------
Income from investment operations:
Net investment income ................................... .72 .66 .61 .25
Net realized and unrealized gain (loss) on investments .. 3.98 1.44 1.79 (.37)(c)
-----------------------------------------------
Total from investment operations ........................... 4.70 2.10 2.40 (.12)
-----------------------------------------------
Less distributions:
Net investment income ................................... (.72) (.66) (.60) (.24)
Net realized gains on investments ....................... (.21) (.21) (.04) --
-----------------------------------------------
Total distributions ........................................ (.93) (.87) (.64) (.24)
-----------------------------------------------
Net asset value, end of period ............................. $21.40 $17.63 $16.40 $14.64
-----------------------------------------------
Total Return (%) ........................................... 27.34 13.08 16.80 (.78)(e)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 638 403 247 175
Ratio of operating expenses to average net assets (%) ...... .91 .88 1.01 1.31(f)
Ratio of net investment income to average net assets (%) ... 3.71 4.09 4.12 3.58(f)
Portfolio turnover rate (%) ................................ 26.79 35.22 63.77 49.32(f)
Average commission rate paid (d) ........................... $.0547 $.0549 $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) 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.
(d) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
(e) Not Annualized (f) Annualized
- --------------------------------------------------------------------------------
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>
Years Ended September 30,
------------------------------------------
1997(a) 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $43.94 $38.36 $34.13 $32.91 $28.67
------------------------------------------
Income from investment operations:
Net investment income ................................... 1.19 1.17 1.11 .94 .83
Net realized and unrealized gain (loss) on investments .. 16.00 6.40 5.44 1.62 4.58
------------------------------------------
Total from investment operations ........................... 17.19 7.57 6.55 2.56 5.41
------------------------------------------
Less distributions from:
Net investment income ................................... (1.19) (1.15) (1.09) (1.13) (.87)
Net realized gains on investments ....................... (1.72) (.84) (1.23) (.21) (.30)
------------------------------------------
Total distributions ........................................ (2.91) (1.99) (2.32) (1.34) (1.17)
------------------------------------------
Net asset value, end of period ............................. $58.22 $43.94 $38.36 $34.13 $32.91
------------------------------------------
Total Return (%) ........................................... 40.70 20.20 20.43 7.99 19.38
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 6,606 4,219 3,007 2,312 1,560
Ratio of operating expenses to average net assets (%) ...... .71 .69 .72 .76 .84
Ratio of net investment income to average net assets (%) ... 2.38 2.94 3.28 3.00 3.08
Portfolio turnover rate (%) ................................ 33.4 25.02 31.26 31.82 17.44
Average commission rate paid (b) ........................... $.0619 $.0542 $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
139
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .20
Net realized and unrealized gain (loss) on investment ........... 2.97
------
Total from investment operations ................................... 3.17
------
Less distributions from net investment income ...................... (.18)
------
Net asset value, end of period ..................................... $17.99
------
Total Return (%) (b) ............................................... 21.22(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 38
Ratio of operating expenses, net to average net assets (%) ......... .50(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 2.38(d)
Ratio of net investment income to average net assets (%) ........... 1.94(d)
Portfolio turnover rate (%) ........................................ 14.52(d)
Average commission rate paid ....................................... $.0288
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.
- --------------------------------------------------------------------------------
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>
Years Ended September 30,
1997(a) 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $43.47 $38.36 $31.74 $36.20 $30.30
------------------------------------------
Income from investment operations:
Net investment income ................................... .34 .42 .36 .00 .06
Net realized and unrealized gain (loss) on investments .. 18.43 5.59 6.91 (1.51) 7.19
------------------------------------------
Total from investment operations ........................... 18.77 6.01 7.27 (1.51) 7.25
------------------------------------------
Less distributions from:
Net investment income ................................... (.41) (.39) (.01) (.05) (.14)
Net realized gains on investments ....................... (3.99) (.51) (.64) (2.90) (1.21)
------------------------------------------
Total distributions ........................................ (4.40) (.90) (.65) (2.95) (1.35)
------------------------------------------
Net asset value, end of period ............................. $57.84 $43.47 $38.36 $31.74 $36.20
------------------------------------------
Total Return (%) ........................................... 46.72 15.97 23.47 (4.70) 24.53
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 1,228 826 692 683 607
Ratio of operating expenses, to average net assets (%) ..... .92 .90 .95 .97 1.05
Ratio of net investment income to average net assets (%) ... .70 1.05 1.00 .02 .22
Portfolio turnover rate (%) ................................ 39.04 64.84 98.44 79.65 100.63
Average commission rate paid (b) ........................... $.0576 $.0614 $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
140
<PAGE>
- --------------------------------------------------------------------------------
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .04
Net realized and unrealized gain (loss) on investments .......... 4.98
------
Total from investment operations ................................... 5.02
------
Net asset value, end of period ..................................... $20.02
------
Total Return (%) (b) ............................................... 33.53(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 50
Ratio of operating expenses, net to average net assets (%) ......... 1.75(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 2.79(d)
Ratio of net investment income to average net assets (%) ........... 0.40(d)
Portfolio turnover rate (%) ........................................ 5.01(d)
Average commission rate paid ....................................... $.0274
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.
- --------------------------------------------------------------------------------
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(a) and other performance information derived from the financial
statements.
<TABLE>
Year Ended For the Period
September 30, February 1, 1996(b)
1997 to September 30, 1996
------------- ---------------------
<S> <C> <C>
Net asset value, beginning of period ........................................... $15.49 $15.00
----------------------------
Income from investment operations:
Net investment income ....................................................... .09 .06
Net realized and unrealized gain (loss) on investments ...................... 3.72 .43
----------------------------
Total from investment operations ............................................... 3.81 .49
----------------------------
Less distributions from net investment income .................................. (.06) --
----------------------------
Net asset value, end of period ................................................. $19.24 $15.49
----------------------------
Total Return (%) (c) ........................................................... 24.67 3.27(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ......................................... 148 78
Ratio of operating expenses, net to average net assets (%) ..................... 1.75 1.75(e)
Ratio of operating expenses before expense reductions, to average
net assets (%) .............................................................. 1.82 2.31(e)
Ratio of net investment income to average net assets (%) ....................... .55 1.03(e)
Portfolio turnover rate (%) .................................................... 31.34 12.56(e)
Average commission rate paid ................................................... $.0004 $.0150
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations
(c) Total returns would have been lower had certain expenses not been reduced.
(d) Not Annualized (e) Annualized
141
<PAGE>
- --------------------------------------------------------------------------------
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .23
Net realized and unrealized gain (loss) on investments .......... 2.13
------
Total from investment operations ................................... 2.36
------
Net asset value, end of period ..................................... $17.36
------
Total Return (%) (b) ............................................... 15.73(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 20
Ratio of operating expenses, net to average net assets (%) ......... 1.75(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 4.28(d)
Ratio of net investment income to average net assets (%) ........... 2.35(d)
Portfolio turnover rate (%) ........................................ 50.73(d)
Average commission rate paid ....................................... $.0309
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.
- --------------------------------------------------------------------------------
AARP DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
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, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .43
Net realized and unrealized gain (loss) on investments .......... .96
------
Total from investment operations ................................... 1.39
------
Less distribution from net investment income ....................... (.43)
------
Net asset value, end of period ..................................... $15.96
------
Total Return (%) (e) ............................................... 9.35(b)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 43
Ratio of operating expenses, net to average net assets (%) ......... --(d)
Ratio of net investment income to average net assets (%) ........... 5.13(c)
Portfolio turnover rate (%) ........................................ 5.57(c)
</TABLE>
(a) Commencement of operations
(b) Not Annualized (c) Annualized
(d) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the period, the Portfolio did bear its
share of the operating, administrative and advisory expenses of the
Underlying AARP Funds.
(e) If the Fund Manager had not maintained some of the underlying AARP Funds'
expenses, the total return for this Fund would have been lower.
142
<PAGE>
- --------------------------------------------------------------------------------
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .34
Net realized and unrealized gain (loss) on investments .......... 2.06
------
Total from investment operations ................................... 2.40
------
Net asset value, end of period ..................................... $17.40
------
Total Return (%) (f) ............................................... 16.00(b)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 62
Ratio of operating expenses to average net assets (%) .............. --(d)
Ratio of net investment income to average net assets (%) ........... 3.52(c)
Portfolio turnover rate (%) ........................................ 7.67(c)
</TABLE>
(a) Commencement of operations
(b) Not Annualized
(c) Annualized
(d) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the period, the Portfolio did bear its
share of the operating, administrative and advisory expenses of the
Underlying AARP Funds.
(e) Based on monthly average shares outstanding during the period.
(f) If the Fund Manager had not maintained some of the underlying AARP Funds'
expenses, the total return for this Fund would have been lower.
143
<PAGE>
This page
intentionally
left blank.
144
<PAGE>
N O T E S T O
F I N A N C I A L S T A T E M E N T S
More definitive information about the Financial
Statements is found in the Notes section. This
information includes further elaboration on Expenses,
Organization Cost, Portfolio Insurance, and
Transactions, including Management fees and Commitments.
Tax Information and Program Services: Provides you with
toll-free numbers and several addresses where you can
get answers to questions regarding your holdings in the
AARP Investment Program. In addition, tax information
that may be of interest to you can be found in the
section.
Report of Independent Accountants: A letter from Price
Waterhouse LLP, a leading accounting firm, opining that
all the "Financial Statements" are fairly presented in
all material respects, based upon their audits.
Officers and Trustees: Identifies the various members of
the AARP Board of Trustees and the Officers from
Scudder, Stevens & Clark, Inc. responsible for
overseeing the growth and strategic direction of the
AARP Investment Program.
145
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies.
The following AARP Mutual Funds from Scudder (the "AARP Funds" or the
"Funds") are organized as Massachusetts business trusts and are registered under
the Investment Company Act of 1940, as amended, (the "1940 Act") as open-end
management investment companies.
Trust name: Series name:
--------------------------------------------------------------------------
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 Bond Fund for Income
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
AARP U.S. Stock Index Fund
AARP Small Company Stock Fund
AARP International Stock Fund
AARP Managed Investment
Portfolios Trust:
AARP Diversified Income Portfolio
AARP Diversified Growth Portfolio
All Funds are diversified. 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 Portfolios
within the AARP Managed Investment Portfolios Trust invest primarily in existing
AARP Mutual Funds from Scudder (the "Underlying AARP Funds").
The Funds' 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 1940
Act. Under this method, securities for which market quotations are readily
available and securities purchased with original maturities of 61 days or more
are valued at market. Securities purchased with an original maturity of 60 days
or less are valued at amortized cost. The AARP High Quality Tax Free Money Fund
uses the amortized cost method of security valuation as permitted under Rule
2a-7 of the 1940 Act. 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 U.S. or foreign 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 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
146
<PAGE>
over-the-counter market are valued at the most recent sale price on such market.
If there are no such sales, the value is the most recent bid quotation.
Portfolio debt securities other than money market securities 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.
Money market instruments purchased with an original maturity of sixty days
or less are valued at amortized cost. Variable rate demand notes are carried at
cost which together with accrued interest approximates market.
Investments of the AARP Diversified Income Portfolio and AARP Diversified
Growth Portfolio are valued at the net asset value per share of each Underlying
AARP Fund as of the close of regular trading on the New York Stock Exchange.
The value of all other securities is determined in good faith under the
direction of the Board of Trustees.
B. 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 at least equal to the
repurchase price.
C. Futures Contracts. The Funds in the AARP Income Trust, the AARP Insured
Tax Free General Bond Fund, the AARP Balanced Stock and Bond Fund, the AARP
Global Growth Fund, the AARP International Stock Fund, the AARP U.S. Stock Index
Fund, and the AARP Small Company Stock 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 High Quality Bond
Fund and the AARP Insured Tax Free General Bond Fund sold interest rate futures
to hedge against declines in the value of portfolio securities and the AARP High
Quality Bond Fund purchased interest rate futures to manage the duration of the
portfolio. Also, during the period, the AARP U.S. Stock Index Fund purchased
index futures as a temporary substitute for purchasing selected investments.
Upon entering into a futures contract, the Fund is required to deposit
with a financial intermediary an amount equal to a certain percentage of the
face value indicated in the futures contract ("initial margin"). 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. Options. In an option contract, the writer of the option grants the
buyer of the option the right to purchase from (call option), or sell to (put
option), the writer a designated instrument at a specified price within a
specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised.
147
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The Funds in the AARP Income Trust, the AARP Insured Tax Free General Bond
Fund, the AARP Balanced Stock and Bond Fund, the AARP Global Growth Fund, the
AARP International Stock Fund, and the AARP Small Company Stock Fund may enter
into purchased and written options on futures contracts. The Funds in the AARP
Growth Trust and the AARP Income Trust may write covered call options. The Funds
in the AARP Growth Trust may purchase put and call options on stock indices.
During the period, the AARP International Stock Fund purchased put options
on currencies as a hedge against potential adverse price movements in the value
of portfolio assets. Also, during the period, the AARP High Quality Bond Fund
purchased call options on futures as a temporary substitute for purchasing
selected investments.
If the Fund writes an option and the option expires unexercised, the Fund
will realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written
call or purchased put option is adjusted for the amount of option premium. If a
written put or purchased call option is exercised the Fund's cost basis of the
acquired security or currency would be the exercise price adjusted for the
amount of the option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange
for the premium, the opportunity to profit during the option period from an
increase in the market value of the underlying security or currency above the
exercise price. When the Fund writes a put option it accepts the risk of a
decline in the market value of the underlying security or currency below the
exercise price. Over-the-counter options have the risk of the potential
inability of counterparties to meet the terms of their contracts. The Fund's
maximum exposure to purchased options is limited to the premium initially paid.
In addition, certain risks may arise upon entering into option contracts
including the risk that an illiquid secondary market will limit the Fund's
ability to close out an option contract prior to the expiration date and, that a
change in the value of the option contract may not correlate exactly with
changes in the value of the securities or currencies hedged.
E. Securities Purchased on a Forward Delivery or When-Issued Basis. The
AARP High Quality Money Fund, the Funds in the AARP Income Trust and in the AARP
Tax Free Income Trust, and the 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. The AARP GNMA and U.S. Treasury Fund had an outstanding
commitment to purchase forward delivery securities as of September 30, 1997
F. Forward Currency Exchange Contracts. The Funds in the AARP Growth
Trust, the AARP High Quality Bond Fund and the AARP Bond Fund for Income may, in
connection with portfolio purchases and sales of securities denominated in a
foreign currency, enter into forward 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
148
<PAGE>
rate. During the period, the AARP Balanced Stock and Bond Fund, the AARP Growth
and Income Fund, and the AARP Global Growth Fund utilized forward contracts as a
hedge against changes in exchange rates relating to foreign currency denominated
assets, and as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. Also, during the period, the AARP
International Stock 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 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.
G. 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.
H. 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.
Distributions of income and capital gains earned by the Diversified Growth and
Diversified Income Portfolios from the Underlying AARP Funds are recorded on the
ex-dividend date.
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.
I. 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 of 1986, 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.
J. Distribution of Income and Gains. Each AARP Fund intends to follow the
practice of distributing all of its net investment income to shareholders.
Dividends from the AARP High Quality Money Fund and the Funds in the AARP Income
Trust and the AARP Tax Free Income Trust are declared daily and distributed
monthly. Dividends from the AARP Diversified Income Portfolio are declared and
paid monthly. Dividends from the AARP Balanced Stock and
149
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Bond Fund, the AARP U.S. Stock Index Fund, and the AARP Growth and Income Fund
are declared and paid quarterly. Dividends from the AARP Global Growth Fund, the
AARP Small Company Stock Fund, the AARP International Stock Fund, the AARP
Diversified Growth Portfolio, and the AARP Capital Growth Fund are declared and
paid annually. During any particular year, net realized gains 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 may
take into account realized gains and losses on the sales of securities in its
daily distributions. Additional distributions may be made by each Fund if
necessary.
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 from distributions during such period. Accordingly,
the Funds may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Fund.
K. Expenses. Each Fund (except for the AARP Diversified Income and
Diversified Growth Portfolios) 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.
The AARP Diversified Income and Diversified Growth Portfolios ("the
Portfolios") have entered into a Special Servicing Agreement with Scudder,
Stevens & Clark, Inc. (the "Fund Manager"), the Underlying AARP Funds, Scudder
Service Corporation, Scudder Fund Accounting Corporation and Scudder Investor
Services, whereby the Fund Manager arranges for all services pertaining to the
operations of the Portfolios. If the aggregate expenses of the Portfolios are
less than the estimated savings to the Underlying AARP Funds from the operation
of each Portfolio, each of the Underlying AARP Funds will bear those expenses in
proportion to the average daily value of its shares owned by the respective
Portfolio. Consequently, no Underlying AARP Fund will be expected to carry
expenses that are in excess of the estimate of savings to the respective
Underlying AARP Fund. These estimated savings result from the reduction in
shareholder servicing costs due to the elimination of separate shareholder
accounts which either currently are or have potential to be invested in the
Underlying AARP Funds. In the event that the financial benefits to the
Underlying AARP Funds do not exceed aggregate expenses of any Portfolio, the
Fund Manager will pay certain costs on behalf of the respective Portfolio. In
accordance with the Special Servicing Agreement, as discussed above, no expenses
were charged to the AARP Diversified Income and Diversified Growth Portfolios
during the period. For the period February 1, 1997 (commencement of operations)
to September 30, 1997, the Fund Manager paid expenses in the amount $43,964 and
$69,567, on behalf of the Diversified Income and Diversified Growth Portfolios,
respectively. Additionally, the Fund Manager has assumed the organization costs
of each Portfolio.
For the period ended September 30, 1997, the amounts charged and unpaid to
the Underlying AARP Funds under the Special Servicing Agreement, as shown in the
Statement of Operations as part of the Shareholder Services, were as follows:
AARP High Quality Money Fund $ 32,616
AARP Growth and Income Fund $ 58,770
AARP GNMA and U.S. Treasury Fund $ 97,381
AARP International Stock Fund $ 6,683
AARP Bond Fund for Income $ 17,015
AARP Global Growth Fund $ 38,619
AARP Capital Growth Fund $ 6,549
AARP Small Company Stock Fund $ 5,312
AARP U.S. Stock Index Fund $ 17,515
The AARP High Quality Tax Free Money Fund, the AARP High Quality Bond
Fund, the AARP Insured Tax Free General Bond Fund, and the AARP Balanced
Stock and Bond Fund are not subject to the Special Servicing Agreement.
150
<PAGE>
L. Organization Cost. Costs incurred by the AARP Balanced Stock and Bond
Fund, the AARP Global Growth Fund, the AARP U.S. Stock Index Fund, the AARP Bond
Fund for Income, the AARP International Stock Fund, and the AARP Small Company
Stock Fund in connection with their organization and initial registration of
shares have been deferred and are being amortized on a straight-line basis over
a five-year period. The Fund Manager has assumed the organization costs of the
AARP Diversified Growth and the AARP Diversified Income Portfolios.
M. Portfolio Insurance. The cost of premiums paid by the AARP Insured Tax
Free General Bond Fund for insurance on individual securities is
non-cancellable, runs the life of such securities, and 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.
N. Transactions in Securities of Affiliated Issuers. The AARP Growth and
Income Fund had transactions in securities of affiliated issuers. An affiliated
issuer is a company in which the Fund has ownership of at least 5% of the voting
securities. A summary of the Fund's transactions with companies which are or
were affiliates for the year ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Beginning Purchases Sales
Affiliate Cost ($) Cost ($) Cost ($) Ending Cost ($) Market Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Growth Properties, Inc. 39,388,655 9,946,350 -- 49,335,005 74,181,300
=========================================================================================
<CAPTION>
Realized Gain/Loss ($) Dividend Income ($)
----------------------------------------------------------------------
<S> <C> <C>
Affiliated Issuers -- 3,021,216
Unaffiliated Issuers 533,200,232 148,394,016
----------------------------------------------------------------------
Total 533,200,232 151,415,232
======================================================================
</TABLE>
Note 2. Management Fee and other Related Transactions.
Under the investment management and advisory agreement (the "Management
Agreement") between each Trust (excluding the AARP Managed Investment Portfolios
Trust) and 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") except the
AARP Diversified Income and the Diversified Growth Portfolios, and 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 (excluding the
AARP Diversified Income and the Diversified Growth Portfolios).
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, each Fund (excluding the AARP Diversified
Income and the AARP Diversified Growth Portfolios) 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 Fund Manager has retained
Bankers Trust Company as Subadviser to the AARP U.S. Stock Index Fund; under the
Subadvisory Agreement, the Fund Manager pays a quarterly fee to the Subadviser,
which amounted to $42,323 for the period ended September 30, 1997.
151
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The Individual Fund Fee Rate is calculated at the following percentages of
the average daily net assets of each Fund:
Fund Rate
- --------------------------------------------- --------------
AARP High Quality Money Fund ............... .10%
AARP High Quality Tax Free Money Fund ...... .10%
AARP GNMA and U.S. Treasury Fund ........... .12%
AARP High Quality Bond Fund ................ .19%
AARP Insured Tax Free General Bond Fund .... .19%
AARP Bond Fund for Income .................. .28%
AARP Balanced Stock and Bond Fund .......... .19%
AARP Growth and Income Fund ................ .19%
AARP U.S. Stock Index Fund ................. 0%
AARP Capital Growth Fund ................... .32%
AARP Small Company Stock Fund .............. .55%
AARP Global Growth Fund .................... .55%
AARP International Stock Fund .............. .60%
The total amount of management fees 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
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 Fund Manager agreed to waive a portion of its management fee and
reimburse a portion of expenses in order to maintain the annualized expenses of
the AARP Global Growth Fund at no more than 1.75% of average daily net assets
until January 31, 1998. Effective February 1, 1997, the Fund Manager has agreed
to waive all or a portion of its management fee and reimburse all or a portion
of expenses in order to maintain the following annualized expense ratios until
January 31, 1998: AARP U.S. Stock Index Fund, 0.50% of average daily net assets;
AARP Bond Fund for Income, 0.00% of average daily net assets; AARP International
Stock Fund, 1.75% of average daily net assets; and AARP Small Company Stock
Fund, 1.75% of average daily net assets. The amount of expenses waived and/or
reimbursed by the Fund Manager, if any, for each Fund has been shown in the
Statement of Operations as Expense Reductions.
The Fund Manager did not impose any or a portion of its Management Fee for
certain Funds during the period ended September 30, 1997, as follows: AARP Bond
Fund for Income $97,012; AARP Global Growth Fund $74,953; AARP International
Stock Fund $59,143; AARP Small Company Stock Fund $111,376; and the AARP U.S.
Stock Index Fund $38,841.
On June 26, 1997, the Fund Manager entered into an agreement with The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, pursuant to which Zurich will acquire a majority interest
in the Fund Manager, and the Fund Manager will form a new global investment
organization by combining with Zurich's subsidiary, Zurich Kemper Investments,
Inc. and change its name to Scudder Kemper Investments, Inc. Subject to the
receipt of the required regulatory and shareholder approvals, the transaction is
expected to close in the fourth quarter of 1997.
These Trusts also have a shareholder servicing agreement with Scudder
Service Corporation ("SSC"), a subsidiary of the Fund Manager. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount for each Fund is shown in the
table below, and is included in Services to shareholders in the Statements of
Operations.
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 the Funds. The
amount for each Fund is shown in the table below, and is included in Custodian
and accounting fees in the Statements of Operations.
152
<PAGE>
For the period ended September 30, 1997 the amounts charged by SSC and
SFAC to the Funds were as follows:
<TABLE>
<CAPTION>
Total SSC Total SFAC
Amount Unpaid at Amount Unpaid at
Charged To September 30, Charged To September 30,
Fund Fund by SSC(a) 1997* Fund by SFAC(b) 1997*
- ------------------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $1,505,677 $ 121,984 $ 54,052 $ 4,588
AARP High Quality Tax Free Money Fund 256,965 20,052 30,023 2,500
AARP GNMA and U.S. Treasury Fund 6,732,169 539,940 480,845 38,769
AARP High Quality Bond Fund 1,455,652 114,310 82,859 5,606
AARP Insured Tax Free General Bond Fund 1,741,482 138,720 162,915 13,903
AARP Bond Fund for Income -- -- -- --
AARP Balanced Stock and Bond Fund 1,357,972 132,955 95,386 8,862
AARP Growth and Income Fund 6,853,761 672,527 323,033 31,430
AARP U.S. Stock Index Fund -- -- -- --
AARP Capital Growth Fund 1,889,072 180,473 110,317 10,035
AARP Small Company Stock Fund 93,491 93,491 25,445 25,445
AARP Global Growth Fund 558,504 51,344 95,221 9,698
AARP International Stock Fund -- -- -- --
</TABLE>
* Total unpaid amounts are included in Other payables and accrued expenses
in the Statements of Assets and Liabilities.
(a) SSC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and
AARP International Stock Fund amounting to $40,906, $60,094, $25,298, and
$54,419, respectively.
(b) SFAC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and
AARP International Stock Fund amounting to $25,000, $73,071, $6,725, and
$33,333, respectively.
The AARP Investment Program pays each Trustee unaffiliated with Scudder or
AARP an annual retainer of $10,000; additionally, specified amounts are paid by
each Fund for board and committee meetings attended. The amounts for each Fund
have been shown in the Statement of Operations as Trustees' fees and expenses.
The Diversified Portfolios do not invest in the Underlying AARP Funds for
the purpose of exercising management or control, however, investments within the
set limits may represent a significant portion of an Underlying AARP Fund's net
assets. At September 30, 1997, the Diversified Income Portfolio held the
following Underlying AARP Funds' outstanding shares: approximately 22% of the
AARP Bond Fund for Income; and 6% of the AARP U.S. Stock Index Fund. The
Diversified Growth Portfolio held the following Underlying AARP Funds'
outstanding shares at September 30, 1997: approximately 22% of the AARP
International Stock Fund; 19% of the AARP Bond Fund for Income; 18% of the U.S.
Stock Index Fund; and 9% of the AARP Small Company Stock Fund.
Note 3. Commitments.
As of September 30, 1997, the AARP Global Growth Fund had entered into the
following forward currency exchange contracts resulting in net unrealized
depreciation of $248,684.
Net Unrealized
Appreciation
(Depreciation)
Contracts to Deliver In Exchange For Settlement Date (U.S.$)
- -------------------- ------------------ --------------- -------------------
DEM 7,903,094 USD 4,351,924 1/30/98 $ (155,565)
DEM 3,337,679 USD 1,812,577 2/17/98 (93,119)
-----------
$ (248,684)
===========
153
<PAGE>
Report of Independent Accountants
[PRICE WATERHOUSE LOGO]
To the Trustees and Shareholders of
AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust
and AARP Managed Investment Portfolios Trust
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of each
of the series constituting AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust and AARP Managed Investment
Portfolios Trust (hereafter referred to as the "Trusts") at September 30,
1997, the results of each of their operations, the changes in each of
their net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trusts' management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at September 30,
1997 by correspondence with the custodian and the application of
alternative auditing procedures where securities purchased had not been
received, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
November 12, 1997
154
<PAGE>
O F F I C E R S A N D T R U S T E E S
155
<PAGE>
OFFICERS AND TRUSTEES
CAROLE LEWIS ANDERSON
Trustee of AARP Funds; 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 Funds; Member, New York City Department of Aging
Advisory Council--Appointed by Mayor (1995-Present); Consultant,
Gerontology; Commissioner, County of Nassau, NY, Department of Senior
Citizen Affairs (1971-1991); Board Member, American Association of
International Aging (1981 to 1996); 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.
ROBERT N. BUTLER, M.D.
Trustee of AARP Funds; 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).
ESTHER CANJA
Trustee of AARP Funds; 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).
LINDA C. COUGHLIN*
Chairperson and Trustee of AARP Funds; Managing Director and Member,
Board of Directors of Scudder, Stevens & Clark, Inc.
HORACE B. DEETS
Vice Chairman and Trustee of AARP Funds; Executive Director,
American Association of Retired Persons; Member, Board of
Councilors, Andrus Gerontology Center; Member of the Board,
HelpAge International.
EDGAR R. FIEDLER
Trustee of AARP Funds; Senior Fellow and Economic Counselor, The
Conference Board, Inc.; Director: The Stanley Works, HT Insight Funds,
and Emerging Mexico Fund.
EUGENE P. FORRESTER
Trustee of AARP Funds; 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.
GEORGE L. MADDOX, JR.
Trustee of AARP Funds; 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.
156
<PAGE>
ROBERT J. MYERS
Trustee of AARP Funds; 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.
JAMES H. SCHULZ
Trustee of AARP Funds; Professor of Economics and Kirstein
Professor of Aging Policy, Policy Center of Aging, Florence
Heller School, Brandeis University.
GORDON SHILLINGLAW
Trustee of AARP Funds; Professor Emeritus of Accounting, Columbia
University Graduate School of Business; Formerly Director and Treasurer,
FERIS Foundation of America.
THOMAS W. JOSEPH* JAMES W. PASMAN*
Vice President Vice President
DAVID S. LEE* KATHRYN L. QUIRK*
Vice President and Assistant Treasurer Vice President and Secretary
THOMAS F. MCDONOUGH* HOWARD SCHNEIDER*
Vice President and Assistant Secretary Vice President
PAMELA A. MCGRATH* CORNELIA SMALL*
Vice President and Treasurer President
EDWARD J. O'CONNELL*
Vice President and Assistant Treasurer
*Scudder, Stevens & Clark, Inc.
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.
157
<PAGE>
SERVICE INFORMATION
SHAREHOLDER Our knowledgeable AARP Mutual Fund Representatives
SERVICE LINE are available to answer questions about the
Program or your account Monday through Friday,
1-800-253-2277 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 42 Longwater Drive
mail: Norwell, MA 02061-1612
EASY-ACCESS LINE Shareholders with a touch-tone telephone may call
this automated line to obtain AARP Fund
1-800-631-4636 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 If you have access to a fax machine, you can fax
BY FAX transaction requests. Any exchange or redemption
request received after 4:00 p.m. business days or
1-800-821-6234 on weekends will be processed the next business
day. All faxes are kept confidential.
TDD (TELECOMMUNICATIONS AARP members with hearing or speech impairments
DEVICE FOR THE DEAF AND and access to TDD equipment can communicate with
SPEECH?IMPAIRED) the AARP Investment Program Monday through Friday
between 8:00 a.m. and 5:00 p.m., Eastern time.
1-800-634-9454 Transactions can be made between 8:00 a.m. and
4:00 p.m., Eastern time.
158
<PAGE>
TAX INFORMATION (UNAUDITED)
Of the dividends paid from net investment income by the AARP High Quality
Tax Free Money Fund and the AARP Insured Tax Free General Bond Fund for
the Funds' fiscal years ending September 30, 1997, 100% constituted
exempt-interest dividends for regular federal income tax purposes.
Pursuant to Section 852 of the Internal Revenue Code, the AARP Balanced
Stock and Bond Fund, the AARP Growth and Income Fund, the AARP U.S. Stock
Index Fund, the AARP Capital Growth Fund, the AARP Global Growth Fund, and
the AARP Insured Tax Free General Bond Fund designate $22,565,952,
$503,261,408, $72,533, $71,098,608, $1,636,598, and $2,583,310,
respectively, as capital gain dividends for their fiscal years ended
September 30, 1997.
Pursuant to Section 853 of the Internal Revenue code, the AARP Global
Growth Fund and the AARP International Stock Index Fund designate $0.023
and $0.020 per share (representing a total of $177,801 and $23,212) of
foreign taxes and $0.097 and $0.126 per share (representing a total of
$743,398 and $147,497) of foreign source income as having been paid in the
fiscal year ended September 30, 1997, respectively.
Pursuant to Section 854 of the Internal Revenue Code, the percentages of
ordinary income dividends paid qualify for the dividends received
deduction for corporations are as follow: AARP Balanced Stock and Bond
Fund 41.32%, AARP Capital Growth Fund 100%, AARP U.S. Stock Index Fund
100%, and AARP Growth and Income Fund 96.36%.
In January 1998 you will receive federal tax information on all
distributions paid to your account in calendar year 1997.
159
<PAGE>
GLOSSARY
AVERAGE ANNUALIZED The one-year return of an investment based on its
TOTAL RETURN compounded total return. The annualized return
gives the investor an idea of the performance
during each year of a listed period, such as 3
years, 5 years or 10 years.
BARBELL STRATEGY An investment strategy where the portfolio manager
holds bonds with short maturities and long
maturities that would give the impression of a bar
bell if the clusters of bonds on either end were
illustrated.
COUPON The name given to the interest payments that could
be clipped and sent to the issuer for payment. The
average coupon rate would be the expected interest
rates of all the bonds held in a portfolio.
QUALITY Quality is a measure of a bond issuer's ability to
repay interest and principal in a timely manner.
The average quality is a designation of all the
bonds held in the portfolio.
DURATION Duration is a mathematical calculation of the
average life of a bond (or bonds in a bond fund)
that serves as a useful measure of its price risk.
Each year of duration represents an expected 1%
change in the price of a bond for every 1% change
in interest rates. For example, if a bond fund has
an average duration of two years, its price will
fall about 2% when interest rates rise by one
percentage point. Conversely, the bond fund's
price will rise about 2% when interest rates fall
by one percentage point.
MATURITY The date upon which bonds mature, that is, the
date when the issuer must pay back the face amount
of the bond. An investor who buys $10,000 worth of
25-year bonds will receive $10,000 at the end of
25 years, after having received interest payments
(coupons) over the 25-year period.
PREPAYMENT RISK The possibility that, as interest rates fall,
homeowners will refinance their home mortgages,
resulting in the prepayment of GNMA securities.
TOTAL RETURN A measure of an investment's performance that
takes into account income paid, other
distributions, and any increase or decline in the
value of the principal over a given period of
time.
VALUATION The process in which the value of a security is
assessed or determined.
YIELD The income per share paid to mutual fund
shareholders from the dividends and interest of
that fund, expressed as a percentage for a stated
period of time. It is based on past performance
and measured in time increments.
YIELD TO MATURITY Concept used to determine the rate of return an
investor will receive if a long-term,
interest-bearing investment, such as a bond, is
held until its maturity date.
160
<PAGE>
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