AARP INVESTMENT PROGRAM FROM SCUDDER
PROSPECTUS
February 1, 1995
There are eight pure no-load AARP Mutual Funds that have been developed to help
meet the investment needs of AARP members. The Funds are organized into four
Trusts (see page 3 1 for more information on the Trusts).
Trusts AARP Mutual Funds
AARP Cash Investment Funds AARP High Quality Money Fund
AARP Income Trust AARP GNMA and U.S. Treasury Fund
AARP High Quality Bond Fund
AARP Tax Free Income Trust AARP High Quality Tax Free Money Fund
AARP Insured Tax Free General Bond Fund
AARP Growth Trust AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP Capital Growth Fund
This combined Prospectus provides information about the AARP Investment
Program from Scudder that a prospective investor should know before investing.
Please keep it 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. For limitations on insurance
relative to the AARP Insured Tax Free General Bond Fund, see page 20 . 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. 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, 1995, 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).
You may get a copy of the SAI or a LARGER PRINT VERSION OF THIS PROSPECTUS
without charge. Call 1-800-253-2277, or write 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.
FUND EXPENSES
The AARP Mutual Funds do not charge sales fees or commissions.
100% of your investment goes to work for you.
* No fees to open your account
* No fees to open or maintain an AARP IRA or AARP Keogh Plan account
* No fees to buy shares
* No fees to exchange (move investments from one fund to another)
* No fees to sell (redeem) shares
* No marketing fees or distribution fees (12b-1 fees)
* No fees to reinvest dividends
There are Annual Fund Operating Expenses for each of the AARP Funds. You do not
pay these expenses directly. The AARP Funds pay these expenses before
distributing net investment income to you. These expenses include the management
fee paid to the Fund Manager as well as other expenses for services such as
maintaining shareholder records and furnishing shareholder statements and fund
reports. The expenses are reflected in the AARP 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. You may use these tables to compare the fees and
expenses of the AARP Funds with other mutual funds.
Annual Fund Operating Expenses (after reduction of fees and
reimbursement of expenses ) are expressed as a percentage of each AARP
Fund's average daily net assets.
The chart shows the expenses for each of the Funds for the fiscal year ended
September 30, 1994 had the current management agreement been in effect for the
full fiscal year.**
<TABLE>
<CAPTION>
Effective Total Fund
Management Other Operating
Fund Fee Rate** Expenses Expenses
- ---- ---------- ------------- -----------
<S> <C> <C> <C>
AARP High Quality Money Fund .40% .71% 1.11%
AARP High Quality Tax Free Money Fund .40% .50% .90%#
AARP GNMA and U.S. Treasury Fund .42% .24% .66%
AARP High Quality Bond Fund .49% .46% .95%
AARP Insured Tax Free General Bond Fund .49% .20% .69%
AARP Balanced Stock and Bond Fund* .49% .56 % 1.05 %*
AARP Growth and Income Fund .49% .27% .76%
AARP Capital Growth Fund .62% .36% .98%
</TABLE>
EXAMPLES OF WHAT FUND EXPENSES WOULD BE ON A $1,000 INVESTMENT IN EACH AARP FUND
Based on the level of assets as of September 30, 1994, we have calculated the
total expenses of a $1,000 investment in each AARP Fund for 1
year, 3 years, 5 years and 10 years. These examples assume 5% annual return.
There are 3 other assumptions: (1) redemption at the end of each period, (2)
reinvestment of all dividends and distributions, and (3) total fund operating
expenses noted on page 2 remain the same each year.
For additional information, including reference to a $5.00 wire service fee that
is charged in some cases, please refer to page 37.
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- ----- ------ -------- ------- ----------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $11 $35 $61 $135
AARP High Quality Tax Free Money Fund 9 29 50 111
AARP GNMA and U.S. Treasury Fund 7 21 37 82
AARP High Quality Bond Fund 10 30 53 117
AARP Insured Tax Free General Bond Fund 7 22 38 86
AARP Balanced Stock and Bond Fund 11 33 58 128
AARP Growth and Income Fund 8 24 42 94
AARP Capital Growth Fund 10 31 54 120
</TABLE>
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.
* The AARP Balanced Stock and Bond Fund was introduced on February 1, 1994.
The Fund Manager agreed to maintain expenses of the Fund at not more
than 1.50% from February 1, 1994 to September 30, 1994. As of September
30, 1994 the annualized ratio of operating expenses to average net assets
was 1.31%.
** The AARP 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 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. See pages 31 and 32
for information on how the Effective Management Fee Rate is calculated.
# The Fund Manager has agreed to maintain total annualized expenses of the
AARP High Quality Tax Free Money Fund at not more than .90% of its average
daily net assets until February 1, 1996. Had such expense maintenance not
been in effect, total annualized expenses of the Fund would have been .91%
for the fiscal year ending September 30, 1994 (of which .4 3 % would
have consisted of management fees).
FINANCIAL HIGHLIGHTS
On the next six pages you will find a variety of information about the income
and the expenses of each AARP Fund for the stated periods. 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 Funds' independent accountants, have examined
this information. The Annual Report to Shareholders includes their report.
For a copy of the Annual Report to Shareholders, please contact an AARP Mutual
Fund Representative at 1-800-253-2277.
<TABLE>
<CAPTION>
Net Asset Net Realized Dividends
For the Years Ended Value at Net & Unrealized Total from from Net Distributions
September 30 Beginning Investment Investment Investment Investment from Net
- ------------ of Period Income (a) Gain (Loss) Operations Income Realized Gains
--------- ---------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
AARP High Quality Money Fund
1994 $1.00 $.028 _ $.028 $(.028) _
1993 1.00 .021 _ .021 (.021) _
1992 1.00 .040 _ .040 (.040) (c) _
1991 1.00 .060 _ .060 (.060) _
1990 1.00 .073 _ .073 (.073) _
1989 1.00 .080 _ .080 (.080) _
1988 1.00 .060 _ .060 (.060) _
1987 1.00 .050 _ .050 (.050) _
1986 1.00 .064 _ .064 (.064) _
1985 (d) 1.00 .012 _ .012 (.012) _
AARP High Quality Tax Free Money Fund (h)
1994 $1.000 $.017 _ $.017 $(.017) _
1993 1.000 .016 _ .016 (.016) _
1992 1.000 .026 _ .026 (.026) _
1991 (h) .996 .055 $.004 .059 (.055) _
1990 .998 .061 (.002) .059 (.061) _
1989 1.008 .059 (.010) .049 (.059) _
1988 .998 .055 .010 .065 (.055) _
1987 1.027 .049 (.026) .023 (.049) $(.003)
1986 .996 .048 .031 .079 (.048) _
1985 (e) .989 .031 .007 .038 (.031) _
AARP GNMA and U.S. Treasury Fund
1994 $15.96 $.93 $(1.23) $(.30) $(.93) _
1993 16.19 1.15 (.23) .92 (1.15) _
1992 15.72 1.22 .47 1.69 (1.22) _
1991 14.95 1.26 .77 2.03 (1.26) _
1990 14.98 1.31 (.03) 1.28 (1.31) _
1989 15.11 1.31 (.13) 1.18 (1.31) _
1988 14.89 1.37 .22 1.59 (1.37) _
1987 15.99 1.35 (1.09) .26 (1.35) $(.01)
1986 15.52 1.54 .50 2.04 (1.54) (.03)
1985 (e) 15.00 1.17 .52 1.69 (1.17) _
</TABLE>
<TABLE>
<CAPTION>
Net Asset
For the Years Value at Net Assets
Ended Total End of Total End of Period
September 30 Distributions Period Return % ($ millions)
- ------------ -------------- --------- -------- --------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund
1994 $(.028) $1.00 2.84 333
1993 (.021) 1.00 2.13 254
1992 (.040) 1.00 4.12 323
1991 (.060) 1.00 6.22 357
1990 (.073) 1.00 7.58 376
1989 (.080) 1.00 8.32 324
1988 (.060) 1.00 6.15 224
1987 (.050) 1.00 5.13 178
1986 (.064) 1.00 6.60 104
1985 (d) (.012) 1.00 1.34(f) 45
AARP High Quality Tax Free Money Fund (h)
1994 $(.017) $1.000 1.76 129
1993 (.016) 1.000 1.62 134
1992 (.026) 1.000 2.58 127
1991 (h) (.055) 1.000 6.10 119
1990 (.061) .996 6.02 98
1989 (.059) .998 4.98 90
1988 (.055) 1.008 6.65 79
1987 (.052) .998 2.25 70
1986 (.048) 1.027 8.07 48
1985 (e) (.031) .996 3.90 30
AARP GNMA and U.S. Treasury Fund
1994 $(.93) $14.73 (1.90) 5,585
1993 (1.15) 15.96 5.89 6,712
1992 (1.22) 16.19 11.19 5,232
1991 (1.26) 15.72 14.12 3,311
1990 (1.31) 14.95 8.86 2,583
1989 (1.31) 14.98 8.17 2,518
1988 (1.37) 15.11 11.07 2,837
1987 (1.36) 14.89 1.54 2,827
1986 (1.57) 15.99 13.62 1,963
1985 (e) (1.17) 15.52 11.77 322
</TABLE>
<TABLE>
<CAPTION>
Ratio of Ratio of Net
Operating Investment
For the Years Expenses to Income to Portfolio Per Share
Ended Average Net Average Net Turnover Reimbursement of
September 30 Assets % (a) Assets % Rate % Expenses (a):
- ------------ ------------- -------------- --------- -------------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund
1994 1.125 2.889 _ _
1993 1.312 2.123 _ _
1992 1.151 3.613 _ $.000
1991 1.053 6.050 _ .001
1990 1.058 7.319 _ .001
1989 1.071 8.061 _ .001
1988 1.097(b) 6.025 _ .001
1987 1.160 5.090 _ .004
1986 .712 6.310 _ .009
1985 (d) .662(g) 7.317(g) _ _
AARP High Quality Tax Free Money Fund (h)
1994 .90 1.75 _ $ .000
1993 .93 1.60 _ .002
1992 .95 2.54 _ .002
1991 (h) 1.06 5.43 _ .001
1990 1.12 6.06 39.88 _
1989 1.17 5.85 21.28 _
1988 1.27 5.47 62.73 .005
1987 1.31 4.80 22.20 .006
1986 1.48 4.72 23.00 _
1985 (e) 1.50(g) 4.51(g) _ .015
AARP GNMA and U.S. Treasury Fund
1994 .66 6.09 114.54 _
1993 .70 7.15 105.49 _
1992 .72 7.69 74.33 _
1991 .74 8.23 86.64 _
1990 .79 8.71 60.54 _
1989 .79 8.76 48.35 _
1988 .81 9.09 84.72 _
1987 .88 8.76 50.68 _
1986 .90 9.49 61.92 _
1985 (e) 1.03(g) 10.62(g) 67.24(g) _
</TABLE>
(a) Reflects a per share reimbursement of expenses during the period by the
Fund Manager. See last column.
(b) Reflects fees not imposed by the Fund Manager of $.001 per share.
(c) Includes approximately $.005 per share of net realized short-term capital
gains.
(d) Operations for the period of July 22, 1985 (commencement of operations) to
September 30, 1985.
(e) Operations for the period of November 30, 1984 (commencement of operations)
to September 30, 1985.
(f) Not Annualized.
(g) Annualized.
(h) 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.
<TABLE>
<CAPTION>
Net Asset Net Realized & Dividends
Value at Net Unrealized Total from from Net Distributions
For the Years Ended Beginning Investment Investment Investment Investment from Net
September 30 of Period Income (a) Gain (Loss) Operations Income Realized Gains
- ------------------- ---------- ---------- ----------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
AARP High Quality Bond Fund
1994 $17.19 $.85 $(1.76) $(.91) $(.85) _
1993 16.44 .93 .93 1.86 (.93) $ (.18)
1992 15.71 1.03 .73 1.76 (1.03) _
1991 14.63 1.10 1.08 2.18 (1.10) _
1990 15.04 1.17 (.41) .76 (1.17) _
1989 14.80 1.23 .24 1.47 (1.23) _
1988 14.45 1.27 .46 1.73 (1.27) (.11) (f)
1987 15.87 1.22 (1.19) .03 (1.22) (.23)
1986 15.31 1.41 .61 2.02 (1.41) (.05)
1985 (b) 15.00 1.06 .31 1.37 (1.06) _
AARP Insured Tax Free General Bond Fund
1994 $19.00 $.86 $(1.67) $(.81) $(.86) $(.34)
1993 17.88 .90 1.55 2.45 (.90) (.43)
1992 17.30 .93 .75 1.68 (.93) (.17)
1991 16.12 1.00 1.18 2.18 (1.00) _
1990 16.61 1.04 (.24) .80 (1.04) (.25)
1989 16.02 1.08 .59 1.67 (1.08) _
1988 15.00 1.08 1.02 2.10 (1.08) _
1987 16.69 1.07 (1.49) (.42) (1.07) (.20)
1986 15.12 1.01 1.63 2.64 (1.01) (.06)
1985 (b) 15.00 .64 .12 .76 (.64) _
AARP Balanced Stock and Bond Fund
1994 (e) $15.00 $.25 $(.37) (g) $(.12) $(.24) _
AARP Growth and Income Fund
1994 $32.91 $.94 $1.62 $2.56 $(1.13) $(.21)
1993 28.67 .83 4.58 5.41 (.87) (.30)
1992 26.97 .97 2.11 3.08 (.90) (.48)
1991 22.30 1.11 4.78 5.89 (1.17) (.05)
1990 26.11 1.11 (3.69) (2.58) (1.15) (.08)
1989 20.94 1.01 5.20 6.21 (1.04) _
1988 25.54 1.04 (3.93) (2.89) (.94) (.77)
1987 20.88 .67 5.51 6.18 (.64) (.88)
1986 16.84 .73 4.10 4.83 (.70) (.09)
1985 (b) 15.00 .39 1.64 2.03 (.19) _
</TABLE>
<TABLE>
<CAPTION>
Distributions Net Asset
in Excess of Value at Net Assets
For the Years Ended Net Realized Total End of Total End of Period
September 30 Gains Distributions Period Return % ($ millions)
- ------------------- ------------- -------------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
AARP High Quality Bond Fund
1994 $(.38) $(1.23) $15.05 (5.55) 568
1993 _ (1.11) 17.19 11.88 604
1992 _ (1.03) 16.44 11.56 384
1991 _ (1.10) 15.71 15.44 201
1990 _ (1.17) 14.63 5.21 151
1989 _ (1.23) 15.04 10.38 129
1988 _ (1.38) 14.80 12.38 123
1987 _ (1.45) 14.45 (.09) 108
1986 _ (1.46) 15.87 13.60 88
1985 (b) _ (1.06) 15.31 9.40(c) 45
AARP Insured Tax Free General Bond Fund
1994 $(.06) $(1.26) $16.93 (4.48) 1,914
1993 _ (1.33) 19.00 14.31 2,087
1992 _ (1.10) 17.88 10.01 1,487
1991 _ (1.00) 17.30 13.85 1,068
1990 _ (1.29) 16.12 4.89 771
1989 _ (1.08) 16.61 10.66 527
1988 _ (1.08) 16.02 14.39 312
1987 _ (1.27) 15.00 (2.94) 238
1986 _ (1.07) 16.69 17.96 129
1985 (b) _ (.64) 15.12 5.09(c) 62
AARP Balanced Stock and Bond Fund
1994 (e) _ $(.24) $14.64 (.78)(c) 175
AARP Growth and Income Fund
1994 _ $(1.34) $34.13 7.99 2,312
1993 _ (1.17) 32.91 19.38 1,560
1992 _ (1.38) 28.67 11.59 748
1991 _ (1.22) 26.97 27.19 392
1990 _ (1.23) 22.30 (10.19) 248
1989 _ (1.04) 26.11 30.58 236
1988 _ (1.71) 20.94 (10.75) 228
1987 _ (1.52) 25.54 30.92 358
1986 _ (.79) 20.88 29.00 99
1985 (b) _ (.19) 16.84 13.53(c) 27
</TABLE>
<TABLE>
<CAPTION>
Ratio of Ratio of Net
Operating Investment Per Share
Expenses to Income to Portfolio Reimbursement
For the Years Ended Average Net Average Net Turnover of Expenses
September 30 Assets %(a) Assets % Rate % (a):
- ------------------- -------------- ------------- --------- --------------
<S> <C> <C> <C> <C>
AARP High Quality Bond Fund
1994 .95 5.31 63.75 _
1993 1.01 5.64 100.98 _
1992 1.13 6.40 63.00 _
1991 1.17 7.26 90.43 _
1990 1.14 7.86 47.39 $.009
1989 1.16 8.33 57.69 .007
1988 1.17 8.55 23.57 .005
1987 1.18 7.81 192.80 .034
1986 1.30 8.86 62.72 .011
1985 (b) 1.50(d) 9.86(d) 53.87(d) .003
AARP Insured Tax Free General Bond Fund
1994 .68 4.80 38.39 _
1993 .72 4.90 47.96 _
1992 .74 5.31 62.45 _
1991 .77 5.92 32.18 _
1990 .80 6.29 48.24 _
1989 .84 6.52 148.94 _
1988 .92 6.95 163.51 _
1987 1.00 6.58 135.32 _
1986 1.13 6.40 35.99 _
1985 (b) 1.29(d) 6.11(d) 90.76(d) _
AARP Balanced Stock and Bond Fund
1994 (e) 1.31(d) 3.58(d) 49.32(d) _
AARP Growth and Income Fund
1994 .76 3.00 31.82 _
1993 .84 3.08 17.44 _
1992 .91 3.84 36.40 _
1991 .96 4.61 53.68 _
1990 1.03 4.76 58.47 _
1989 1.04 4.19 55.21 _
1988 1.06 4.52 61.34 _
1987 1.08 3.81 43.25 $.007
1986 1.21 4.55 37.44 _
1985 (b) 1.50(d) 5.62(d) 12.75(d) .020
</TABLE>
(a) Reflects a per share reimbursement of expenses during the period by the
Fund Manager. See last column.
(b) Operations for the period of November 30, 1984 (commencement of operations)
to September 30, 1985.
(c) Not Annualized.
(d) Annualized.
(e) Operations for the period of February 1, 1994 (commencement of operations)
to September 30, 1994.
(f) Includes $0.06 of distributions from paid-in capital.
(g) 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.
<TABLE>
<CAPTION>
Net Asset Net Realized Dividends
For the Years Value at Net & Unrealized Total from from Net Distributions
Ended Beginning Investment Investment Investment Investment from Net Total
September 30 of Period Income (a) Gain (Loss) Operations Income Realized Gains Distributions
- -------------- ---------- ---------- ------------ ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
AARP Capital Growth Fund
1994 $36.20 $.00 $(1.51) $(1.51) $(.05) $(2.90) $(2.95)
1993 30.30 .06 7.19 7.25 (.14) (1.21) (1.35)
1992 30.23 .15 1.09 1.24 (.23) (.94) (1.17)
1991 23.32 .24 9.05 9.29 (.59) (1.79) (2.38)
1990 34.17 .54(d) (9.27) (8.73) (.19) (1.93) (2.12)
1989 23.88 .21 10.17 10.38 (.09) _ (.09)
1988 27.55 .10 (1.97) (1.87) (.15) (1.65) (1.80)
1987 21.13 .11 7.40 7.51 (.19) (.90) (1.09)
1986 16.95 .18 4.28 4.46 (.09) (.19) (.28)
1985 (b) 15.00 .12 1.83 1.95 _ _ _
</TABLE>
<TABLE>
<CAPTION>
Net Asset Total Net Assets Ratio of Ratio of Net Portfolio Per Share
For the Value at Return % End of Period Operating Investment Turnover Reimbursement of
Years Ended End of ($ millions) Expenses to Income to Rate % Expenses (a):
September 30 Period Average Net Average Net
- ------------ Assets %(a) Assets %
<S> <C> <C> <C> <C> <C> <C> <C>
AARP Capital Growth Fund
1994 $31.74 (4.70) 683 .97 .02 79.65 _
1993 36.20 24.53 607 1.05 .22 100.63 _
1992 30.30 3.94 424 1.13 .61 89.20 _
1991 30.23 42.81 242 1.17 .90 99.62 _
1990 23.32 (26.94) 160 1.11 2.00 83.28 $.009
1989 34.17 43.62 180 1.16 .89 63.51 _
1988 23.88 (5.44) 91 1.23 .37 45.37 .044
1987 27.55 37.02 116 1.24 .62 53.61 .025
1986 21.13 26.65 56 1.44 1.27 46.32 _
1985 (b) 16.95 12.93(c) 21 1.50(d) 1.95(d) 41.95(d) .031
</TABLE>
(a) Reflects a per share reimbursement of expenses during the period by the
Fund Manager. See last column.
(b) Operations for the period of November 30, 1984 (commencement of operations)
to September 30, 1985.
(c) Not Annualized.
(d) Annualized.
AN OVERVIEW OF THE AARP INVESTMENT PROGRAM
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. The family of funds would provide members
with a limited number of distinct investment choices that were managed by an
experienced investment adviser. To provide the family of funds, AARP sought an
investment management firm to develop and manage the funds. After interviewing a
number of investment managers, AARP selected Scudder, Stevens & Clark, Inc., who
will be referred to in this prospectus as Scudder or the Fund Manager.
Who is Scudder, Stevens & Clark?
Scudder, Stevens & Clark is America's oldest independent investment counsel
firm. Its founder, Theodore T. Scudder, established the profession of long-term,
fee-based investment counsel in 1919 at a time when investment firms were
focused on short-term, commission-based trading. In the more than 75 years that
have passed since then, Scudder has grown to be one of America's largest
independent investment managers. Today, Scudder manages more than $90 billion in
assets for clients around the world. Scudder manages corporate funds, pension
plans, and endowments for institutions, and provides an array of investment
products and services . These include the Scudder Funds, a family of
no-load mutual funds; a no-load variable annuity;
401 ( k ) Plan s ; and several closed-end funds.
Scudder brings decades of experience and innovation to mutual fund investing. In
1928, Scudder offered America's first no-load mutual fund. Scudder was the first
company to offer an international mutual fund to U.S. investors. In 1984,
Scudder was selected by AARP to develop and manage the AARP Mutual Funds.
What are the roles of AARP and Scudder?
The AARP Investment Program from Scudder was established in accordance with
criteria set by AARP. Specifically, these criteria include providing members
with competitive investment performance, allowing easy access to investments,
offering easy-to-understand information concerning investing and consistently
delivering superior service. Fulfilling this mandate is the mission of AARP and
Scudder. Both organizations work closely to ensure these criteria are met. AARP
provides insight into the diversity and changing character of AARP members.
Association staff closely monitor Program services and review all Program
materials developed for members to ensure conformity to AARP's high standards.
Members of AARP leadership also serve as Trustees for the AARP Funds. Scudder
provides investment management and administrative services for the AARP Funds
and brings to the Program more than 75 years of investment counseling and
management experience.
WHAT DO THE AARP MUTUAL FUNDS OFFER?
The eight AARP Mutual Funds offer members a choice of conservatively managed
investments which vary in the potential returns and risk they offer. The Funds
address four major investment needs: stability of principal, income, tax-free
income and growth. Each of the AARP Mutual Funds is managed to offer you
competitive returns. In addition, you can feel confident when you invest in
an AARP Fund because, recognizing the needs of AARP members, each AARP Fund
seeks to moderate share price volatility . Consequently, your
investment will be managed conservatively and knowledgeably , and with the
needs of AARP investors always in mind. Conservative investment management
entails our focus on moderating share price volatility of the AARP Funds. Other
mutual funds with higher share price volatility may also have higher
returns. While the AARP Funds are conservatively managed, it is important
that you realize that your principal is never insured or guaranteed, and
the value of your investment and your return will move up and down as market
conditions change.
The share price of a mutual fund, other than a money market fund, typically
moves up and down on a day-to-day basis. Share price volatility reflects the
level of fluctuation of the value of a Fund's shares over relatively short time
periods. A mutual fund that experiences large changes in its share price on a
daily basis would be considered to have high share price volatility. The AARP
Funds will be managed to seek to reduce share price volatility as compared to
other mutual funds or securities described in a Fund's investment objective.
This does not mean a Fund's share price will not be affected by market forces.
Market forces may include downward and upward movements of the stock market or
interest rates with resulting upward or downward movement in the Fund's share
price. For a more detailed discussion of each AARP Fund, please read the
"Investment Objectives and Policies" section.
Information on each AARP Fund is included in this Prospectus, focusing on how
the AARP Funds differ in their potential return and risk. Before investing, you
should determine your investment objectives and personal time horizons. This
will help you decide which Fund or combination of AARP Funds fits your
investment needs.
The following is a brief summary of the diversity of investment needs the AARP
Funds seek to meet. The differing nature of an investment in each Fund will
affect the length of time for which you should be planning to invest.
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 ( 1 year
or less) while providing a modest level of income. Both seek to provide
investors with stability of principal through a constant $1.00 share price,
although this may not always be achieved. Like other money funds, the 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 that the two AARP Money Funds differ in
that 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 monthly income:
Consider the AARP GNMA and U.S. Treasury Fund, the AARP High Quality Bond Fund
or the AARP Insured Tax Free General Bond Fund. When you choose one of these
conservatively managed funds, remember that both the value of your shares
and the yield will change daily, generally in reaction to shifting
interest rates. In most cases, as interest rates rise, the value of investments
in bond funds like these tends to fall. As interest rates fall, the value of
investments in these bond funds tends to rise. Investing in these Funds offers
the opportunity for gain through potential appreciation in the value of your
investment and from the monthly income that the investment earns. While each of
these Funds is managed to attempt to moderate share price
volatility , the value of your investment can decrease due to price
changes of Fund investments . That's why you should be prepared to
tolerate some fluctuation in the value of your investment and in the income you
earn and to invest for the longer term (at least 1 year or more).
If you are investing for the long term and you are interested in growth:
Consider the AARP Balanced Stock and Bond Fund, the AARP Growth and Income Fund
or the AARP Capital Growth Fund. When you invest in one of these Funds, remember
that any investment in stocks involves risk and that the value of your shares
will fluctuate daily. The share price of these AARP Funds will tend to rise when
the stock market rises and decline when the stock market declines. Investing in
these Funds offers the opportunity for gain through potential appreciation in
the value of your investment as well as from the income that the investment
earns. While each of these Funds is managed to attempt to moderate share
price volatility , the value of your investment can decrease due to price
changes of Fund investments . 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 3 to 5 years or more.
How is my Investment Managed?
The AARP Mutual Funds are managed to seek both competitive returns and to
moderate share price volatility . Each of the AARP Mutual Funds is
run by a team of investment professionals at Scudder. Professional portfolio
managers develop investment strategies and select securities for each AARP
Fund's portfolio. They are supported by Scudder's dedicated staff of economists,
research analysts, traders, and other investment specialists who work in offices
across the United States and abroad. At Scudder, there has always been a strong
partnership between research analysts and portfolio managers. Scudder's large
staff of independent research analysts helps the portfolio managers assess
economic and industry trends as they make their investment decisions. Because of
this emphasis on "fundamentals," the 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.
WHAT DOES THE AARP INVESTMENT PROGRAM OFFER ME?
The Program was created to address the investment concerns of AARP members and
to help them make informed investment decisions. It features several benefits
that may make investing advantageous and give you greater confidence that you've
made decisions appropriate for your needs:
* A Unique Family of Funds: The Program offers a range of mutual funds which
recognize the needs of AARP members. Each of the AARP Funds is
conservatively managed, seeking to moderate share price
volatility , while seeking competitive returns. This makes the
AARP Funds distinct from other mutual funds, which may seek higher returns
but do not focus on reducing share price volatility.
* No Sales Fees or Commissions: Unlike most other mutual funds, the AARP
Funds are pure no-loadt so you don't pay any sales fees or commissions to
purchase, exchange or sell (redeem) shares. In addition, the Funds do not
charge 12b-1 fees, which are a form of a sales charge that covers marketing
and distribution expenses.
* No Fees to open and maintain an AARP IRA or AARP Keogh Plan account: You'll
pay no separate fees to open or maintain your retirement plan account. All
your money goes to work for your retirement.
* Low initial investment: Open an account for just $500 for each AARP Fund
($2,500 for the AARP High Quality Tax Free Money Fund) or $250 for each
AARP Fund in an AARP IRA or AARP Keogh Plan account. So it's easy to get
started. See page 34 of this prospectus for more information on minimum
investments.
* Professional investment management by Scudder, Stevens & Clark: Scudder
brings over 75 years of investment management experience to the AARP Funds.
* Responsive Service from AARP Mutual Fund Representatives: Our knowledgeable
representatives are ready to answer your questions, initiate transactions
or help you select the AARP Fund which meets your needs_call them
toll-free. They are available Monday through Friday, from 8 a.m. to 8 p.m.
Eastern time.
* Access to your investment when you need it. You'll be able to redeem your
investment at no charge by simply calling toll-free or writing_your
investment is not locked in. See page 37 of this prospectus for more
information.
You'll also benefit from:
* Informative Communications, such as newsletters and free educational
guides;
* Consolidated Monthly Statements or Quarterly AARP IRA or AARP Keogh Plan
Statements;
* Prompt transaction confirmations;
* Special Services designed to make investing simple and convenient;
* AARP's commitment to represent your interests; and
* Dedication to delivery of quality investor service.
INVESTMENT OBJECTIVES AND POLICIES
The following pages provide detail on the investment objectives and policies of
the eight AARP Mutual Funds. Included are each Fund's objectives, whom it is
designed for, what it offers investors, what it can invest in, the risks
involved, when distributions are paid and who at Scudder manages the
Fund . As with any investment, there is no guarantee that the AARP Funds
will successfully meet their investment objectives. Be sure to read the section
titled "Other Investment Policies and Risk Factors" on page 26.
Each Trust's Trustees can modify a Fund's objectives without the approval of a
majority of that Fund's shareholders. Shareholders will be informed in writing
of any changes in objectives. In that event, they should consider whether the
Fund is still an appropriate investment given their then current financial
position and needs.
AARP HIGH QUALITY MONEY FUND
Fund Objective:
From investments in high quality securities, the Fund is designed to provide
current income. The Fund also seeks to maintain stability and safety of
principal while offering liquidity. The Fund seeks to maintain a constant net
asset value of $1.00 per share. There may be circumstances under which this goal
cannot be achieved.
Whom is the Fund designed for?
The Fund may be appropriate for investors who have short-term needs or who do
not want the risk that accompanies investing in stocks or bonds. These investors
include:
* Investors creating a diversified portfolio who want a portion of their
assets in a conservative investment designed to offer safety and stability.
* Investors seeking a short-term investment prior to making longer-term
investment choices.
* Investors seeking money market income to meet regular day-to-day needs.
* Investors who need immediate access to their money through free
checkwriting services.
The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan
accounts.
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 checkwriting.
What does the Fund invest in?
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.
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 that the Fund purchases , or that underly 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 (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.
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. 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 nonfundamental policies designed to maintain
diversification. These policies may be changed without shareholder approval.
With limited exceptions, the Fund may not invest more than 5% of its assets in
the securities of a single issuer, except for U.S. Government securities. Nor
may it invest more than 10% of its total assets in securities subject to
unconditional puts by a single 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 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 securities in which money
market funds are allowed to invest. See "Other Investment Policies and Risk
Factors."
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Net
realized capital gain or loss is included in the daily declaration of
income. See page 30 for additional information on distributions
and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Neff has been responsible for setting the
Fund's investment strategy and has overseen the Fund's day-to-day management
since 1985. Mr. Neff joined Scudder in 1972 and has more than 20 years of
experience managing short-term fixed-income assets. Debra A. Hanson,
Portfolio Manager, assists with the development and execution of investment
strategy and has been with Scudder since 1983. Stephen L. Akers, Portfolio
Manager, focuses on securities selection and assists with the creation and
implementation of investment strategy for the Fund. Mr. Akers joined the Fund's
team in 1995 and has managed several fixed-income portfolios since joining
Scudder in 1984.
AARP HIGH QUALITY TAX FREE MONEY FUND
Fund Objective:
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.
Whom is the Fund designed for?
The Fund may be appropriate for investors in high tax brackets who have
short-term investment needs or who do not want the risk that accompanies
investing in stocks or bonds. These include:
* Investors creating a diversified portfolio who want a portion of their
assets in a conservative investment designed to offer safety and stability.
* Investors seeking a short-term investment prior to making longer-term
investment choices.
* Investors seeking tax free money market income to meet regular day-to-day
expenses.
* Investors who need immediate access to their money through free
checkwriting services.
This Fund is not available for AARP IRA, AARP SEP-IRA or AARP Keogh Plan
accounts.
What does the Fund offer to investors?
The Fund is designed to offer current income free from federal income tax, while
providing you with 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 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).
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 underly 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.
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%. Ordinarily, the Fund expects that 100% of its portfolio securities
will be tax-exempt securities.
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. 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 nonfundamental 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 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 securities in
which money market funds are allowed to invest. See "Other Investment
Policies and Risk Factors."
Will I be subject to taxes on this fund?
All income distributed by the Fund is expected to be exempt from federal
income taxes. However, income may be subject to state and local income taxes.
Each year you will be provided with a breakdown of the Fund's investments
on a state by state basis 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.
Income from taxable securities is not 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. See page 30 for additional information on
distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager K. Sue Cote has been responsible for setting the
Fund's investment strategy and has overseen the Fund's day-to-day
management since 1991. Ms. Cote joined Scudder in 1983 and has over 10
years of experience in the investment industry. Donald C. Carleton, Portfolio
Manager, focuses on securities selection and assists with the creation and
implementation of investment strategy for the Fund. Mr. Carleton has more
than 20 years' experience in tax-free investing and has been at Scudder since
1983.
AARP GNMA AND U.S. TREASURY FUND
Fund Objective:
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.
Whom is the Fund designed for?
The Fund is suitable for conservative investors who want high current income but
want a degree of protection from bond market price risk. Investors should be
seeking to invest for the longer term and be comfortable with fluctuation in the
value of their principal.
The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan
accounts.
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 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 share price volatility than long-term bonds or
many 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, and bonds, 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 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.
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 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 fluctuation, or price volatility to your
principal, by investing in a combination of short-, intermediate-, and long-term
securities and by using portfolio management techniques. 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 purchase "when issued" securities and repurchase agreements, and 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
under certain conditions may reduce current income.
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. See page 30 for additional
information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager David H. Glen has been responsible for setting the
Fund's investment strategy and overseeing security selection for the Fund's
portfolio since 1985 . Mr. Glen has more than 14 years' experience in
finance and investing. Mark Boyadjian, Portfolio Manager, focuses on
securities selection and assists with the creation and implementation of
investment strategy for the Fund. Mr. Boyadjian joined the Fund's team in 1995
and has been involved in investment management since joining Scudder in
1989.
AARP HIGH QUALITY BOND FUND
Fund Objective:
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.
Whom is the Fund designed for?
The Fund is suitable for investors who want high current income with moderate
risk from a high quality portfolio. Investors should be seeking to invest for
the longer term (at least 1 year or more) and be comfortable with fluctuation in
the value of their principal.
The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan
accounts.
What does the Fund offer to investors?
The Fund is designed to offer a high level of current income from a portfolio of
high-quality securities. Normally the level of return should be higher
than that available from the AARP GNMA and U.S. Treasury Fund, with greater
fluctuation in the value of your principal.
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.
What does the Fund invest in?
Under normal circumstances, at least 65% of the assets of the Fund are invested
in 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 the equivalent of
those rated in the three highest rating categories of Moody's (Aaa, Aa, and A)
or S&P (AAA, AA, and A) 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.
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
also purchase obligations of international agencies, U.S. dollar-denominated
foreign debt securities, and money market instruments such as commercial paper,
banker's acceptances, and certificates of deposit issued by domestic and foreign
branches of U.S. banks.
The Fund will invest in a broad range of short-, intermediate- and long-term
securities. The maturities and types of securities held by the Fund will vary
with current market conditions. The Fund may have a substantial portion of its
assets in securities of a particular maturity. The non-governmental investments
of the Fund will be spread among a variety of companies and will not be
concentrated in any one industry.
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. Due to the greater market price risk of the securities in which it
invests, the Fund may have a more variable share price than the AARP GNMA and
U.S. Treasury Fund. See "Other Investment Policies and Risk Factors."
The level of income provided will be affected by movements up and down in
interest rates. Also, income from high-quality securities the Fund purchases may
be lower than income from lower-quality securities.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce fluctuation, or the price volatility of your
investment, by investing in securities with varying maturities. 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 purchase "when issued" securities and repurchase
agreements, and 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 under certain conditions may reduce
current income.
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. See page 30 for additional
information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager William M. Hutchinson has set the Fund's overall
investment strategy and has overseen the Fund's day-to-day management
since 1987. Mr. Hutchinson has over 20 years of investment experience. Stephen
Wohler, Portfolio Manager, focuses on securities selection and assists in
identifying attractive investment opportunities for the Fund. Mr. Wohler has
over 14 years' experience managing fixed-income investments. He joined Scudder
in 1979 as a portfolio manager and quantitative analyst. He became the
senior fixed-income manager for Scudder's domestic portfolios in 1993.
AARP INSURED TAX FREE GENERAL BOND FUND
Fund Objective:
From a portfolio consisting primarily of municipal securities covered by
insurance, the Fund seeks to provide high income free from federal income taxes
and to keep the value of its shares more stable than that of a long-term
municipal bond.
Whom is the Fund designed for?
The Fund is suitable for investors in higher tax brackets who want high income
free from federal income taxes. Investors should invest for the longer term (at
least 1 year or more) and be comfortable with fluctuation in the value of their
principal.
The Fund is not available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan
accounts.
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 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 offer less share price volatility than long-term
municipal bonds or many 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 the 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
United States 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 "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 which 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 manage fluctuation, or the price volatility of your
investment, 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 as to 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."
Will I be subject to taxes on this fund?
All income distributed by the Fund is expected to be exempt from federal
income taxes. However, 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%. Each year you will be
provided with a breakdown of the Fund's investments on a state by state
basis 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.
Income from taxable securities is not 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. See page
30 for additional information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Donald C. Carleton has been responsible for setting
the Fund's investment strategy and has overseen the Fund's day-to-day
management since 1990. Mr. Carleton has over 20 years' experience in
tax-free investing. Philip G. Condon, Portfolio Manager,
focuses on securities selection and assists with the creation and implementation
of investment strategy for the Fund. Mr. Condon has been with Scudder since
1983 and has more than 17 years of investment experience.
AARP BALANCED STOCK AND BOND FUND
Fund Objective:
To seek to provide long-term growth of capital and income while
attempting to keep the value of its shares more stable than other balanced
mutual funds. The Fund pursues these objectives by investing in a combination of
stocks, bonds, and cash reserves.
Whom is the Fund designed for?
This Fund is suitable for conservative investors who are seeking long-term
growth of their assets, but want less risk than an investment solely in stocks.
Investors should invest for the longer term (at least 3 years or more) and be
comfortable with the value of their principal fluctuating up and down. The Fund
is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts.
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, over time, help reduce fluctuation in the Fund's share price. Through a
broadly diversified portfolio consisting primarily of stocks with above average
dividend yields and investment-grade bonds, the Fund seeks to offer less
share price volatility than many balanced mutual funds. The Fund
should typically have less risk and a lower return than the AARP Growth
and Income Fund and the AARP Capital Growth Fund.
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, anticipated growth of corporate profits, and
the financial climate worldwide.
What does the Fund invest in?
The Fund seeks to manage fluctuation 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 liquidity,
defensive purposes, and when market conditions dictate, the Fund may invest
without limit in money market and short-term instruments. These include
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
Equity securities consist of common stocks, securities convertible into common
stocks, and preferred stocks. A research-oriented approach to investing is used
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.; it may invest, however, 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, and preferred and convertible 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 also 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 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."
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. See page
30 for additional information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman is responsible for
managing the stock portion of the Fund. William M. Hutchinson,
Portfolio Manager, is responsible for the bond portion of the
Fund . Messrs. Hutchinson and Hoffman have been Portfolio Managers for the
Fund since it commenced operations on February 1, 1994. Kathleen T. Millard,
Portfolio Manager, focuses on stock strategy and stock selection. Ms. Millard
has worked in the investment industry since 1983 and at Scudder since 1991.
AARP GROWTH AND INCOME FUND
Fund Objective:
From investments primarily in common stocks and securities convertible into
common stocks, the Fund seeks to provide long-term capital growth and
income, and to keep the value of its shares more stable than other growth
and income mutual funds.
Whom is the Fund designed for?
The 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 3 years or more) and be comfortable with fluctuation to their
principal that is associated with investing in stocks.
The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan
accounts.
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,
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 share price
volatility than many growth and income funds. The Fund should offer a
greater opportunity for share price appreciation, over time, with less income
and 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 stock. 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 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 United States. It may invest,
however, 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 liquidity, temporary defensive purposes,
or when market conditions warrant, the Fund may invest without limit in high
quality money market securities. These include U.S. Treasury Bills, commercial
paper, certificates of deposit, 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 3 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.
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. See page
30 for additional information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman has had responsibility for
setting the Fund's stock investment strategy and has oversee n the
Fund's day-to-day management since 1991 . Mr. Hoffman, who joined Scudder
in 199 0 , has over 9 years of experience in the investment industry.
Kathleen T. Millard, Portfolio Manager, focuses on stock investing strategy
and stock selection. Ms. Millard has worked in the investment industry since
1983 and at Scudder since 1991. Benjamin W. Thorndike, Portfolio Manager, is
the Fund's chief analyst and strategist for convertible securities. Mr.
Thorndike, who has more than 15 years of investment experience, joined Scudder
and the Fund in 1986.
AARP Capital Growth Fund
Fund Objective:
From investments primarily in common stocks and securities convertible into
common stocks, the Fund seeks to provide long-term capital growth, and to keep
the value of its shares more stable than other capital growth mutual funds.
Whom is the Fund designed for?
The Fund is suitable for investors seeking high long-term growth of their
principal. Investors should invest for the longer term (at least 5 years or
more) and be comfortable with the value of their principal fluctuating up and
down. The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan
accounts.
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 income.
In pursuing long-term growth, the Fund will typically have more risk than any
other AARP Fund. The Fund should offer greater opportunity for share price
appreciation, over time, with greater share price fluctuation than other AARP
Funds.
Through a broadly diversified portfolio consisting primarily of high quality,
medium- to large-sized companies with strong competitive positions in their
industries, and relatively low portfolio turnover, the Fund
seek s to offer less share price volatility than many
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. 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 . It may invest,
however, 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 liquidity, temporary defensive purposes, or when market conditions warrant,
the Fund may invest without limit in high quality money market securities,
including repurchase agreements, and other debt securities, such as U.S.
Government obligations and corporate debt instruments.
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 than
other AARP Funds. 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 5 years or more) and be comfortable
with fluctuation to the value of their principal. See "Other Investment Policies
and Risk Factors."
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.
See page 30 for additional information on distributions and taxes.
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 13 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 14 years of
investment industry experience and joined Scudder in 1991.
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 Funds, except the AARP Growth and Income Fund and the AARP Capital
Growth 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 Funds may enter into repurchase agreements only with Federal
Reserve member banks or broker-dealers recognized as reporting government
securities dealers.
Foreign Securities
The AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP High
Quality Bond Fund and the AARP Capital Growth Fund may each invest without limit
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.
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 Funds may invest.
Forward Foreign Currency Exchange Contracts
Each of the Funds in the AARP Growth Trust 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 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 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 Fund Manager will engage in such 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 a transaction.
Futures Contracts and Related Options
To a limited extent, the Funds in the AARP Income Trusts and the AARP Insured
Tax Free General Bond Fund and the AARP Balanced Stock and Bond Fund 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 are used to attempt to protect
against adverse effects of interest rates changes. A particular index-based
futures contract may be used when the Fund Manager believes that correlation
exists between price movements in an index-based futures contract and securities
in a Fund's portfolio. Such correlation is not likely to be perfect. That is
because a Fund's portfolio is not likely to contain the same securities used in
the index.
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 and could lose the expected benefit of
the transactions if interest rates 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 used them. 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.
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.
Segregated Accounts
Each Fund may be required to segregate assets (such as cash, U.S. Government
securities and other high grade debt obligations) or otherwise provide coverage
consistent with applicable regulatory policies. This would be in respect to 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
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 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 .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 7 days' notice. To the extent any
participation interest is illiquid, it is subject to the Fund's limit on
restricted and not readily marketable 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 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.
INVESTMENT RESTRICTIONS
To help reduce investment risk, each of the AARP Funds has adopted certain
investment policies. Only the shareholders can approve changes to the following
policies:
* 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.
* A Fund may borrow money only for temporary or emergency purposes.
The following policies may be changed without shareholder approval if applicable
legal requirements change.
* Each AARP Fund may not invest more than 10% of its net assets in restricted
or not readily marketable securities. These "illiquid securities" include
repurchase agreements maturing in more than 7 days. Funds in the
AARP Growth Trust may not invest more than 5% of their net assets in
restricted securities.
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 Funds to withhold 31% of taxable
dividends , capital gain distributions and redemption or exchange proceeds
for accounts without a 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 Funds reserve the right to reject Enrollment Forms or close accounts
without a 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;
2. You can reinvest them in additional shares of an AARP Fund; or
3. You can invest them in shares of another AARP 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.
* Distributions are taxable in the same manner, whether received in cash or
reinvested.
* Distributions of short-term capital gains by all the AARP Funds are taxable
as ordinary income.
* Distributions of long-term capital gains are taxable for federal income tax
purposes as long-term capital gains regardless of the length of time you
have owned shares. Any capital gain distributed by either AARP Tax
Free Fund is 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.
* Each AARP 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 Fund and purchase shares in another AARP Fund.
* The AARP Funds reserve the right to make extra distributions for tax
purposes.
FUND ORGANIZATION
The AARP Investment Program Trusts
The eight mutual funds described in this prospectus are organized as four
Massachusetts business trusts_AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust and AARP Growth 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 other trusts 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.
General Management
The Trustees have overall responsibility for the management of their respective
Trusts under Massachusetts law. Under their direction, the Fund Manager_Scudder,
Stevens & Clark, Inc._provides general investment management of the AARP 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
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 Fund might become liable for a misstatement in this prospectus regarding
another Trust or AARP Fund. The Trustees of each Trust considered this risk when
approving the use of a combined prospectus.
The right of the Trusts and AARP 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 Funds continue to use the AARP name.
Management Fees
Each AARP Fund pays the Fund Manager a fee for management and administrative
services. Commencing February 1, 1994, the following fee arrangement was
instituted. 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. Each AARP Fund pays, as its portion of the
Base Fee, an amount equal to the ratio of its daily net assets to the daily net
assets of all of the AARP Funds. The table below shows the annual Base Fee Rate
at specified levels of Program assets:
<TABLE>
<CAPTION>
Annual Base Fee Rate Program Assets
- -------------------------- ------------------------
<C> <C>
.350% First $2 billion
.330% Next $2 billion
.300% Next $2 billion
.280% Next $2 billion
.260% Next $3 billion
.250% Next $3 billion
.240% Thereafter
</TABLE>
In addition to the Base Fee Rate, each AARP Fund 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 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
following table shows the Individual Fund Fee Rate for each of the AARP Funds:
<TABLE>
<CAPTION>
Fund Individual Fee Rate
- -------------------------------------- -------------------
<S> <C>
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 Balanced Stock and Bond Fund .19%
AARP Growth and Income Fund .19%
AARP Capital Growth Fund .32%
</TABLE>
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
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, 1994 (under the former fee arrangement from October 1,
1993 to January 31, 1994, and the new agreement from February 1, 1994 to
September 30, 1994), fees paid to the Fund Manager totaled .42 of 1% of the
average daily net assets of the AARP High Quality Money Fund, .43 of 1% of the
AARP High Quality Tax Free Money Fund, .42 of 1% of the AARP GNMA and U.S.
Treasury Fund, .62 of 1% of the AARP Capital Growth Fund, and .49 of 1% for each
of the AARP High Quality Bond Fund, AARP Insured Tax Free General Bond Fund,
AARP Growth and Income Fund and AARP Balanced Stock and Bond 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 .07 of 1%
for the first $6 billion, .06 of 1% for the next $10 billion and .05 of 1%
thereafter.
UNDERSTANDING FUND PERFORMANCE
Performance of an AARP Fund may be included in advertisements, sales literature
or shareholder reports. Important components of performance are yield, total
return and cumulative total return. These components vary based on changes in
market conditions, the level of interest rates and the level of the Fund's
expenses. Yield, total return, and cumulative total return are based on
historical earnings and are not intended to indicate future performance.
What is Yield?
For the AARP High Quality Money Fund, the AARP Income Funds and the AARP Tax
Free Funds, yield is a measure of income. Yield refers to the net investment
income generated over a specific period of time. It is always calculated using a
standard industry formula so it is a useful way to compare the income produced
by different mutual funds. For non-money market funds, yield refers to the 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. For money market funds, yield refers to the net investment income
generated by the fund over a specified 7-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 Total Return?
The total return of a mutual fund refers to the average annual percentage change
in value of an investment in the fund assuming that the investment has been held
for the stated period. Total return quotations are expressed in terms of average
annual compound rates of return for all periods quoted and assume that all
dividends and capital gain distributions during the period were reinvested in
shares of the fund.
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 meant by Tax-Equivalent Yield and how is it calculated?
To determine if tax-free investing is right for you, it is helpful to convert a
yield from a tax-free mutual fund to its equivalent taxable yield. The
tax-equivalent yields of the AARP Tax Free Funds, which may be quoted
from time to time, let you determine the yield you would have to receive from a
fully taxable investment to produce an after-tax yield equivalent to a tax-free
fund. The calculation is as follows:
(Tax-Free Yield)/(100% - your tax rate)=Tax-Equivalent Yield
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%)/(100%-31%)=7.68%
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?
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. The AARP Funds' custodian, State Street Bank and Trust
Company, determines net asset value per share of each Fund as of the close of
regular trading on the New York Stock Exchange, normally 4:00 p.m. Eastern time
on each day the 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.
OPENING AN ACCOUNT
How do I get started?
Decide on the AARP Fund or Funds which meets your needs. Then fill out, sign and
return your Enrollment Form with your check in the postage paid envelope
provided. Once your Enrollment Form is received, an account number will be
assigned to you. Your check should only be drawn on a U.S. bank and be payable
to the AARP Investment Program.
If you don't want to send your check through the mail, you can send a bank wire.
Simply fill out and return your Enrollment Form in the mail. Then, before you
send the wire, call an AARP Mutual Fund Representative. The Representative will
set up the account and contact you to provide you with your account number and
further wiring instructions. To complete the wire transfer, follow the special
wire transfer instructions below. Please note you cannot open AARP IRA or AARP
Keogh Plan accounts by wire.
What is the minimum investment?
The minimum is $500 for each AARP Fund, except for the AARP High Quality Tax
Free Money Fund, which has a minimum investment of $2,500. You can open an AARP
IRA with as little as $250 for each applicable AARP Fund.
What happens if my investment falls below its minimum balance?
The Funds reserve the right to redeem accounts below the minimum balance and
return the proceeds to you if you do not increase an account above the minimum
within 60 days after notice. However, if your account falls below the minimum
solely as a result of market activity, your account will not be closed.
What is the normal processing time of checks when purchasing shares?
If checks are drawn on a Federal Reserve System member bank, the Program will
normally execute checks (and wire transfers) received in good order on the same
business day that they are received.
When do I start earning income on this purchase?
For AARP Funds paying daily dividends (AARP Money Funds, AARP Income Funds and
the AARP Insured Tax Free General Bond Fund), income begins to accrue on the
business day following actual execution of the order.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
WIRE TRANSFER INSTRUCTIONS
* To open an account (mail Enrollment Form first and make sure to call a
Representative to obtain an account number_AARP IRA and AARP Keogh Plan
accounts cannot be opened by wire)
* To add to your account
Contact your bank with the following information:
1) the names(s) on your account;
2) your AARP Fund account number;
3) the name of the Fund(s) you want to invest in;
4) the name and address of the Fund's custodian bank: State Street Bank
and Trust Company, Boston MA 02101;
5) the routing numbers ABA Number 011000028 and AC-99035420.
Can I add another AARP Fund to my account?
You can open another AARP Fund at any time. The new investment must meet the
minimum initial investment described above. Your new AARP Fund will have the
same account number and registration as your existing one(s). You can open a new
AARP Fund in a number of ways:
Mail your request Send a letter stating your request and naming the new
AARP Fund. Include a check made payable to the AARP
Investment Program.
Wire the money Have your account number ready and follow the wire
instructions above.
Exchange from an AARP See instructions on how to exchange_page 36.
Fund
Telephone Transactions
When you open an account you automatically become eligible to exchange shares by
telephone and to redeem by telephone up to $50,000 to your registered address.
You may also request by telephone that redemption proceeds be wired to a bank
account you select. When exchange or redemption requests are made over the
telephone, procedures are in place 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.
ADDING TO YOUR INVESTMENT
How do I add to my investment?
After your account is opened, you can add to your AARP Fund investment in any
amount in the following ways:
Mail your request Send your check with a personalized investment slip or
with a letter naming your account number and AARP
Fund.
Call Toll-Free If you selected the Transact By Phone service, you'll
be able to call and have money transferred from your
checking account to cover the purchase. See page 39.
Wire the purchase Have your account number ready and follow the wire
instructions on page 35.
Exchange from an AARP See Exchanging below.
Fund
Invest Automatically See page 40 for information on the Automatic
Investment Plan.
EXCHANGING
What is an exchange?
You make an exchange when you sell shares in one AARP Fund to purchase shares in
another. This is technically two transactions, a sale and a purchase of shares.
If the value of the shares sold in the exchange was higher or lower than your
original purchase price, you may have a capital gain or loss. This is important
to note for tax planning purposes. You may exchange all or part of your shares
in one AARP Fund for shares in another AARP Fund. Exchanges between existing
AARP Funds can be for any amount. Exchanges that open a new AARP Fund must meet
the minimum balance.
How can I exchange shares?
There are several ways to exchange, including:
Mail or fax your request Tell us the AARP Fund from which to take the money and
the AARP Fund to exchange to. Include your account
number, registered name(s) and address, and either the
dollar amount or number of shares you want to
exchange. Be sure to sign your name(s) exactly as it
appears on the account statement.
Call Toll-Free Call us before 4:00 p.m. Eastern time to exchange by
close of business the same day. If you purchased
shares by check or by phone, you may not use this
option until 7 business days after the purchase date
to allow the check to clear. During this period, you
must send your exchange request by mail or fax.
Call the Easy-Access You can exchange shares through this automated
Line toll-free line. It is available 24 hours a day, 7 days
a week. Simply call toll-free and follow the recorded
voice instructions.
ACCESS TO YOUR INVESTMENT
How do I redeem?
You can sell (redeem) fund shares in a number of ways. The share price may be
more or less than your original purchase price. Therefore, you may have either a
taxable capital gain or loss. Keep in mind that you can redeem shares of your
AARP IRA or AARP Keogh Plan account only by sending your request in writing.
Mail or Fax your Tell us the name of the AARP Fund and the number of shares or
request dollar amount you wish to sell. Make sure to give us your
account number, registered name(s) and where you want the
proceeds sent. If you want the proceeds to go to an address
other than your registered address, to your bank, or to
someone else, please provide complete details. Under certain
circumstances, this may require a special type of
authorization called a Signature Guarantee (see page 38).
Sign the letter exactly as it appears on your account
statement. If your request requires a Signature Guarantee,
you must mail the request instead of faxing it.
Call Toll-Free Call before 4:00 p.m. Eastern time business days and redeem
up to $50,000 per AARP Fund. The proceeds will be mailed to
your registered address or to your bank (unless you declined
the Telephone Redemption to your Bank feature on your
Enrollment Form). The proceeds can also be wired to your bank
if it is a member of the Federal Reserve System. A $5.00 fee
will be charged for each wire to your bank. Your bank may
also charge you for receiving a wire. In the event that you
are unable to reach us by telephone, you should write to the
AARP Investment Program; see "Service Information" for the
address. If you elected the Transact by Phone option on your
Enrollment Form, you can have the proceeds sent
electronically to your checking account. See page 39 for more
information on Transact By Phone.
Call the You can redeem shares through this automated toll-free line.
Easy-Access Line Initiate redemptions any time_24 hours a day. Simply call
toll-free and follow the recorded voice instructions.
Sell See page 40 for information on the Automatic Withdrawal Plan
Automatically or Systematic Withdrawal Plan for AARP IRA or AARP Keogh Plan
accounts.
When are redemptions processed?
Any redemption request received in good order prior to 4:00 p.m. Eastern time
during normal business operations will be processed on that day. The request
will be processed at that night's closing share price. Normally, requests
received in good order after 4:00 p.m. Eastern time will be processed on the
next business day.
Shares redeemed from Funds in the AARP Income Trust, AARP Tax Free Income Trust
or the AARP High Quality Money Fund will earn a dividend on the day of
redemption.
Normally, proceeds of your redemption will be sent on the business day following
a redemption request in good order. In any event, the AARP Funds may take no
more than 7 calendar days to send your redemption proceeds.
When can I expect to receive my money?
We will mail your redemption proceeds promptly. If you purchase shares by check
or by telephone and then redeem them by letter within 7 business days of
the purchase, the redemption proceeds may be held until the purchase check has
cleared the banking system. When the check has cleared, we will mail your
redemption proceeds promptly.
We will not accept redemption requests by telephone or by checkwriting prior to
the expiration of the 7 business day period. You may avoid this delay by
purchasing shares by wire.
Short-Term Trading
You should make purchases and sales for long-term investment purposes only. The
AARP Funds do not permit a pattern of frequent purchases and sales in response
to short-term changes in share price.
When such a pattern occurs, the AARP Funds and Scudder Investor Services, Inc.
reserve the right to restrict purchases or exchanges. This restriction does not
apply to the AARP money funds. This right extends to individual purchasers or
groups of related purchasers.
SIGNATURE GUARANTEES
What is a "Signature Guarantee"?
A "Signature Guarantee" is a certification of your signature. We require this
for your protection and to prevent fraudulent redemptions. In effect, the
appropriate institution (see below) guarantees that you are authorized to make
certain requests.
When do I need one?
A "Signature Guarantee" from each person on the account registration is needed
for the following redemption requests:
1) Redemptions of more than $50,000;
2) When redemption proceeds are payable to someone other than the
registered shareholder(s);
3) When redemption proceeds are to be sent to an address other than the
registered address; or
4) If the account's registered address has changed during the last 30
days.
Transactions requiring signature guarantees cannot be faxed.
Where can I get one?
You can get your signature guaranteed through 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 Securities and
Exchange Commission. Signature Guarantees by notary publics are not acceptable.
INVESTOR SERVICES
To make investing simpler and more convenient there are many free investor
services available to you.
Easy-Access Line
* Exchange between AARP Funds
* Exchange to open a new AARP Fund CALL TOLL-FREE
* Redeem money to your registered address 1-800-631-4636
* Get current performance information 24 HOURS A DAY
* Get current account balance information 7 DAYS A WEEK
* Confirm your last transaction
With the Easy-Access Line you can get performance, and account information. If
you have a touch-tone phone, you can also exchange or redeem shares worth up to
$50,000. Simply call toll-free 1-800-631-4636 using a touch-tone phone and
follow the easy pre-recorded voice instructions.
Transact By Phone
* Add to an AARP Fund by transfer from
your bank checking or NOW account CALL TOLL-FREE
* Redeem and send the proceeds to your 1-800-253-2277
checking or NOW account
Transact By Phone allows you to call toll-free to purchase and redeem shares.
The money will be automatically transferred to or from your bank checking
account. Your bank must be a member of the Automated Clearing House for you to
take advantage of this service.
Buying Shares Call us before 3:00 p.m. Eastern time, business days, when
through Transact you want to buy additional shares, and money will be
By Phone: transferred from your bank account to your AARP Fund account
to cover the purchase. Purchases must be for at least $250
but not more than $50,000. Your purchase will generally be
completed in 2 business days at the closing share price on
the day it takes place. Shares purchased in this manner will
not be redeemable for a period of up to 7 business days.
Selling Shares Call us before 4:00 p.m. Eastern time, business days, when
through Transact you want to sell shares. We'll sell your shares and transfer
By Phone: the proceeds to your bank account_generally within 2
business days from the day of your request. You can redeem
any amount greater than $250. Shares will be sold at that
night's closing price on the day of your request. Requests
received after 4:00 p.m. will be sold at the next business
day's closing price.
Free Checkwriting
Shareholders in the AARP High Quality Money Fund or the AARP High Quality Tax
Free Money Fund have free checkwriting privileges. There is no charge to
shareholders for this service, but the AARP Funds reserve the right to impose a
charge in the future. To enroll, you must fill out a signature card on the
Enrollment Form. If shares were purchase 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.
Distributions Direct
You may choose to have dividend and capital gain distributions automatically
deposited into your bank checking or NOW account. To enroll in this service,
your bank must be a member of the Automated Clearing House (ACH) network. Once
you enroll, your dividends and capital gains will be automatically deposited
into your personal bank account within 3 business days of the
distribution date. You'll receive a statement confirming the amount. There is no
charge to shareholders for the service.
Systematic Plans
Several other investor services are available. These include:
* Automatic Investment Plan: Arrange for regular investments into your
AARP Fund through automatic deductions from your bank checking
account.
* Direct Deposit: At your direction, your Social Security, U.S.
Government or any regular income checks (pension, dividend, interest
or payroll) will be automatically deposited into your AARP Fund.
* Automatic Withdrawal Plan: At your direction, we will automatically
send a monthly redemption of $50 or more directly to you when you have
at least $10,000 or more in an AARP Fund.
* Direct Payment of Fixed Bills: With $10,000 or more in an AARP 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.
* Systematic Retirement Withdrawal Plan: You can receive periodic
distributions from an AARP IRA or AARP Keogh Plan account.
STATEMENTS AND REPORTS
What kinds of statements do I receive?
You will receive a prompt confirmation statement for your transactions. You will
also receive a monthly Consolidated Statement. AARP IRA or AARP Keogh Plan
accounts will receive a quarterly Consolidated Statement.
The Consolidated Statement details the market value of all the AARP Funds in
your account. It also includes a listing of recent transactions. You should keep
these statements for your records.
What other reports do I get?
Each year, you will receive a current prospectus, mid year report and 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.
SERVICE PROVIDERS OF THE AARP FUNDS
Legal Counsel
Dechert Price & Rhoads,
Washington, DC
Independent Accountants
Price Waterhouse LLP , Boston, MA
Underwriter
Scudder Investor Services, Inc., Two International Place, Boston, MA (a
wholly-owned subsidiary of Scudder) is principal underwriter of the AARP Funds.
Scudder Investor Services, Inc. offers for sale and confirms as agent all
purchases of shares of the AARP Funds.
Custodian
State Street Bank and Trust Company, Boston, MA
Transfer and Dividend-Disbursing Agent
Scudder Service Corporation, P.O. Box 2540, Boston, MA 02208-2540 (a
wholly-owned subsidiary of Scudder)
Investment Adviser
Scudder, Stevens & Clark, Inc., 345 Park Avenue, New York, New York is
investment adviser for the AARP Funds.
TRUSTEES AND OFFICERS
ADELAIDE ATTARD, Trustee ( 1, 2,4), Consultant, Gerontology; Commissioner,
County of Nassau, New York, Department of Senior Citizen Affairs (1971-1991);
Chairperson, Federal Council on Aging (1983-1992).
CYRIL F. BRICKFIELD, Trustee (2,3,4), Honorary Trustee (1); Honorary President
and Special Counsel, American Association of Retired Persons.
ROBERT N. BUTLER, M.D., Trustee (2,4) Brookdale Professor of Geriatrics and
Adult Development, Mount Sinai School of Medicine; formerly Director, National
Institute on Aging, National Institute of Health.
LINDA C. COUGHLIN, President and Trustee (5), Managing Director, Scudder,
Stevens & Clark, Inc., Director, Scudder Investor Services, Inc.*
HORACE B. DEETS, Vice Chairman and Trustee (5), Executive Director, American
Association of Retired Persons; Member, Board of Councilors, Andrus Gerontology
Center; Member of the Board, HelpAge International.
MARY JOHNSTON EVANS, Trustee (1,3,4), Corporate Director; Senior Member, The
Conference Board, Inc.
EDGAR R. FIEDLER, Trustee (1,2,3), Vice President and Economic Counselor, The
Conference Board, Inc.
CUYLER W. FINDLAY, Chairman and Trustee (5), Managing Director, Scudder, Stevens
& Clark, Inc., Senior Vice President and Director, Scudder Investor Services,
Inc.*
EUGENE P. FORRESTER, Trustee (2,3), Lt. General (Retired) U.S. Army;
International Trade Consultant; Corporate Director.
WAYNE F. HAEFER, Trustee (2,3,4), Director, Membership Division of AARP;
Secretary, Employee's Pension and Welfare Trusts of AARP and Retired Persons
Services, Inc.; Formerly Director, Administration and Data Management Division
of AARP.
WILLIAM B. MACOMBER, Trustee (3,4), formerly Teacher, History and Government,
Nantucket H.S., Nantucket, MA; formerly President, The Metropolitan Museum of
Art and U.S. Ambassador to Turkey and Jordan.
GEORGE L. MADDOX, JR., Trustee (2,3), Chairman, Duke University Council on Aging
and Human Development; Professor of Sociology, Departments of Sociology and
Psychiatry, Duke University.
ROBERT J. MYERS, Trustee (1,2,4), Actuarial Consultant; formerly Executive
Director, National Commission on Social Security Reform; formerly Chairman,
Commission on Railroad Retirement Reform.
JOSEPH S. PERKINS, Trustee (5), Director, American Association of Retired
Persons; Corporate Retirement Manager, Polaroid Corporation.
JAMES H. SCHULZ, Trustee ( 2, 3,4), Professor of Economics and Kirstein
Professor of Aging Policy, Policy Center on Aging, Florence Heller School,
Brandeis University.
GORDON SHILLINGLAW, Trustee (1,3,4), Professor Emeritus of Accounting, Columbia
University Graduate School of Business.
EDWARD V. CREED*, Vice President (5)
THOMAS W. JOSEPH*, Vice President (5)
DAVID S. LEE*, Vice President and Assistant Treasurer (5)
DOUGLAS M. LOUDON*, Vice President (5)
THOMAS F. McDONOUGH*, Vice President and Assistant Secretary (5)
PAMELA A. McGRATH*, Vice President and Treasurer (5)
EDWARD J. O'CONNELL*, Vice President and Assistant Treasurer (5)
KATHRYN L. QUIRK*, Vice President and Secretary (5)
HOWARD SCHNEIDER*, Vice President (5)
CORNELIA M. SMALL*, Vice President (5)
*Scudder, Stevens & Clark, Inc.
(1) AARP Cash Investment Funds
(2) AARP Income Trust
(3) AARP Tax Free Income Trust
(4) AARP Growth Trust
(5) All Funds
<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
AARP Cash Investment Funds:
AARP HIGH QUALITY MONEY FUND
AARP Income Trust:
AARP GNMA and U.S. TREASURY FUND
AARP HIGH QUALITY BOND FUND
AARP Tax Free Income Trust:
AARP HIGH QUALITY TAX FREE MONEY FUND
AARP INSURED TAX FREE GENERAL BOND FUND
AARP Growth Trust:
AARP BALANCED STOCK AND BOND FUND
AARP GROWTH AND INCOME FUND
AARP CAPITAL GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1995
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the combined Prospectus for all eight of the above
Funds, dated February 1, 1995, 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AARP INVESTMENT PROGRAM FROM SCUDDER 1
Summary of Advantages and Benefits 1
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES 3
AARP Money Funds 3
AARP Income Funds 6
AARP Insured Tax Free Income Fund 8
AARP Growth Funds 11
Special Investment Policies of the AARP Funds 13
General Investment Policies of the AARP Funds 23
Investment Restrictions 24
PURCHASES 28
General Information 28
Checks 28
Share Price 28
Share Certificates 28
Direct Deposit Program 29
Wire Transfers 29
Holidays 29
Other Information 29
REDEMPTIONS 29
General Information 29
Redemption by Telephone 30
Redemption by Mail or Fax 31
Redemption by Checkwriting 31
Redemption-in-Kind 32
Other Information 32
EXCHANGES 32
TRANSACT BY PHONE 33
Purchasing Shares by Transact by Phone 33
Redeeming Shares by Transact by Phone 33
FEATURES AND SERVICES OFFERED BY THE FUNDS 34
Automatic Dividend Reinvestment 34
Distributions Direct 34
Reports to Shareholders 34
Consolidated Statements 34
RETIREMENT PLANS 34
AARP No-Fee Individual Retirement Account (" AARP No- 35
Fee IRA")
AARP Keogh Plan 36
OTHER PLANS 36
Automatic Investment 36
Automatic Withdrawal Plan 37
Direct Payment of Regular Fixed Bills 37
DIVIDENDS AND YIELD 37
Performance Information: Computation of Yields and Total Return 38
TRUST ORGANIZATION 43
MANAGEMENT OF THE FUNDS 44
TRUSTEES AND OFFICERS 48
REMUNERATION 51
DISTRIBUTOR 53
TAXES 53
BROKERAGE AND PORTFOLIO TURNOVER 57
Brokerage 57
Portfolio Turnover 59
NET ASSET VALUE 59
AARP Money Funds 59
AARP Non-Money Market Funds 59
ADDITIONAL INFORMATION 60
Experts 60
Shareholder Indemnification 60
Ratings of Corporate Bonds 61
Ratings of Commercial Paper 61
Ratings of Municipal Bonds 61
Other Information 62
Tax-Exempt Income vs. Taxable Income 63
FINANCIAL STATEMENTS 64
</TABLE>
AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Investment Program from Scudder (the "Program") was developed by
the American Association of Retired Persons ("AARP") to provide an array of
conservatively managed investment options for its members. Today's
financial markets present an enormous, ever-changing selection of investments
suited for investors with varying needs. AARP, a non-profit organization
dedicated to improving the quality of life, independence and dignity of older
people, has undertaken to help its members by designing an investment program
which attempts to satisfy the investment and retirement planning needs of most
of its members, whether they be experienced investors or savers who have never
invested at all. As with any program with the "AARP" name, the Program includes
special benefits as described in the combined prospectus for the four Trusts,
dated February 1, 1995 (the "Prospectus"). AARP endorses this program which was
developed with the assistance of Scudder, Stevens & Clark, Inc. (" the
Fund Manager"), a firm with over 75 years of investment counseling and
management experience. Scudder, Stevens & Clark, Inc. was selected after an
extensive search among qualified candidates, and provides the Program with
continuous and conservative professional investment management. (See
"MANAGEMENT OF THE FUNDS").
The Program consists of four Trusts - AARP Cash Investment Funds, AARP
Income Trust, AARP Tax Free Income Trust, and AARP Growth Trust (the "Trusts").
Each of the Trusts is an open-end, management investment company authorized to
issue its shares of beneficial interest in separate series (" the AARP
Funds"). A total of eight diversified Funds are currently offered by the four
Trusts. The differing investment objectives of the eight Funds in the Program
provide AARP members with a variety of sensible investment alternatives, and by
matching their own objectives with those of the different AARP Funds, AARP
members may design an investment program to meet their personal needs. Not all
your money is the same. There is short-term money, for example money needed for
your regular budgeting and for emergencies, and there is money which can be
invested for the longer term. It is generally thought that three months of
income/expenses should be set aside in a savings account or money market fund to
cover short-term needs. The Program is designed to offer alternatives to
keeping all of your money in short-term fixed price investments like money
market funds, insured short-term savings accounts and insured six-month
certificates of deposit. The AARP Money Funds provide a taxable and a tax free
alternative for short-term monies and the AARP Income Funds, the AARP Insured
Tax Free General Bond Fund and the AARP Growth Funds provide a range of choices
for longer term investment dollars.
The Program includes functions performed by AARP Member Services ;
the AARP Funds ; Scudder Investor Services, Inc., the AARP Funds'
"underwriter" ; Scudder Service Corporation ("SSC"), the AARP Funds'
"transfer agent" ; and State Street Bank and Trust Company, the AARP
Funds' "custodian."
Summary of Advantages and Benefits
* Experienced Professional Management: Scudder, Stevens & Clark, Inc.,
investment counsel since 1919 and mutual Fund managers since 1928, provides
investment advice to the Funds.
* 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.
* Wide Selection of Investment Objectives: you can emphasize money market
returns and liquidity, income, tax-free income, growth, or any combination.
* Diversification: you benefit from investing in one or more large
portfolios of carefully selected securities.
* $500 Minimum Starting Investment for Seven of the Funds ($2,500 Minimum
Starting Investment in AARP High Quality Tax Free Money Fund, $250 Minimum
Starting Investment for AARP IRA and Keogh Plan Accounts): you may make
additional investments in any amount at any time.
* No Sales Commissions: the AARP Funds are pure no-load(tm), so you pay no
sales charges to purchase, transfer or redeem shares nor do you pay Rule
12b-1 fees.
* Investment Flexibility and Exchange: you may exchange among the eight AARP
Funds in the Program at any time without charge.
* Dividends: the AARP Money Funds, the AARP Income Funds, and the AARP
Insured Tax Free Income Fund all pay dividends monthly, the AARP Balanced
Stock and Bond Fund and the AARP Growth and Income Fund are expected
to pay dividends quarterly and the AARP Capital Growth Fund pays
dividends, if any, annually.
* Automatic Dividend Reinvestment: you may receive dividends by check or
arrange to have them automatically reinvested.
* 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.
* Convenience and Efficiency: simplified investment procedures save you time
and help your money work harder for you.
* 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.
* 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.
* 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.
* 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.
* Personal Service and Information: professionally trained service
representatives help you whenever you have questions through our toll-free
number, 1-800-253-2277.
* 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.
* Shareholder Handbook: the Shareholder Handbook was created to help answer
many of the questions you may have about investing in the Program.
* 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.
* A Glossary of Investment Terms: the Glossary defines commonly used
financial and investment terms.
* 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 Funds
(See "AARP High Quality Money Fund", "AARP High Quality Tax Free Money
Fund", "INVESTMENT OBJECTIVES AND POLICIES", and "OTHER INVESTMENT POLICIES AND
RISK FACTORS" in the Prospectus.)
The AARP Funds offer a choice of a taxable and a tax free money fund for
small savers, big savers and people looking for a way to invest. People who
earn a relatively low interest rate in an insured bank savings account, who have
to make withdrawals or deposits in person or whose money isn't easily accessible
may find that the AARP Money Funds can help.
AARP High Quality Money Fund. The AARP High Quality Money Fund is a
separate series of AARP Cash Investment Funds and is the only Fund currently
offered by that Trust. Additional series of the Trust may be offered in the
future. From investments in high quality securities, the Fund is designed to
provide current income. The Fund also seeks to maintain stability and safety of
principal while offering liquidity. The Fund seeks to maintain a constant net
asset value of $1.00 per share. There may be circumstances under which this goal
cannot be achieved. The Fund invests in securities with remaining maturities of
397 calendar days or less, except in the case of U.S. Government securities
which may have maturities of up to 762 calendar days. The average dollar-
weighted maturity of its investments is 90 days or less. The investment
policies and restrictions of the Fund are described as follows:
To provide safety and liquidity, the investments of the AARP High Quality
Money Fund are limited to those that at the time of purchase are rated, or
judged by the Fund Manager to be the equivalent of those rated, within the two
highest credit ratings ("high quality instruments") by one or more rating
agencies such as: Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's ("S&P") or Fitch Investors Service ("Fitch"). In addition, the Fund
Manager seeks through its own credit analysis to limit investments to
high-quality instruments presenting minimal credit risks. If a security
ceases to be rated or is downgraded below the second highest quality rating
indicated above, the Fund will promptly dispose of the security, unless the
Trustees determine that continuing to hold such security is in the best
interests of the Fund. Generally, the Fund will invest in securities rated
in the highest quality rating by at least two of these rating agencies.
Securities eligible for investment by the Fund include "first tier
securities" and "second tier securities." "First tier securities" are those
securities which are generally rated (or issued by an issuer with comparable
securities rated) in the highest category by at least two rating services (or by
one rating service, if no other rating service has issued a rating with respect
to that security). Securities generally rated (or issued by an issuer with
comparable securities rated) in the top two categories by at least two rating
agencies (or one, if only one rating agency has rated the security) which do not
qualify as first tier securities are known as "second tier securities." To
ensure diversity of the Fund's investments, as a matter of non-Fundamental
policy the Fund will not invest more than 5% of its total assets in the
securities of a single issuer, other than the U.S. Government. The Fund may,
however, invest more than 5% of its total assets in the first tier securities of
a single issuer for a period of up to three business days after purchase,
although the Fund may not make more than one such investment at any time. The
Fund may not invest more than 5% of its total assets in securities which were
second tier securities when acquired by the Fund. Further, the Fund may not
invest more than the greater of (1) 1% of its total assets, or (2) one million
dollars, in the securities of a single issuer which were second tier securities
when acquired by the Fund.
The Fund purchases high quality short-term securities consisting of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of supranational organizations such as the
International Bank for Reconstruction and Development (the World Bank);
obligations of domestic banks and their foreign branches, including bankers'
acceptances, certificates of deposit, deposit notes and time deposits;
obligations of savings and loan institutions; instruments whose credit has been
enhanced by: banks (letters of credit), insurance companies (surety bonds), or
other corporate entities (corporate guarantees); corporate obligations,
including commercial paper, notes, bonds, loans and loan participations;
securities with variable or floating interest rates; asset-backed securities,
including certificates, participations and notes; municipal securities including
notes, bonds and participation interests, either taxable or tax-free, as
described in more detail for the AARP High Quality Tax Free Money Fund;
securities with put features; and repurchase agreements. The Fund may hold
cash, which does not earn interest, to facilitate stabilizing its net asset
value per share and for liquidity purposes.
Commercial paper at the time of purchase will be rated, or judged by the
Fund Manager under the supervision of the Trustees, to be the equivalent of
securities rated, A-1 or higher by S&P, Prime-1 or higher by Moody's or F-1 or
higher by Fitch. Investments in other corporate obligations, such as bonds or
notes, will be limited to securities rated, or judged by the Fund Manager to be
the equivalent of securities rated, AA or higher by S&P or Fitch or Aa or higher
by Moody's. Obligations which are the subject of repurchase agreements will be
limited to those of the type described above. Shares of this Fund are not
insured or guaranteed by the U.S. Government.
The Fund may invest in certificates of deposit and bankers' acceptances of
large domestic banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of $1 billion) and their
foreign branches and of smaller banks as described below. These as well as all
other investments of the Fund must be U.S. dollar denominated. The Fund will
not invest in certificates of deposit or bankers' acceptances of foreign banks
without additional consideration by and the approval of the Trustees of the
Trust. Although the Fund recognizes that the size of a bank is important, this
fact alone is not necessarily indicative of its creditworthiness.
Investment in certificates of deposit and bankers' acceptances issued by
foreign branches of domestic banks involves investment risks that are different
in some respects from those associated with investment in obligations issued by
domestic banks. Such investment risks include the possible imposition of
withholding taxes on interest income, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations, or other adverse political or economic
developments. In addition, it might be more difficult to obtain and enforce a
judgment against a foreign branch of a domestic bank.
The Fund may also invest in certificates of deposit issued by banks which
had, at the time of their most recent annual financial statements, total assets
of less than $1 billion, provided that (i) the principal amounts of such
certificates of deposit are insured by an agency of the U.S. Government, (ii) at
no time will the Fund hold more than $100,000 principal amount of certificates
of deposit of any one such bank, and (iii) at the time of acquisition, no more
than 10% of the Fund's net assets (taken at current value) are invested in
certificates of deposit and bankers' acceptances of banks having total assets
not in excess of $1 billion.
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System whose creditworthiness has been determined by the Fund
Manager to be equal to that of issuers of commercial paper rated within the two
highest grades. See "Repurchase Agreements" under "Special Investment
Policies of the AARP Funds."
AARP High Quality Tax Free Money Fund. The AARP High Quality Tax Free
Money Fund is a separate series of AARP Tax Free Income Trust. From investments
in high quality municipal securities, the Fund is designed to provide current
income free from federal income taxes. The Fund also seeks to maintain stability
and safety of principal, while offering liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share. There may be circumstances under
which this goal cannot be achieved. Such securities may mature no more than 397
calendar days or less from the date the purchase is expected to be settled by
the Fund, with a weighted average maturity of 90 days or less.
The Fund will invest in municipal securities which are rated at the time of
purchase within the two highest quality ratings of rating agencies such
as: Fitch--AAA and AA, F1 and F2, or Moody's--Aaa and Aa, or within Moody's
short-term municipal obligations top ratings of MIG 1 and MIG 2 and P1, or S&P--
AAA/AA and SP1+/SP1, A1+ and A1--all in such proportions as management will
determine. Securities must be so rated by at least two agencies or by at least
one, if only one has rated the security. Generally, the Fund will invest
in securities rated in the highest quality rating by at least two of these
rating agencies. In some cases, short-term municipal obligations are rated
using the same categories as are used for corporate obligations. In addition,
unrated municipal securities will be considered as being within the foregoing
quality ratings if other equal or junior municipal securities of the same issuer
are rated and their ratings are within the foregoing ratings of Fitch, Moody's
or S&P. The Fund may also invest in municipal securities which are unrated if,
in the opinion of the Fund Manager, such securities possess creditworthiness
comparable to those rated securities in which the Fund may invest. For a
description of ratings, please see "Additional Information." Shares of this
fund are not insured or guaranteed by the U.S. Government.
Subsequent to its purchase by the AARP High Quality Tax Free Money Fund, an
issue of municipal securities may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. The Fund will dispose of
any such security unless the Board of Trustees of the Fund determines that such
disposal would not be in the best interests of the Fund.
As a fundamental policy, under normal circumstances, at least 80% of the
net assets of AARP High Quality Tax Free Money Fund will be invested in
tax-exempt securities. Although the Fund normally intends to ensure that all
income to shareholders will be exempt from federal income tax, there can be no
assurance that this goal will be achieved or that income to shareholders which
is federally tax exempt will be exempt from state and local taxes.
From time to time on a temporary basis or for defensive purposes, the Fund
may, subject to its investment restrictions, hold cash and invest in taxable
investments consisting of: (1) other obligations issued by or on behalf of
municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances; and (5)
repurchase agreements (agreements under which the seller agrees at the time of
sale to repurchase the security at an agreed time and price) with respect to any
of the obligations which the Fund is permitted to purchase. The Fund will not
invest in instruments issued by banks or savings and loan associations unless at
the time of investment such issuers have total assets in excess of $1 billion
(as of the date of their most recently published financial statements).
Commercial paper investments will be limited to commercial paper rated A1+ and
A1 by S&P, Prime 1 by Moody's or F-1 by Fitch. The Fund may hold cash or invest
temporarily in taxable investments due, for example, to market conditions or
pending investment of proceeds of subscriptions for shares of the Fund or
proceeds from the sale of portfolio securities or in anticipation of
redemptions. However, the Fund expects to invest such proceeds in municipal
securities as soon as practicable. Interest income from temporary investments
may be taxable to shareholders as ordinary income.
Maintenance of Constant Net Asset Value Per Share. The Trustees of AARP
High Quality Money Fund and AARP High Quality Tax Free Money Fund have
determined that it is in the best interests of the Funds and their shareholders
to maintain the net asset value of the Funds' shares at a constant $1.00 per
share. In order to facilitate the maintenance of a constant $1.00 net asset
value per share, the AARP High Quality Money Fund and the AARP High Quality Tax
Free Money Fund operate in accordance with a rule of the Securities and Exchange
Commission (the "SEC"). In accordance with that rule, the assets of the Funds
consist entirely of cash, cash items, and high quality U.S. dollar-denominated
investments which have minimal credit risks and which have a remaining
maturity date of not more than 397 days from date of purchase (except
that the AARP High Quality Money Fund may invest in U.S. Government securities
having maturities of up to 762 days). The average dollar-weighted
maturity of each Fund is varied according to money market conditions, but may
not exceed 90 days. The maturity of a portfolio security shall be the period
remaining until the date stated in the security for payment of principal or such
earlier date as it is called for redemption, except that a shorter period shall
be used for Variable and Floating Rate Instruments in accordance with and
subject to the conditions contained in the Rule.
The Trustees have established procedures reasonably designed to stabilize
the price per share of the Funds at $1.00, as computed for the purposes of
sales, repurchases and redemptions, taking into account current market
conditions and each Fund's investment objectives. Such procedures, which the
Trustees review annually, include specific requirements designed to assure that
issuers of the Funds' securities continue to meet high standards of
creditworthiness. The procedures also establish certain requirements concerning
the quality and maturity of the Fund's investments. Finally, the procedures
require the determination, at such intervals as the Trustees deem appropriate
and reasonable, of the extent, if any, to which a Fund's net asset value
calculated by using available market quotations deviates from $1.00 per share.
Market quotations and market equivalents used in making such determinations may
be obtained from an independent pricing service approved by the Trustees. Such
determinations will be reviewed periodically by the Trustees.
If at any time it is determined that a deviation exists which may result in
material dilution or other unfair results to investors or existing shareholders
of a Fund, certain corrective actions may be taken, including selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redeeming shares in kind; or
establishing a net asset value per share by using available market quotations or
equivalents. In addition, in order to stabilize the net asset value per share
at $1.00 the Trustees have the authority (1) to reduce the number of outstanding
shares of a Fund on a pro rata basis, and (2) to offset each shareholder's pro
rata portion of the deviation between the net asset value per share and $1.00
from the shareholder's accrued dividend account or from future dividends. The
Funds may hold cash for the purpose of stabilizing their net asset value per
share. Holdings of cash, on which no return is earned, would tend to lower the
yield on the shares of the Funds.
The net income of the Funds is declared as dividends to shareholders daily
and distributed monthly in shares of the Funds unless payment is requested in
cash.
AARP Income Funds
(See "AARP GNMA and U.S. Treasury Fund," "AARP High Quality Bond Fund,"
"INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK
FACTORS" in the Prospectus.) Each of the Funds seeks to earn a high level of
income consistent with its investment policies.
AARP GNMA and U.S. Treasury Fund. AARP GNMA and U.S. Treasury Fund is
designed for investors who are seeking high current income from
high quality securities and who wish to receive a degree of protection from bond
market price risk. The Fund's investment objective is to produce a high
level of current income and to keep the price of its shares more stable than
that of a long-term bond. The Fund pursues this objective by investing
principally in U.S. Government-guaranteed GNMA securities and U.S. Treasury
obligations. The Fund has been designed with the conservative, safety-conscious
investor in mind. Of the two funds in the AARP Income Trust, the AARP GNMA and
U.S. Treasury Fund is the more conservative choice. Although past performance
is no guarantee of future performance, historically, this Fund offers higher
yields than such short-term investments as insured savings accounts, insured six
month certificates of deposit and fixed-price money market funds.
The Fund invests in U.S. Treasury bills, notes and bonds; other securities
issued or backed by the full faith and credit of the U.S. Government, including,
but not limited to, Government National Mortgage Association ("GNMA")
mortgage-backed securities, Merchant Marine Bonds guaranteed by the Maritime
Administration and obligations of the Export-Import Bank; financial futures
contracts with respect to such securities; options on either such securities or
such financial futures contracts; and bank repurchase agreements. At least 65%
of the Fund's net assets will be directly invested in U.S. Treasury obligations,
including GNMA's. The Fund will make long-term investments but will also
attempt to dampen its price variability in comparison to that of a
long-term bond by including short-term U.S. Treasury securities in its
portfolio. The Fund may also utilize hedging techniques involving limited
use of financial futures contracts and the purchase and writing (selling) of put
and call options on such contracts. Under certain market conditions, these
strategies may reduce current income. At any time the Fund may have a
substantial portion of its assets in securities of a particular type or
maturity. The Fund may also write covered call options on portfolio securities
and purchase "when-issued" securities.
GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed
securities representing part ownership of a pool of mortgage loans. These
loans, issued by lenders such as mortgage bankers, commercial banks and savings
and loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). A "pool" or group of
such mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, a Government
corporation within the U.S. Department of Housing and Urban Development, the
timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government. This is not, however, a guarantee
related to the Fund's yield or the value of your investment principal.
As mortgage-backed securities, GNMAs differ from bonds in that principal is
paid back by the borrower over the length of the loan rather than returned in a
lump sum at maturity. GNMAs are called "pass-through" securities because both
interest and principal payments including prepayments are passed through to the
holder of the security (in this case, the Fund).
The payment of principal on the underlying mortgages may exceed the minimum
required by the schedule of payments for the mortgages. Such prepayments are
made at the option of the mortgagors for a wide variety of reasons reflecting
their individual circumstances and may involve capital losses if the mortgages
were purchased at a premium. For example, mortgagors may speed up the rate at
which they prepay their mortgages when interest rates decline sufficiently to
encourage refinancing. The Fund, when such prepayments are passed through to
it, may be able to reinvest them only at a lower rate of interest. The Fund
Manager, in determining the attractiveness of GNMAs relative to alternative
fixed-income securities, and in choosing specific GNMA issues, will have made
assumptions as to the likely speed of prepayment. Actual experience may vary
from this assumption resulting in a higher or lower investment return than
anticipated.
Some investors may view the Fund as an alternative to a bank certificate of
deposit (CD). While an investment in the Fund is not federally insured, and
there is no guarantee of price stability, an investment in the Fund--unlike a
CD-is not locked away for any period, may be redeemed at any time without
incurring early withdrawal penalties, and may provide a higher yield.
AARP High Quality Bond Fund. Consistent with investments primarily in high
quality securities, the Fund seeks to provide a high level of income and to keep
the value of its shares more stable than that of a long-term bond. By
including short- and medium-term bonds in its portfolio, the Fund seeks to offer
less share price volatility than long-term bonds or many long-term bond funds,
although its yield may be lower. Due to the greater market price risk of
its securities, the Fund may have a more variable share price than the AARP GNMA
and U.S. Treasury Fund. It is also possible that the Fund may provide a higher
level of income than the AARP GNMA and U.S. Treasury Fund.
This Fund intends under normal circumstances to have at least 65% of its
total assets invested in bonds which include corporate notes and bonds including
high-yield issues convertible into common stock. It may also purchase any
investments eligible for the AARP GNMA and U.S. Treasury Fund as well as
obligations of federal agencies that are not backed by the full faith and credit
of the U.S. Government, such as obligations of Federal Home Loan Bank, Farm
Credit Banks and the Federal Home Loan Mortgage Corporation. In addition, it
may purchase obligations of international agencies such as the International
Bank for Reconstruction and Development, the Inter-American Development Bank and
the Asian Development Bank. Other eligible investments include U.S.
dollar-denominated foreign debt securities (such as U.S. dollar denominated debt
securities issued by the Dominion of Canada and its provinces), and money market
instruments such as commercial paper and bankers' acceptances and certificates
of deposit issued by domestic and foreign branches of U.S. banks. The Fund
invests in a broad range of short, intermediate, and long-term securities.
Proportions among maturities and types of securities may vary depending upon the
prospects for income related to the outlook for the economy and the securities
markets, the quality of available investments, the level of interest rates, and
other factors.
Except for limitations in the Fund's investment restrictions, there is no
limit as to the proportions of the Fund which may be invested in any of the
eligible investments. However, it is a policy of the Fund that its non-
governmental investments will be spread among a variety of companies and will
not be concentrated in any industry. (See "Investment Restrictions", herein.)
High Quality Portfolio. The policies of AARP High Quality Bond Fund are
designed to provide a portfolio that combines high quality securities with
investments that attempt to reduce its market price risk.
The portfolio of the AARP High Quality Bond Fund is high grade . In
fact, according to information provided by Morningstar, Inc., the Fund
has one of the highest quality standards of any general bond Fund currently
available. No purchase will be made if, as a result thereof, less than 65% of
the Fund's net assets would be invested in debt obligations, including money
market instruments, that (a) are issued or guaranteed by the U.S. Government,
(b) are rated at the time of purchase within the two highest grades assigned by
any of the nationally-recognized rating services including Moody's or S&P, or
(c) if not rated, are judged at the time of purchase by the Fund Manager,
subject to the Trustees' review, to be of a quality comparable to those in the
two highest ratings described in (b) above. All of the debt obligations in
which the Fund invests will, at the time of purchase, be rated within the three
highest credit ratings or, if not rated, will be judged to be of comparable
quality by the Fund Manager. (See "ADDITIONAL INFORMATION - Ratings of
Corporate Bonds.")
Variations of Maturity. In an attempt to capitalize on the differences in
total return from securities of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Fund
Manager's expectations of changes therein.
Foreign Securities. The AARP High Quality Bond Fund may invest, without
limit, in U.S. dollar-denominated foreign debt securities (including U.S. dollar
denominated debt securities issued by the Dominion of Canada and its provinces
and other debt securities which meet the Fund's criteria applicable to its
domestic investments), and in certificates of deposit issued by foreign branches
of United States banks, to any extent deemed appropriate by the Fund Manager.
AARP Insured Tax Free Income Fund
(See "AARP Insured Tax Free General Bond Fund," "INVESTMENT OBJECTIVES
AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the
Prospectus.)
AARP Insured Tax Free General Bond Fund. The AARP Insured Tax Free General
Bond Fund is a separate series of AARP Tax Free Income Trust. From a portfolio
consisting primarily of municipal securities covered by insurance, the Fund
seeks to provide high income free from federal income taxes and to keep the
value of its shares more stable than that of a long-term municipal bond. The
Fund seeks to provide investors with the higher tax-free income that is often
available from municipal securities by investing, under normal circumstances, in
a high grade portfolio of bonds consisting primarily of municipal securities,
with no restrictions as to maturity. Securities comprising at least 65% of the
total assets held by the Fund are fully insured as to face value and interest by
private insurers. While longer-term securities such as those in which the Fund
may invest have in recent years had higher yields, they also experience greater
price fluctuation than shorter-term securities. By including short- and
medium-term bonds in its portfolio, the Fund seeks to offer less share price
volatility than long-term municipal bonds or many long-term municipal bond
funds, although its yield may be lower. Because the Fund may trade its
securities, it is also free to attempt to take advantage of opportunities in the
market to achieve higher current income. This opportunity is not available to
unit investment trusts, which hold fixed portfolios of municipal
securities.
Under normal circumstances, at least 80% of the Fund's net assets are
invested in tax-exempt securities. For this purpose, private activity bonds,
the interest on which is treated as a preference item for purposes of
calculating alternative minimum tax liability, will not be treated as tax exempt
securities. The Fund does not intend to purchase any such private activity
bonds. (See "TAXES" herein.)
There can be no assurance that the objectives of the Fund will be achieved
or that all income to shareholders which is exempt from federal income taxes
will be exempt from state or local taxes. Shareholders may also be subject to
tax on long-term and short-term capital gains (see "TAXES" herein).
In addition, the market prices of municipal securities, like those of
taxable debt securities, go up and down when interest rates change. Thus, the
net asset value per share can be expected to fluctuate and shareholders may
receive more or less than their purchase price for shares they redeem. In
addition to investments in municipal obligations, as described below, the Fund
may invest in short-term taxable U.S. Government securities and repurchase
agreements backed by U.S. Government securities. The Fund also may invest in
demand notes and tax-exempt commercial paper, financial futures contracts, and
may invest in and write (sell) options related to such futures contracts. These
investments are not insured or guaranteed or backed by the U.S. Government.
Except for futures and options, which are not rated, the AARP Insured Tax Free
General Bond Fund will only purchase securities rated within the top three
ratings by Moody's and S&P, or the equivalent as determined by the Fund Manager,
or repurchase agreements on such securities. To qualify as "within the top
three ratings," a security must have such a rating due to the credit of the
issuer or due to specific insurance on the security, whether acquired at
issuance or by the Fund at the time of purchase. A security would not so
qualify if its rating was solely the result of coverage under the Fund's
portfolio insurance.
Securities in which the Fund may invest may include: (a) a security that
carries at the time of issuance, whether because of the credit of the issuer or
because it is insured at issuance by an insurance company, a rating within the
top three ratings; and (b) a security not rated within the top three ratings at
the time of issuance but insured to maturity by the Fund at the time of purchase
if, upon issuance of such insurance, the Fund Manager is able to determine that
the security is now the equivalent of a security rated within the top three
ratings by a nationally recognized rating agent.
When, in the opinion of the Fund Manager, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term investments such
as U.S. Treasury notes, bills and bonds and repurchase agreements collateralized
by U.S. Government securities, the interest income from which may be subject to
federal income tax. Notwithstanding the foregoing, the Fund may invest more
than 20% of its net assets in such taxable U.S. Treasury securities and
repurchase agreements for temporary defensive purposes.
Insurance. Insurance on at least 65% of the AARP Insured Tax Free General
Bond Fund's total assets will be obtained from nationally recognized private
insurers, including the following: Financial Guaranty Insurance Company
("FGIC") is owned by FGIC Corporation, which in turn is owned by General
Electric Credit Corporation; AMBAC Indemnity Corporation; and Municipal Bond
Investors Assurance Corporation, a wholly-owned subsidiary of MBIA Incorporated,
the principal shareholders of which are: The Aetna Life & Casualty Company,
Fireman's Fund Insurance Company, subsidiaries of the CIGNA Corporation and
affiliates of the Continental Insurance Company.
The Fund currently has portfolio insurance provided by FGIC pursuant to
which it may insure securities mutually agreed to between the Fund and FGIC so
long as the security remains in the Fund's portfolio. Pursuant to an
irrevocable commitment, FGIC also provides the Fund with the option to obtain
insurance for any security covered by the FGIC portfolio insurance, which
insurance can continue if the security were to be sold by the Fund. The Fund
may procure portfolio insurance from other insurers.
At least 65% of the Fund's assets are fully insured by private insurers as
to payment of face value and interest to the Fund, when due. If uninsured
securities or securities not directly or indirectly backed or guaranteed by the
U.S. Government are purchased and expected to be held for 60 days or more,
insurance will be obtained within 30 days to ensure that 65% of the Fund's
assets are insured by the issuer or arranged for by the Fund. If at least 65% of
its assets are not insured securities, the Fund will obtain insurance for a
portion of its U.S. Government guaranteed or backed securities so that the 65%
standard is achieved.
The Fund requires that insurance with respect to its securities provide for
the unconditional payment of scheduled principal and interest when due. In the
event of a default by the issuer, the insurer will, within 30 days of notice of
such default, provide to its agent or Trustee funds needed to make any such
payments. Such agent or Trustee will bear the responsibility of seeing that
such funds are used to make such payments to the appropriate parties. Such
insurance will not guarantee the market value of a security. Insurance on the
Fund's securities will in some cases continue in the event the securities are
sold by the Fund, while in other cases it may not.
To the extent the Fund's insured municipal securities do not equal 65% of
its total assets, the Fund will obtain insurance on such amount of its U.S.
Government guaranteed or backed securities as is necessary to have 65% of the
Fund's total assets insured at all times. This type of insurance will terminate
when the security is sold and will involve an added cost to the Fund while not
increasing the quality rating of the security.
Insurance on individual securities, whether obtained by the issuer or the
Fund, is non-cancelable and runs for the life of the security. Securities
covered under the Fund's portfolio insurance are insured only so long as they
are held by the Fund, though the Fund has the option to procure individual
secondary market insurance which would continue to cover any such security after
its sale by the Fund. Such guaranteed renewable insurance continues so long as
premiums are paid by the Fund and, in the judgment of the Fund Manager, coverage
should be continued. Non-payment of premiums on the portfolio insurance will,
under certain circumstances result in the cancellation of such insurance and
will also permit FGIC to take action against the Fund to recover premiums due
it. In the case of securities which are individually insured, default by the
issuer is not expected to affect the market value of the security relative to
other insured securities of the same maturity value and coupon and covered by
the same insurer. In the case of a security covered by the Fund's portfolio
insurance, the market value of such a security in the event of such default
might be less unless the Fund elected to purchase secondary market insurance for
it. It is the intention of the Fund Manager either to procure individual
secondary market insurance for, or retain in the Fund's portfolio, securities
which are insured by the Fund under portfolio insurance and which are in default
or significant risk of default in the payment of principal or interest. Any
such securities retained by the Fund would be held until the default has been
cured or the principal and interest have been paid by the issuer or the insurer.
Premiums for individual insurance may be payable in advance or may be paid
periodically over the term of the security by the party then owning the
security, and the costs will be reflected in the price of the security. The
cost of insurance for longer-term securities, expressed in terms of income on
the security, is likely to reduce such income by from 10 to 60 basis points.
Thus, a security yielding 10% might have a net insured yield of 9.9% to 9.4%.
The impact of the cost of the Fund's portfolio insurance on the Fund's net yield
is somewhat less. The cost of insurance for shorter-term securities, which are
generally lower-yielding, is expected to be less. It should be noted that
insurance raises the rating of a municipal security. Lower rated securities
generally pay a higher rate of interest than higher rated securities. Thus,
while there is no assurance that this will always be the case, the Fund may
purchase lower rated securities which, when insured, will bear a higher rating,
and may pay a higher net rate of interest than other equivalently rated
securities which are not insured.
Insurers have certain eligibility standards as to municipal securities they
will insure. Such standards may be more or less strict than standards which
would be applied for purchase of a security for the Fund. To the extent the
insurers apply stricter standards, the Fund will be restricted by such standards
in the purchase and retention of municipal securities.
The Internal Revenue Service has issued revenue rulings indicating that (a)
the fact that municipal obligations are insured will not affect their tax-exempt
status and (b) insurance proceeds representing maturing interest on defaulted
municipal obligations paid to certain municipal bond funds will be excludable
from federal gross income under Section 103(a) of the Internal Revenue Code.
While operation of the Fund and the terms of the insurance policies on the
Fund's securities may differ somewhat from those addressed by the revenue
rulings, the Fund does not anticipate that any differences will be material or
change the result with respect to the Fund.
Insurers of the Fund's municipal securities are subject to regulation by
the department of insurance in each state in which they are qualified to do
business. Such regulation, however, is no guarantee that an insurer will be
able to perform on its contract of insurance in the event a claim should be made
thereunder at some time in the future. The Fund Manager reviews the financial
condition of each insurer of their securities at least annually, and in the
event of any material development, with respect to its continuing ability to
meet its commitments to any contract of bond or portfolio insurance.
Management Strategies. In pursuit of its investment objectives the Fund
purchases securities that it believes are attractive and competitive values in
terms of quality, and relationship of current price to market value. However,
recognizing the dynamics of municipal bond prices in response to changes in
general economic conditions, fiscal and monetary policies, interest levels and
market forces such as supply and demand for various bond issues, the Fund
Manager manages the Fund continuously, attempting to achieve a high level of
tax-free income. The primary strategies employed in the management of the Fund
are:
Variations of Maturity. In an attempt to capitalize on the differences in
total return from municipal securities of differing maturities, maturities may
be varied according to the structure and level of interest rates, and the Fund
Manager's expectations of changes therein.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal securities of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand.
These temporary disparities in normal yield relationships may afford
opportunities to invest in more attractive market sectors or specific issues by
trading securities currently held by the Fund.
Market Trading Opportunities. In addition to the above, the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than 3 months) if the Fund believes that such transactions, net of
costs, would further the attainment of that Fund's objectives. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
Fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Funds will be able to take advantage of
them. The Fund will limit its voluntary short-term trading to the extent
necessary to qualify as a "regulated investment company" under the Internal
Revenue Code.
Special Considerations: Income Level and Credit Risk. To the extent that
AARP Insured Tax Free General Bond Fund holds insured municipal
obligations, the income earned on its shares will tend to be less than for an
uninsured portfolio of the same securities. The fund will amortize as
income, over the life of the respective security issues, any original issue
discount on debt obligations (even where these are acquired in the
after-market), and market discount on short-term U.S. Government securities.
The Fund will elect to amortize the premium paid on acquisition of any premium
coupon obligations. Since such discounts and premiums will be recognized in the
Fund's accounts over the life of the respective security issues and included in
the regular monthly income distributions to shareholders, they will not give
rise to taxable capital gains or losses. However, a capital gain may be
realized upon the sale or maturity and payment of certain obligations purchased
at a market discount.
AARP Growth Funds
(See "AARP Balanced Stock and Bond Fund," "AARP Growth and Income Fund,"
"AARP Capital Growth Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER
INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.)
AARP Balanced Stock and Bond Fund. The AARP Balanced Stock and Bond Fund's
investment objective is to seek to provide long-term growth of capital and
income while attempting to keep the value of its shares more stable than
other balanced mutual funds. The Fund pursues these objectives by investing in a
combination of stocks, bonds, and cash reserves.
The Fund is intended to provide--through a single investment--access to a
wide variety of income-oriented stocks and investment-grade bond investments.
Common stocks and other equity investments provide long-term growth potential to
help offset the effect of inflation on an investor's purchasing power. Bonds and
other fixed-income investments provide current income and may, over time, help
reduce fluctuations in the Fund's share price.
In seeking a balance of growth and income, as well as long-term
preservation of capital, the Fund invests in a diversified portfolio of equity
and fixed-income securities. At least 30% of the Fund's assets will be in fixed-
income securities, with the remainder of its net assets in common stocks and
securities convertible into common stocks. For temporary defensive purposes, the
Fund may invest without limit in cash and in other money market and short-term
instruments.
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), mortgage-backed and other asset-backed securities, municipal
obligations, zero coupon securities, and restricted securities issued in private
placements.
For liquidity and defensive purposes, the Fund may invest in money market
securities such as commercial paper, bankers' acceptances, and certificates of
deposit issued by domestic and foreign branches of U.S. banks. The Fund may also
enter into repurchase agreements with respect to U.S. Government securities.
All of the Fund's debt securities will be investment grade, that is, rated
Baa or above by Moody's or BBB by S&P. Moreover, at least 75% of these
securities will be high grade, that is, rated within the three highest quality
ratings of Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or, if unrated,
judged to be of equivalent quality as determined by the Fund Manager at the time
of purchase. Securities must also meet credit standards applied by the Fund
Manager. Moreover, the Fund does not purchase debt securities rated below Baa by
Moody's or BBB by S&P. Should the rating of a portfolio security be downgraded
the Fund Manager will determine whether it is in the best interest of the Fund
to retain or dispose of the security.
AARP Growth and Income Fund. From investments primarily in common stocks
and securities convertible into common stocks, the Fund seeks to provide long-
term capital growth and income, and to keep the value of its shares more
stable than other growth and income mutual funds.
The Fund invests primarily in common stocks and securities convertible into
common stocks. It also may invest in rights to purchase common stocks of
companies offering the prospect for capital growth and growth of earnings while
paying current dividends. The Fund may also invest in preferred stocks
consistent with the Fund's objective. Over time, continued growth of earnings
tends to produce higher dividends and to enhance capital value. In addition,
since 1945, the overall performance of common stocks has exceeded the rate of
inflation. For temporary defensive purposes when market and economic conditions
warran t, 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.
AARP Capital Growth Fund. From investments primarily in common stocks and
securities convertible into common stocks, the Fund seeks to provide long-term
capital growth, and to keep the value of its shares more stable than other
capital growth mutual funds. Through a broadly diversified portfolio
consisting primarily of high quality, medium- to large-sized companies with
strong competitive positions in their industries, and relatively low portfolio
turnover, the Fund seeks to offer less share price volatility than many growth
funds. It may also invest in rights to purchase common stocks, the growth
prospects of which are greater than most stocks but which may also have
above-average market risk. The Fund may also invest in preferred stocks
consistent with the Fund's objective. The securities in which the Fund may
invest are described under "AARP Capital Growth Fund" in the Prospectus.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
Fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry. However, the Fund reserves the
right to invest up to 25% of its total assets (taken at market value) in any one
industry.
The Fund may regularly invest in repurchase agreements. 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
market and economic conditions warrant.
Special Investment Policies of the AARP Funds (See "OTHER INVESTMENT POLICIES
AND RISK FACTORS" in the Prospectus.)
U.S. Government Securities. U.S. Treasury securities, backed by the full
faith and credit of the U.S. Government, include a variety of securities which
differ in their interest rates, maturities and times of issuance. Treasury
bills have original maturities of one year or less. Treasury notes have
original maturities of one to ten years and Treasury bonds generally have
original maturities of greater than ten years.
U.S. Government agencies and instrumentalities which issue or guarantee
securities include, for example, the Export-Import Bank of the United States,
the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, the Small Business Administration and the
Federal Farm Credit Bank. Obligations of some of these agencies and
instrumentalities, such as the Export-Import Bank, are supported by the full
faith and credit of the United States; others, such as the securities of the
Federal Home Loan Bank, by the ability of the issuer to borrow from the
Treasury; while still others, such as the securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. No assurance can be given
that the U.S. Government would provide financial support to the latter group of
U.S. Government instrumentalities, as it is not obligated to do so.
Interest rates on U.S. Government obligations which the AARP Funds may
purchase may be fixed or variable. Interest rates on variable rate obligations
are adjusted at regular intervals, at least annually, according to a formula
reflecting then current specified standard rates, such as 91-day U.S. Treasury
bill rates. These adjustments tend to reduce fluctuations in the market value
of the securities.
Municipal Obligations. Municipal obligations held by AARP High Quality Tax
Free Money Fund and AARP Insured Tax Free General Bond Fund are issued by or on
behalf of states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on these
obligations is generally exempt from federal income tax in the hands of most
investors. The two principal classifications of municipal obligations are
"notes" and "bonds". Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenue such as income, sales, use and business taxes. Bond
Anticipation Notes are sold to provide interim financing and Construction Loan
Notes are sold to provide construction financing. These notes are generally
issued in anticipation of long-term financing in the market. In most cases,
these monies provide for the repayment of the notes. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the FHA under "Fannie Mae" (the Federal National Mortgage Association)
or GNMA. There are, of course, a number of other types of notes issued for
different purposes and secured differently than those described above.
Municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities, towns
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully-insured, rent-subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt reserve fund.
Lease rental bonds issued by a state or local authority for capital projects are
secured by annual lease rental payments from the state or locality to the
authority sufficient to cover debt service on the authority's obligations.
Some issues of municipal bonds are payable from United States Treasury
bonds and notes held in escrow by a Trustee, frequently a commercial bank. The
interest and principal on these U.S. Government securities are sufficient to pay
all interest and principal requirements of the municipal securities when due.
Some escrowed Treasury securities are used to retire municipal bonds at their
earliest call date, while others are used to retire municipal bonds at their
maturity.
Private activity bonds, although nominally issued by municipal authorities,
are generally not secured by the taxing power of the municipality but are
secured by the revenues of the authority derived from payments by an industrial
or other non-governmental user.
Securities purchased for either Fund may include variable/floating rate
instruments, variable mode instruments, put bonds, and other obligations which
have a specified maturity date but also are payable before maturity after notice
by the holder ("demand obligations"). Demand obligations are considered for the
AARP Funds' purposes to mature at the demand date.
There are, in addition, a variety of hybrid and special types of municipal
obligations as well as numerous differences in the security of municipal
obligations both within and between the two principal classifications (i.e.,
notes and bonds) discussed above.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as the AARP Funds. Thus, such an issue
may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale unless an
exemption from such registration is available, municipal obligations which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for municipal obligations which have not been publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on holdings of
securities which are not readily marketable based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its recorded
value. The AARP Funds believe that the quality standards applicable to their
investments enhance marketability. In addition, stand-by commitments,
participation interests and demand obligations also enhance marketability.
For the purpose of the AARP Funds' investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Fund Manager on the basis of the characteristics
of the obligation as described above, the most significant of which is the
source of funds for the payment of principal and interest on such obligations.
Municipal Lease Obligations and Participation Interests. Participation
interests represent undivided interests in municipal leases, installment
purchase contracts, conditional sales contracts or other instruments. These are
typically issued by a Trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or contracts.
Each AARP Tax Free Fund may purchase from banks participation
interests in all or part of specific holdings of municipal obligations, provided
the participation interest is fully insured. Each participation is backed by an
irrevocable letter of credit or guarantee of the selling bank that the AARP
Funds' investment adviser has determined meets the prescribed quality standards
of the Fund. Thus either the credit of the issuer of the municipal obligation
or the selling bank, or both, will meet the quality standards of the particular
Fund. Each Fund has the right to sell the participation back to the bank after
seven days' notice for the full principal amount of the Fund's interest in the
municipal obligation plus accrued interest, but only (1) as required to provide
liquidity to the Fund, (2) to maintain a high quality investment portfolio or
(3) upon a default under the terms of the municipal obligation. The selling
bank will receive a fee from the Fund in connection with the arrangement.
Neither Fund will purchase participation interests unless it receives an opinion
of counsel or a ruling of the Internal Revenue Service satisfactory to the
Trustees that interest earned by that Fund on municipal obligations on which it
holds participation interests is exempt from Federal income tax.
A municipal lease obligation may take the form of a lease, installment
purchase contract or conditional sales contract which is issued by a state or
local government and authorities to acquire land, equipment and facilities.
Income from such obligations is generally exempt from state and local taxes in
the state of issuance. Municipal lease obligations frequently involve special
risks not normally associated with general obligations or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title in the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in a delay in recovery or the failure to
fully recover a Fund's original investment.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Fund Manager to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Fund Manager will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Fund Manager will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
A Fund may purchase participation interests in municipal lease obligations
held by a commercial bank or other financial institution. Such participations
provide a Fund with the right to a pro rata undivided interest in the underlying
municipal lease obligations. In addition, such participations generally provide
a Fund with the right to demand payment, on not more than seven days' notice, of
all or any part of such Fund's participation interest in the underlying
municipal lease obligation, plus accrued interest. Each Fund will only invest
in such participations if, in the opinion of bond counsel, counsel for the
issuers of such participations or counsel selected by the Fund Manager, the
interest from such participations is exempt from regular federal income tax and
state income tax for each state specific fund.
Stand-by Commitments. Pursuant to an exemptive order from the SEC, each
AARP Tax Free Fund may acquire "stand-by commitments," which will enable
the Fund to improve its portfolio liquidity by making available same-day
settlements on sales of its securities. A stand-by commitment is a right
acquired by a Fund, when it purchases a municipal obligation from a broker,
dealer or other financial institution ("seller"), to sell up to the same
principal amount of such securities back to the seller, at the Fund's option, at
a specified price. Stand-by commitments are also known as "puts". Each Fund's
investment policies permit the acquisition of stand-by commitments solely to
facilitate portfolio liquidity and not to protect against changes in the market
price of the Fund's portfolio securities. The exercise by a Fund of a stand-by
commitment is subject to the ability of the other party to fulfill its
contractual commitment.
Stand-by commitments acquired by a Fund will have the following features:
(1) they will be in writing and will be physically held by the Fund's custodian;
(2) a Fund's right to exercise them will be unconditional and unqualified; (3)
they will be entered into only with sellers which in the Fund Manager's opinion
present a minimal risk of default; (4) although stand-by commitments will not be
transferable, municipal obligations purchased subject to such commitments may be
sold to a third party at any time, even though the commitment is outstanding;
and (5) their exercise price will be (i) the Fund's acquisition cost (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date.
Each Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total
amount "paid" by a Fund in either manner for outstanding stand-by commitments
will not exceed 1/2 of 1% of the value of its total assets calculated
immediately after any stand-by commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential benefit
of a stand-by commitment. Therefore, it is expected that the Trustees will
determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However,
if the market price of the security subject to the stand-by commitment is less
than the exercise price of the stand-by commitment, such security will
ordinarily be valued at such exercise price. Where a Fund has paid for a
stand-by commitment, its cost will be reflected as unrealized depreciation for
the period during which the commitment is held.
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, a repurchase agreement is deemed to be a
loan to the seller of the Obligation and is therefore covered by each Fund's
investment restriction applicable to loans. Each repurchase agreement entered
into by a Fund requires that if the market value of the Obligation becomes less
than the repurchase price (including interest), a Fund will direct the seller of
the Obligation, on a daily basis to deliver additional securities so that the
market value of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. In the event that a Fund is unsuccessful in
seeking to enforce the contractual obligation to deliver additional securities,
and the seller defaults on its obligation to repurchase, the Fund bears the risk
of any drop in market value of the Obligation(s). In the event that bankruptcy
or insolvency proceedings were commenced with respect to a bank or broker-dealer
before its repurchase of the Obligation, a Fund may encounter delay and incur
costs before being able to sell the security. Delays may involve loss of
interest or decline in price of the Obligation. In the case of repurchase
agreements, it is not clear whether a court would consider a repurchase
agreement as being owned by the particular Fund or as being collateral for a
loan by the Fund. If a court were to characterize the transaction as a loan and
the Fund had not perfected a security interest in the Obligation, the Fund could
be required to return the Obligation to the bank's estate and be treated as an
unsecured creditor. As an unsecured creditor, the Fund would be at the risk of
losing some or all of the principal and income involved in that transaction.
The Fund Manager seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligations.
Securities subject to a repurchase agreement are held in a segregated
account, and the amount of such securities is adjusted so as to provide a market
value at least equal to the repurchase price on a daily basis.
Each of the AARP Income Funds has adopted a policy, which may be changed
without the vote of the shareholders of those funds, not to invest more than 50%
of its total assets in repurchase agreements. In addition, none of the AARP
Funds may invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days. (See "Investment Restrictions", herein,
regarding requirements for a majority vote.)
Loans of Portfolio Securities. Each Fund may lend its portfolio securities
provided: (1) the loan is secured continuously by collateral consisting of U.S.
Government securities or cash or cash equivalents adjusted daily to have a
market value at least equal to the current market value of the securities
loaned; (2) the Fund may at any time call the loan and regain the securities
loaned; (3) the Fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund. In addition, it is
anticipated that the Fund may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan. In determining whether to lend securities, the Fund's investment
adviser considers all relevant factors and circumstances including the
creditworthiness of the borrower. The AARP Funds have no current intention of
lending their portfolio securities.
Securities Purchased on a "Forward Delivery" or "When-Issued" Basis. Debt
securities, including municipal obligations when originally issued, are
frequently offered on a "forward delivery" or "when-issued" basis and may be
purchased on this basis by the AARP Money, Income and Tax Free Funds, and the
AARP Balanced Stock and Bond Fund. When so offered, the price, which may be
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase of U.S. Government obligations. During the period between purchase and
settlement, no payment is made on behalf of the Fund and no interest accrues to
the Fund. To the extent that assets of the Fund are not invested prior to the
settlement of a purchase of securities, the Fund will earn no income; however,
it is the intention of each Fund to be fully invested to the extent practicable,
subject to the policies stated above. While securities purchased on a forward
delivery or when-issued basis may be sold prior to the settlement date, each of
the above Funds intends to purchase such securities with the purpose of actually
acquiring them for its portfolio unless a sale appears desirable for investment
reasons. At the time the commitment to purchase a debt security on a forward
delivery or when-issued basis is made, the transaction will be recorded and the
value of the security will be reflected in determining its net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Funds do not
believe that their net asset value or income will be adversely affected by their
purchase of debt securities on a when-issued or forward delivery basis. Each
Fund will establish with its custodian a segregated account in which it will
maintain cash, U.S. Government securities and other high-quality debt
obligations equal in value to commitments for when-issued or forward delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date.
Futures Contracts. The AARP Income Funds, the AARP Insured Tax-Free
General Bond Fund, and the AARP Balanced Stock and Bond Fund may each enter into
financial futures contracts. Such contracts may be either based on indices of
particular groups or varieties of securities ("Index Futures Contracts") or be
for the purchase or sale of debt obligations ("Debt Futures Contracts"). Such
futures contracts are traded on exchanges licensed and regulated by the
Commodity Futures Trading Commission. Each Fund enters into futures contracts
to gain a degree of protection against anticipated changes in interest rates
that would otherwise have an adverse effect upon the economic interests of the
Fund. However, the costs of and possible losses from futures transactions
reduce the Funds' yield from interest on its holdings of debt securities.
Income from futures transactions constitutes taxable gain.
For each Fund, the custodian places cash, U.S. government securities and
other high grade debt obligations into a segregated account in an amount equal
to the value of the total assets committed to the consummation of futures
positions. If the value of the securities placed in the segregated account
declines, additional cash or securities are required to be placed in the account
on a daily basis so that the value of the account equals the amount of a Fund's
commitments with respect to such contracts. Alternatively, a Fund may cover
such positions by purchasing offsetting positions, or covering such positions
partly with cash, U.S. government securities and other high grade debt
obligations, and partly with offsetting positions.
An Index Futures Contract is a contract to buy or sell units of a
particular index of securities at a specified future date at a price agreed upon
when the contract is made. Index Futures Contracts typically specify that no
delivery of the actual securities making up the index takes place. Instead,
upon termination of the contract, final settlement is made in cash based on the
difference between the contract price and the actual price on the termination
date of the units of the index.
A Debt Futures Contract is a binding contractual commitment which, if held
to maturity, requires a Fund to make or accept delivery, during a particular
month, of obligations having a standardized face value and rate of return. By
purchasing a Debt Futures Contract, a Fund legally obligates itself to accept
delivery of the underlying security and to pay the agreed price; by selling a
Debt Futures Contract it legally obligates itself to make delivery of the
security against payment of the agreed price. However, positions taken in the
futures markets are not normally held to maturity. Instead they are liquidated
through offsetting transactions which may result in a profit or loss. While
Debt Futures Contract positions taken by a Fund are usually liquidated in this
manner, a Fund may instead make or take delivery of the underlying securities
whenever it appears economically advantageous.
A clearing corporation, associated with the exchange on which futures
contracts are traded, assumes responsibility for close-outs of such contracts
and guarantees that the sale or purchase, if still open, is performed on the
settlement date.
By entering into futures contracts, a Fund seeks to establish more
certainly than would otherwise be possible the effective rate of return on its
portfolio securities. A Fund may, for example, take a "short" position in the
futures markets by selling a Debt Futures Contract for the future delivery of
securities held by the Fund in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of such securities. Or it
might sell an Index Futures Contract based on a group of securities whose price
trends show a significant correlation with those of securities held by the Fund.
When hedging of this character is successful, any depreciation in the value of
portfolio securities is substantially offset by appreciation in the value of the
futures position. On other occasions a Fund may take a "long" position by
purchasing futures contracts. This is done when the Fund is not fully invested
or expects to receive substantial proceeds from the sale of portfolio securities
or of Fund shares, and anticipates the future purchase of particular securities
but expects the rate of return then available in the securities markets to be
less favorable than rates that are currently available in the futures markets.
The Funds expect that, in the normal course, securities will be purchased upon
termination of the long futures position, but under unusual market conditions, a
long futures position may be terminated without a corresponding purchase of
securities.
Debt Futures Contracts, however, currently involve only taxable obligations
and do not encompass municipal securities. The value of Debt Futures Contracts
on taxable securities, as well as Index Futures Contracts, may not vary in
direct proportion with the value of a Fund's securities, limiting the ability of
the Fund to hedge effectively against interest rate risk.
Presently the only available index futures contract in which the AARP
Insured Tax Free General Bond Fund might invest is the Bond Buyer Municipal Bond
Index. The Fund might sell a contract based on this index in anticipation of an
increase in interest rates, to attempt to offset the decrease in market value of
its portfolio securities which could result. Or the Fund might purchase such a
contract in the anticipation of a significant decrease in interest rates to
offset the increased cost of securities it hopes to purchase in the future. No
index futures contracts have yet been developed which are suitable for
investment by the Funds in the AARP Income Trust.
The investment restriction concerning futures contracts does not specify
the types of index-based futures contracts into which the Funds may enter
because it is impossible to foresee what particular indices may be developed and
traded or may prove useful to the Funds in implementing their overall risk
management strategies. For example, price trends for a particular index-based
futures contract may show a significant correlation with price trends in the
securities held by the Funds, or either of them, even though the securities
comprising the index are not necessarily identical to those held by such Fund or
Funds. In any event, the Funds would not enter into a particular index-based
futures contract unless the Adviser determined that such a correlation existed.
Index Futures Contracts and Debt Futures Contracts currently are actively
traded on the Chicago Board of Trade and the International Monetary Market at
the Chicago Mercantile Exchange.
Options on Futures Contracts. To attempt to gain additional protection
against the effects of interest rate fluctuations, each of the AARP Income
Funds, the AARP Insured Tax Free General Bond Fund and the AARP Balanced Stock
and Bond Fund may purchase and write (sell) put and call options on futures
contracts that are traded on a U.S. exchange or board of trade and enter into
related closing transactions. There can be no assurance that such closing
transactions will be available at all times. In return for the premium paid,
such an option gives the purchaser the right to assume a position in a futures
contract at any time during the option period for a specified exercise price.
A Fund may purchase put options on futures contracts in lieu of, and for
the same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract.
The purchase of call options on futures contracts is intended to serve the
same purpose as the actual purchase of the futures contracts. A Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
A Fund may write (sell) a call option on a futures contract in order to
hedge against a decline in the prices of the index or debt securities underlying
the futures contracts. If the price of the futures contract at expiration is
below the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing (selling) of a put option on a futures contract is similar to
the purchase of the futures contracts, except that, if market price declines, a
Fund would pay more than the market price for the underlying securities or index
units. The net cost to that Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Limitations on Futures Contracts and Options on Futures Contracts. A Fund
will not engage in transactions in futures contracts or related options for
speculation but only as a hedge against changes resulting from market conditions
in the values of debt securities held in its portfolio or which it intends to
purchase and where the transactions are appropriate to the reduction of the
Fund's risks. The Trustees have adopted policies (which are not Fundamental and
may be modified by the Trustees without a shareholder vote) that, immediately
after the purchase for a Fund of a futures contract or a related option, the
value of the aggregate initial margin deposits with respect to all futures
contracts (both for receipt and delivery), and premiums paid on related options,
entered into on behalf of the Fund will not exceed 5% of the fair market value
of the Fund's total assets. Additionally, the value of the aggregate premiums
paid for all put and call options held by a Fund will not exceed 20% of its net
assets. Futures contracts and put options written (sold) by a Fund will be
offset by assets of the Fund held in a segregated account in an amount
sufficient to satisfy obligations under such contracts and options.
Each Fund has received from the CFTC an interpretative letter confirming
its opinion that it is not a "commodity pool" as defined under the Commodity
Exchange Act. To ensure that its futures transactions meet this definition,
each Fund will enter into them for the purposes and with the hedging intent
specified in CFTC regulations. It will further determine that the price
fluctuations in the futures contracts used for hedging are substantially related
to price fluctuations in securities held by the Fund or which it expects to
purchase, though there can be no assurance this result will be achieved. The
Funds' futures transactions will be entered into for traditional hedging
purposes -- that is, futures contracts will be sold (or related put options
purchased) to protect against a decline in the price of securities that a Fund
owns, or futures contracts (or related call options) will be purchased to
protect the Fund against an increase in the price of securities it intends to
purchase. As evidence of this hedging intent, each Fund expects that
approximately 75% of its long futures positions (purchases of futures contracts
or call options on futures contracts) will be "completed"; that is, upon sale
(or other termination) of these long contracts, the Fund will have purchased, or
will be in the process of, purchasing, equivalent amounts of related securities
in the cash market. However, under unusual market conditions, a long futures
position may be terminated without the corresponding purchase of securities.
Covered Call Options. Each of the AARP Growth Funds and each of the AARP
Income Funds may write (sell) covered call options on their portfolio securities
in an attempt to enhance investment performance. The writing of covered call
options by each Fund is subject to limitations imposed by certain state
securities authorities. The Funds have been advised that, under the most
restrictive of such limitations currently in effect, no more than 25% of a
Fund's net assets may be subject to covered options. Further, such states
advise that, unless an exception is granted with respect to certain transactions
in debt securities and related options, such options and the securities
underlying the call must both be listed on national securities exchanges.
When a Fund writes (sells) a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") at any time during the option period,
generally ranging up to nine months. If the option expires unexercised, the
Fund will realize gain to the extent of the amount received for the option (the
"premium") less any commission paid. If the option is exercised, a decision
over which the Fund has no control, the Fund must sell the underlying security
to the option holder at the exercise price. By writing a covered option, the
Fund forgoes, in exchange for the premium less the commission ("net premium"),
the opportunity to profit during the option period from an increase in the
market value of the underlying security above the exercise price.
When a Fund sells an option, an amount equal to the net premium received by
the Fund is included in the liability section of the Fund's Statement of Assets
and Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current market value of the option
written. The current market value of a traded option is the last sale price or,
in the absence of a sale, the mean between the closing bid and asked price. If
an option expires on its stipulated expiration date or if the Fund enters into a
closing purchase transaction (i.e., the Fund terminates its obligation as the
writer of the option by purchasing a call option on the same security with the
same exercise price and expiration date as the option previously written), the
Fund will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option was sold) and the deferred
credit related to such option will be eliminated. If an option is exercised,
the Fund will realize a long-term or short-term gain or loss from the sale of
the underlying security and the proceeds of the sale will be increased by the
net premium originally received. The writing of covered options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which options are written will be segregated on the
books of the Fund's custodian.
Purchasing Options on Stock Indices. To protect the value of their
portfolios against declining stock prices, each of the AARP Growth Funds may
purchase put options on stock indices. To protect against an increase in the
value of securities that it wants to purchase, a Fund may purchase call options
on stock indices. A stock index (such as the Standard & Poor's 500) assigns
relative values to the common stocks included in the index and the index
fluctuates with the changes in the market values of the common stocks so
included. Options on stock indices are similar to options on stock except that,
rather than giving the purchaser the right to take delivery of stock at a
specified price, an option on a stock index gives the purchaser the right to
receive cash. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars,
times a specified multiple (the "multiplier"). The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Gain or loss with respect to options on stock indices depends on price movements
in the stock market generally rather than price movements in individual stocks.
The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Because the value of a stock index option depends upon movements in the
level of the stock index rather than the price of a particular stock, whether a
Fund will realize a gain or loss on the purchase of a put or call option on a
stock index depends upon movements in the level of stock prices in the stock
market generally or in an industry or market segment rather than movements in
the price of a particular stock. Accordingly, successful use by a Fund of both
put and call options on stock indices will be subject to the Fund Manager's
ability to accurately predict movements in the direction of the stock market
generally or of a particular industry. In cases where the Fund Manager's
prediction proves to be inaccurate, a Fund will lose the premium paid to
purchase the option and it will have failed to realize any gain.
In addition, a Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices (and therefore the
extent of its gain or loss on such transactions) depends on the degree to which
price movements in the underlying index correlate with price movements in the
Fund's securities. Inasmuch as such securities will not duplicate the
components of an index, the correlation probably will not be perfect.
Consequently, a Fund will bear the risk that the prices of the securities being
hedged will not move in the same amount as the option. This risk will increase
as the composition of a Fund's portfolio diverges from the composition of the
index.
Over-the-counter options ("OTC options") are purchased from or sold to
securities dealers, financial institutions or other parties ("Counterparties")
through direct bilateral agreement with the Counterparty. In contrast to
exchange listed options, which generally have standardized terms and performance
mechanics, all the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guarantees and security, are set by
negotiation of the parties. A Fund will only sell OTC options (other than OTC
currency options) that are subject to a buy-back provision permitting a Fund to
require the Counterparty to sell the option back to the Fund at a formula price
within seven days. A Fund expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Fund Manager must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. A Fund will engage in OTC option transactions only
with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers", or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of A-1 from S&P or P-1 from Moody's or an equivalent rating from any other
nationally recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 10% of its assets in illiquid securities.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when
the Fund sells these instruments it will only segregate an amount of assets
equal to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
Risks of Futures and Options Investments. A Fund will incur brokerage fees
in connection with its futures and options transactions, and it will be required
to segregate Funds for the benefit of brokers as margin to guarantee performance
of its futures and options contracts. In addition, while such contracts will be
entered into to reduce certain risks, trading in these contracts entails certain
other risks. Thus, while a Fund may benefit from the use of futures contracts
and related options, unanticipated changes in interest rates may result in a
poorer overall performance for that Fund than if it had not entered into any
such contracts. Additionally, the skills required to invest successfully in
futures and options may differ from skills required for managing other assets in
the Fund's portfolio.
The AARP Growth Funds may engage in over-the-counter options transactions
with broker-dealers who make markets in these options. The Fund Manager
will consider risk factors such as their creditworthiness when determining a
broker-dealer with which to engage in options transactions. The ability to
terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the issuing
broker rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Certain
over-the-counter options may be deemed to be illiquid securities and may not be
readily marketable. The Fund Manager will monitor the creditworthiness of
dealers with whom the Funds enter into such options transactions under the
general supervision of the Funds' Trustees.
Convertible Securities. Convertible securities include convertible bonds,
notes and debentures, convertible preferred stocks, and other securities that
give the holder the right to exchange the security for a specific number of
shares of common stock. Convertible securities entail less credit risk than the
issuer's common stock because they are considered to be "senior" to common
stock. Convertible securities generally offer lower interest or dividend yields
than non-convertible debt securities of similar quality. They may also reflect
changes in value of the underlying common stock.
Foreign Securities. All the Funds in the AARP Growth Trust may
invest without limit in foreign securities. The AARP High Quality Bond Fund may
invest without limit in U.S. dollar denominated foreign securities. The AARP
Money Funds may currently invest in U.S. dollar-denominated certificates of
deposit and bankers' acceptances of foreign branches of large U.S. banks.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in United States securities and which may
favorably or unfavorably affect the Funds' performance. As foreign companies
are not generally subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic companies, there may be less publicly available information about a
foreign company than about a domestic company. Many foreign securities markets,
while growing in volume of trading activity, have substantially less volume than
the U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity
in most foreign bond markets is less than in the United States and, at times,
volatility of price can be greater than in the United States. Fixed commissions
on some foreign securities exchanges and bid to asked spreads in foreign bond
markets are generally higher than commissions on bid to asked spreads on U.S.
markets, although the Funds will endeavor to achieve the most favorable net
results on their portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the United States. It may be more difficult for the Funds' agents to
keep currently informed about corporate actions which may affect the prices of
portfolio securities. Communications between the United States and foreign
countries may be less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Payment for securities without delivery
may be required in certain foreign markets. In addition, with respect to
certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Investments in foreign securities may also entail certain risks such as possible
currency blockages or transfer restrictions, and the difficulty of enforcing
rights in other countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, to the
extent investments in foreign securities involve currencies of foreign
countries, the Funds may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversion between currencies.
Investments in companies domiciled in developing countries may be subject
to potentially greater risks than investments in developed countries. The
possibility of revolution and the dependence on foreign economic assistance may
be greater in these countries than in developed countries. The management of
each Fund seeks to mitigate the risks associated with these considerations
through diversification and active professional management.
Forward Foreign Currency Exchange Contracts. Each of the AARP Growth Funds
may enter into forward foreign currency exchange contracts in connection with
its investments in foreign securities. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
The maturity date of a forward contract may be any fixed number of days
from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month, and forward contracts may be in any amount
agreed upon by the parties rather than predetermined amounts. Also, forward
contracts are traded directly between banks or currency dealers so that no
intermediary is required. A forward contract generally requires no margin or
other deposit. Closing transactions with respect to forward contracts are
effected with the currency trader who is a party to the original forward
contract.
The Funds may enter into foreign currency futures contracts in several
circumstances. First, when the Funds enter into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Funds
anticipates the receipt in a foreign currency of interest and dividend payments
on such a security which it holds, the Funds may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such interest and
dividend payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of U.S. dollars, of the amount of
foreign currency involved in the underlying transactions, the Funds will attempt
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend payment is declared, and the date on which such
payments are made or received.
The Funds' activities involving forward contracts may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company.
General Investment Policies of the AARP Funds
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
The AARP Funds have no present intention of acquiring restricted
securities, though they have limited authority to do so (see "Investment
Restrictions").
The AARP Funds cannot guarantee a gain or eliminate the risk of loss. The
net asset value of a non-money market Fund's shares will increase or
decrease with changes in the market prices of the Fund's investments and there
is no assurance that a Fund's objective(s) will be achieved.
Except where otherwise indicated, the objectives and policies stated above
may be changed by the Trustees without a vote of the shareholders.
Investment Restrictions
The following restrictions may not be changed with respect to a Fund
without the approval of a majority of the outstanding voting securities of such
Fund which, under the Investment Company Act of 1940 ("the 1940 Act") and the
rules thereunder and as used in this Statement of Additional Information, means
the lesser of (1) 67% of the shares of such Fund present at a meeting if the
holders of more than 50% of the outstanding shares of such Fund are present in
person or by proxy, or (2) more than 50% of the outstanding shares of such Fund.
(A) None of the Funds may:
(1) borrow money, except for temporary or emergency purposes and not for
investment purposes or except in connection with reverse repurchase
agreements; provided that a Fund maintains asset coverage of 300% for
all borrowings;
(2) underwrite any securities issued by other persons, except that it may
be deemed an underwriter in connection with the disposition of
portfolio securities of the Fund;
(3) purchase or sell real estate, but this shall not prevent a Fund from
investing in (i) securities of companies which deal in real estate or
mortgages, and (ii) securities secured by real estate or interests
therein, and that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership of
securities;
(4) purchase or sell physical commodities, or contracts relating to
physical commodities;
(5) make loans to other persons, except (i) loans of portfolio securities,
and (ii) except to the extent that the entry into repurchase
agreements and the purchase of debt securities in accordance with its
investment objective and investment policies may be deemed to be
loans;
(6) issue senior securities except as appropriate to evidence indebtedness
which it is permitted to incur and except for shares of the separate
classes or series of the Trust, provided that collateral arrangements
with respect to currency-related contracts, futures contracts, option
or other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of senior
securities for purposes of this restriction;
(7) with respect to 75% of each Fund's total net assets, purchase more
than 10% of the voting securities of any one issuer or invest more
than 5% of the value of the total assets of the Fund in the securities
of any one issuer (except for investments in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
and except securities of other investment companies);
(B) Neither the AARP High Quality Money Fund, the AARP GNMA and U.S. Treasury
Fund, the AARP High Quality Bond Fund, the AARP Growth and Income Fund nor
the AARP Capital Growth Fund may:
(1) purchase any securities which would cause more than 25% of the market
value of the total assets of the Fund at the time of such purchase to
be invested in the securities of one or more issuers having their
principal business activities in the same industry (for this purpose,
telephone companies are considered to be a separate industry from gas
and electric public utilities, and wholly-owned finance companies are
considered to be in the industry of their parents if their activities
are primarily related to financing the activities of the parents),
provided that there is no limitation in respect to investments in the
U.S. Government or its agencies or instrumentalities or, in the case
of AARP High Quality Money Fund, in certificates of deposit or
bankers' acceptances or, in the case of the AARP Growth and Income
Funds, to municipal securities other than pollution control and
industrial development bonds.
(C) Neither the AARP High Quality Tax Free Money Fund nor the AARP Insured Tax
Free General Bond Fund may:
(1) purchase (i) private activity bonds or (ii) securities which are
neither municipal bonds nor securities of the U.S. Government, its
agencies or instrumentalities, if in either case the purchase would
cause more than 25% of the market value of its total assets at the
time of such purchase to be invested in the securities of one or more
issuers having their principal business activities in the same
industry. For this purpose, telephone companies are considered to be a
separate industry from gas and electric public utilities and wholly-
owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the
activities of their parents provided that, in the case of the AARP
High Quality Tax Free Money Fund, there is no limitation in respect to
investments in the U.S. Government or its agencies or
instrumentalities, or in certificates of deposit or bankers'
acceptances.
(D) AARP High Quality Tax Free Money Fund may not:
(1) purchase securities which are not municipal obligations if such
purchase would cause more than 20% of the Fund's total assets to be
invested in such securities, except, for temporary defensive purposes,
that the Fund may invest more than 20% of its total assets in such
securities prior to the time normal operating conditions have been
achieved and during other than normal market conditions.
The following restrictions are not Fundamental and may be changed by a Fund
without shareholder approval, in compliance with applicable law, regulation or
regulatory policy. None of the Funds may:
(a) make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance
of transactions; and, in the case of the AARP Income Funds and AARP
Insured Tax Free General Bond Fund in connection with entering into
futures contracts and related options;
(b) purchase or retain for a Fund the securities of any issuer if those
officers and Trustees of a Trust, or partners and officers of its
investment adviser, who individually own more than 1/2 of 1% of the
outstanding securities of such issuer, together own more than 5% of
such outstanding securities;
(c) purchase from or sell to any of the officers and Trustees of a Trust,
its investment adviser, its principal underwriter or the officers,
directors, and partners of its investment adviser or principal
underwriter, portfolio securities of a Fund;
(d) purchase restricted securities (for these purposes restricted security
means a security with a legal or contractual restriction on resale in
the principal market in which the security is traded), including
repurchase agreements maturing in more than seven days and securities
which are not readily marketable if as a result more than 10% of the
net assets (valued at market at purchase) would be invested in such
securities;
(e) purchase securities of any issuer with a record of less than three
years continuous operation, including predecessors, and equity
securities of issuers that are not readily marketable, except
obligations issued or guaranteed by the U.S. Government or its
agencies (or, in the case of the AARP Tax-Free Income Funds, municipal
securities rated by a recognized municipal bond rating service), if
such purchase would cause the investments of that Fund in all such
issuers to exceed 5% of the value of the total assets of that Fund;
(f) invest its assets in securities of other open-end investment
companies, but may invest in closed-end investment companies when such
purchases are made in the open market where no commission or profit to
a sponsor or dealer result from such purchase other than the customary
broker's commission, if after such purchase (a) a Fund would own no
more than 3% of the total outstanding voting stock of such investment
company, (b) no more than 5% of a Fund's total assets would be
invested in the securities of any single investment company, (c) no
more than 10% of a Fund's total assets would be invested in the
securities of investment companies in the aggregate, or (d) all the
investment companies advised by the Fund Manager would own no more
than 10% of the total outstanding voting stock of any closed-end
company; provided that this restriction shall not preclude acquisition
of investment company securities by dividend, exchange offer or
reorganization. To the extent that a Fund invests in shares of other
investment companies, additional fees and expenses may be deducted
from such investments in addition to those incurred by a Fund. Except
in the case of the AARP Insured Tax-Free Income Funds, for purposes of
this limitation, foreign banks or their agencies or subsidiaries are
not considered investment companies;
(g) invest in other companies for the purpose of exercising control or
management;
(h) purchase or sell real estate and real estate limited partnership
interests, but this shall not prevent a Fund from investing in
securities secured by real estate or interest therein; and
(i) purchase or sell commodities, commodities contracts (except, in the
case of the AARP income Funds and the AARP Insured Tax Free General
Bond Fund, contracts for the future delivery of debt obligations and
contracts based on debt indices) or oil, gas or other mineral
exploration or development programs or leases (although it may invest
in issuers which own or invest in such interests);
AARP High Quality Money Fund may not:
(j) purchase or sell any put or call options or any combination thereof;
or
(k) purchase warrants, unless attached to other securities in which the
Fund is permitted to invest.
Although not a Fundamental policy of the Fund, the Fund has agreed with
certain state authorities that the Fund will not invest more than 5% of the
value of the Fund's total net assets in securities subject to legal or
contractual restrictions on resale.
Neither the AARP High Quality Money Fund nor the AARP High Quality Tax Free
Money Fund may:
(l) pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (A) (1) above, it may pledge
securities having a value at the time of pledge not exceeding 15% of
the cost of the Fund's total assets.
Neither of the AARP income Funds may:
(m) purchase warrants of any issuer, except that AARP High Quality Bond
Fund can purchase warrants on a limited basis. As a result of such
purchases by the Fund, no more than 2% of the value of the total
assets of the Fund may be invested in warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange, and no
more than 5% of the value of the total assets of the Fund may be
invested in warrants whether or not so listed, such warrants in each
case to be valued at the lesser of cost or market, but assigning no
value to warrants acquired by the Fund in units with or attached to
debt securities;
(n) purchase or sell any put or call options or any combination thereof,
except that the Fund may write and sell national exchange-listed
covered call option contracts on national exchange-listed securities
and, to the extent permitted by applicable state regulatory limits, on
other debt securities owned by the Fund up to, but not in excess of,
25% of the value of the Fund's net assets at the time such option
contracts are written. The Fund may also purchase call options for
the purpose of terminating its outstanding obligations with respect to
securities upon which covered call option contracts have been written
(i.e., "closing purchase transaction"). In connection with the
writing of covered call options, the Fund may pledge assets to an
extent not greater than 25% of the value of its net assets at the time
such options are written. The Fund also may purchase and write
options on futures contracts in the manner described under "The Funds'
Investment Objectives and Policies";
AARP High Quality Bond Fund has adopted a non-Fundamental policy that it
will not underwrite securities issued by entities regulated under Part II of the
Federal Power Act.
Neither the AARP GNMA and U.S. Treasury Fund nor the AARP High Quality Bond Fund
may:
(o) pledge, mortgage or hypothecate its assets, (a) except to the extent
that the writing of covered call options may be deemed to involve the
pledge of securities against which the option is being written, (b)
except to the extent that margin deposits on futures contracts and
related options may be deemed to involve a pledge of assets to
guarantee the performance of the futures obligations, and (c) except
to secure borrowings permitted by subparagraph (A) (1) above, it may
pledge securities having a value at the time of pledge not exceeding
15% of the cost of the Fund's total assets.
Neither AARP Insured Tax Free General Bond Fund nor AARP High Quality Tax Free
Money Fund may:
(p) purchase or sell any put or call options or combinations thereof,
except to the extent that the acquisition of Stand-by Commitments or
Participation Interests may be considered the purchase or sale of a
put option and except that the AARP Insured Tax Free General Bond Fund
may purchase and write options on futures contracts in the manner and
to the extent described herein;
(q) underwrite securities issued by entities regulated under Part II of
the Federal Power Act, provided that, for this purpose private
activity bonds the interest on which is exempt from tax under Section
103 of the Internal Revenue Code of 1986 will be treated as
obligations of the municipal authority or other governmental unit
issuing the bonds.
AARP Insured Tax Free General Bond Fund may not:
(r) hold for a period of more than 30 days any municipal securities
maturing in 60 or more days from purchase by a Fund which are not
fully insured or guaranteed directly or indirectly by the U.S.
Treasury.
(s) pledge, mortgage or hypothecate its assets, except to the extent that
margin deposits on futures contracts and related options may be deemed
to be a pledge of assets to guarantee performance of such obligations,
and except that, to secure borrowings permitted by subparagraph (A)
(1) above, it may pledge securities having a value at the time of the
pledge not exceeding 15% of the cost of the Fund's total assets;
None of the AARP Growth Funds may:
(t) purchase or sell any put or call options or any combination thereof,
except that the AARP Growth Funds may each purchase and sell options
on stock indices in accordance with the requirements of applicable
regulations. The AARP Growth Funds may write (sell) covered call
option contracts on securities owned by the Fund up to, but not in
excess of, 25% of the value of the Fund's net assets at the time such
option contracts are written. The AARP Growth Funds may also purchase
call options for the purpose of terminating their outstanding
obligations with respect to securities upon which covered call option
contracts have been written (i.e., "closing purchase transactions").
In connection with the writing of covered call options, the AARP
Growth Funds may pledge assets to an extent not greater than 25% of
the value of its net assets at the time such options are written;
(u) purchase warrants of any issuer if, as a result more than 2% of the
value of the total assets of the Fund would be invested in warrants
which are not listed on the New York Stock Exchange or the American
Stock Exchange, or more than 5% of the value of the total assets of
the Fund would be invested in warrants acquired by the Fund in units
with or attached to debt securities.
(v) purchase securities if, as a result thereof, more than 5% of the value
of the net assets would be invested in restricted securities (for
these purposes restricted security means a security with a legal or
contractual restriction on resale in the principal market in which the
security is traded).
Neither the AARP Growth and Income Fund nor the AARP Capital Growth Fund may:
(w) pledge, mortgage or hypothecate its assets, except as provided in
subparagraph (t), above, and except that, to secure borrowings
permitted by subparagraph (A) (1) above, it may pledge an amount not
exceeding 15% of the Fund's total assets taken at cost;
"Value" for the purposes of the above Fundamental and non-Fundamental
investment policies shall mean the value used in determining a Fund's net asset
value.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, the restricted
activity or, in the case of AARP High Quality Money Fund and the AARP Income
Funds, an acquisition or encumbrance of securities or assets of, or borrowings
by, the Fund.
PURCHASES
(See "OPENING AN ACCOUNT" and "ADDING TO YOUR INVESTMENT" in the Prospectus.)
General Information
Confirmations of each transaction will be sent following the transaction by
Scudder Investor Services, Inc., as the AARP Funds' agent. By retaining
year-to-date confirmations, an investor will have an historical record of the
account activity.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in United States Funds and must be drawn on a
United States financial institution.
If shares are purchased by a check which proves to be uncollectible, the
Trusts reserve the right to cancel the purchase immediately and the purchaser
will be responsible for any loss incurred by the Fund or the principal
underwriter by reason of such cancellation. Each Trust has the authority, as
agent of the shareholder, to redeem shares in the account to reimburse the Fund
or the principal underwriter for any loss incurred. Investors whose orders have
been canceled may be prohibited from or restricted in placing future orders in
any of the Funds in the Program or in other Funds advised by the AARP Funds'
investment adviser or an affiliate.
Share Price
Accepted purchases for shares in all the AARP Funds will be filled at the
net asset value next computed after receipt of payment by check or other means.
Each Fund's net asset value per share is currently determined once daily, as of
the close of regular trading on the New York Stock Exchange (the "Exchange")
(usually 4:00 p.m. Eastern time), on each day the Exchange is open for trading.
(See "NET ASSET VALUE," herein for additional information on how the Fund's net
asset value is calculated.) Orders received after the close of regular trading
will be filled at the next day's net asset value per share for the relevant
Fund.
There is no sales charge in connection with purchase of shares of any of
the AARP Funds.
Share Certificates
In order to afford ease of redemption, ownership in the AARP Funds is on a
non-certified basis. Share certificates now in a shareholder's possession may
be sent to the AARP Funds' transfer agent for cancellation and credit to such
shareholder's account. Shareholders who prefer may hold the certificates now in
their possession until they wish to exchange or redeem such shares. See
"EXCHANGING" and "ACCESS TO YOUR INVESTMENT" in the Funds' Prospectus.
Direct Deposit Program
Investors can have social security or other checks from the U.S. Government
or any other regular income checks such as pension, dividends, and even payroll
checks automatically deposited directly to their accounts. Investors may
allocate a minimum of 25% of their income checks into any AARP Fund.
Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
Wire Transfers
In the case of wire purchases, failure to receive timely and complete
account information will delay investment and subsequent accrual of dividends
and will result in the federal funds being returned to the sender on the day
following receipt by State Street Bank and Trust Company (the "custodian").
Unlike shareholders subscribing by check, purchasers who wire funds will be able
to redeem shares so purchased by any method without any limitation as to the
period of time such shares have been on a Fund's books.
The bank sending federal funds by bank wire may charge for the service.
Presently, Scudder Investor Services, Inc. or the AARP Funds pay a fee for
receipt by the custodian of "wired funds," but the right to charge investors for
this service is reserved.
Holidays
Boston banks are closed on certain holidays although the Exchange may be
open. These holidays include Martin Luther King, Jr. Day (the 3rd Monday in
January), Columbus Day (the 2nd Monday in October) and Veterans Day (November
11). Investors are not able to purchase shares by wiring federal funds on such
holidays because the custodian is not open to receive such federal funds on
behalf of a Fund.
Other Information
All purchase payments will be invested in full and fractional shares.
The Trusts and Scudder Investor Services, Inc., the AARP Funds' principal
underwriter, each have the right to limit the amount of shares purchased of a
Fund, to reject any purchase and to refuse to sell shares to any person.
It should be noted that if purchases are made through a member of the
National Association of Securities Dealers other than Scudder Investor Services,
Inc., that member may, in its discretion, charge a fee for this service. It is
the responsibility of the broker, not the AARP Funds, to place the purchase
order by the time as of which the net asset value of the Funds is next
determined.
The Trusts may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of, the assets of any investment
company or personal holding company, subject to the requirements of the
Investment Company Act of 1940.
REDEMPTIONS
(See "ACCESS TO YOUR INVESTMENT" in the Prospectus.)
General Information
If a shareholder redeems all shares in an account, the shareholder will
receive, in addition to the net asset value thereof, all declared but unpaid
dividends thereon. The AARP Funds do not impose a redemption charge.
The proceeds of redemption transactions are normally available to be mailed
or wired to the designated bank account within one business day, and in any
event will be available within seven calendar days, following receipt of a
redemption request in good order.
A shareholder's right to redeem shares of a Fund and to receive payment
therefore may be suspended at times (a) when the Exchange is closed, other than
customary weekend and holiday closings, (b) when trading on the Exchange is
restricted for any reason, (c) when an emergency exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets, or (d) when the SEC permits a suspension of the right of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
The Trustees may suspend or terminate the offering of shares of a Fund at
any time.
Redemption by Telephone
Redemption by telephone is not available for shares for which share
certificates have been issued. Redemptions of such shares must be requested by
mail as explained in the section entitled "Redemption by Mail" below.
For other investors, the following procedures are available.
TO ADDRESS OF RECORD: New investors automatically receive the option,
without having to elect it, to redeem by telephone to their address of record
for any amount up to $50,000 per Fund. Telephone Redemption to Address of
Record may be used as long as the account registration address has not changed
within the last 30 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.
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 suspend or terminate
the telephone redemption privilege upon written notice to shareholders. A
shareholder may cancel the telephone redemption authorization upon written
notice. Each Trust employs procedures including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Corporation does not follow such procedures, it may be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption by Mail or Fax
Any shareholder may redeem his or her shares by writing to the Program.
All written requests must be signed by at least one person on the account's
registration exactly as registered. In addition, for the protection of the
shareholder and to prevent fraudulent redemptions, a signature guarantee is
required on all written redemption requests for over $50,000. A signature
guarantee is also required on written redemption requests for any amount if the
check is made payable to someone other than the registered shareholder, if the
proceeds are to be forwarded to an address other than the address of record, or
if the address of record has changed in the last 30 days. In order to ensure
proper authorization before redeeming shares, the Program may request additional
documents such as, but not restricted to, stock powers, Trust instruments,
certificates of death, appointments as executor, certificates of corporate
authority and waivers of tax required in some states when settling estates.
Redemption to Address of Record for up to $50,000 without a signature
guarantee is an automatic feature of any AARP Fund account unless it has been
declined by the shareholder in writing. Any shareholder who refuses this
feature can later establish it with a written request containing a signature
guarantee. This request must be made prior to utilizing the feature for the
first time.
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with the signature(s) guaranteed as explained
above. It is suggested that the shareholders holding certificated shares or
shares registered in other than individual names contact the Program prior to
requesting a redemption to ensure that all necessary documents accompany the
request. When shares are held in the name of a corporation, trust, fiduciary or
partnership, the transfer agent requires, in addition to the stock power,
certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to help ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within seven (7) days after
receipt of a request for redemption that complies with the above requirements.
Delays of more than seven (7) days for payment for shares tendered for
repurchase or redemption may result but only until the purchase check has
cleared.
Redemption by Checkwriting
All new investors in the AARP Money Funds and existing shareholders of
these Funds who apply to State Street Bank and Trust Company for checks may use
them to pay any person, provided that each check is for at least $100 and not
more than $1,000,000. By using one of these checks, the shareholder will
receive daily dividend credit on his or her shares in either Fund until the
check has cleared the banking system. Investors who purchased shares by check
may write checks against those shares only after they have been on the Fund's
books for 7 days. Shareholders who use this service may also use other
redemption procedures. Both Funds pay the bank charges for this service.
However, each Fund will review the cost of operation periodically and it
reserves the right to determine if direct charges to the persons who avail
themselves of this service would be appropriate. An account cannot be closed
using the "free Checkwriting" privilege. The Trusts, the transfer agent and the
custodian each reserve the right at any time to suspend or terminate the "free
Checkwriting" procedure.
Redemption-in-Kind
The AARP Growth Trust reserves the right to permit the AARP Balanced Stock
and Bond Fund, AARP Growth and Income Fund, and the AARP Capital Growth Fund, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or repurchase order by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for purposes of
computing the Fund's net asset value (a redemption-in-kind). If payment is made
in securities, a shareholder may incur transaction expenses in converting these
securities into cash. The AARP Growth Trust has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which each Fund of the
Trust is obligated to redeem shares, with respect to any one shareholder during
any 90 day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of such Fund at the beginning of the period.
Other Information
The value of shares redeemed or repurchased may be more or less than the
shareholder's cost depending on the net asset value at the time of redemption or
repurchase. The Funds do not impose a redemption or repurchase charge.
Redemptions of shares, including redemptions undertaken to effect an exchange
for shares of another Fund in the Program, may result in tax consequences (gain
or loss) to the shareholder and the proceeds of such redemptions may be subject
to backup withholding (see "TAXES").
Shareholders who wish to redeem shares from Retirement Plans (see
"RETIREMENT PLANS," below) should contact the Trustee or custodian of the Plan
for information on proper procedures.
The Trustees have established certain amount size requirements. For an
account established prior to September 1, 1989 in a particular Fund, the minimum
investment is $250. For accounts established on or after September 1, 1989 in a
particular Fund, the minimum investment is $500, except that in the case of the
AARP High Quality Tax Free Money Fund accounts opened on or after August 1, 1991
the minimum is $2,500. Each Trust reserves the right to adopt a policy that if
transactions at any time reduce a shareholder's account in a Fund to below the
applicable minimum, the shareholder will be notified that, unless the account is
brought up to at least the applicable minimum the Fund will redeem all shares
and close the account by making payment to the shareholder. The shareholder has
sixty days to bring the account up to the applicable minimum before any action
will be taken by the Fund. Reductions in value that result solely from market
activity will not trigger an involuntary redemption. No transfer from an
existing to a new account may be for less than $500 ($2,500 for AARP High
Quality Tax Free Money Fund); otherwise the new account may be redeemed as
described above. (This policy applies to accounts of new shareholders in a
particular Fund, but does not apply to Retirement Plan Accounts.) The Trustees
have the authority to increase the minimum account size.
EXCHANGES
The procedure for exchanging shares from one AARP Fund to another AARP Fund
in the Program, when the account in the new AARP Fund is established with the
same registration, telephone option, dividend option and address as the present
account, is set forth under "EXCHANGING" in the Prospectus. If the registration
data for the account receiving the proceeds of the exchange is to be different
in any respect from the account from which shares are to be exchanged, the
exchange request must be in writing and must contain a signature guarantee as
described under "SIGNATURE GUARANTEES" in the Prospectus. If an exchange
involves an initial investment in the Fund being acquired, the amount to be
exchanged must be at least $500 ($2,500 for AARP High Quality Tax Free Money
Fund) for non-retirement plan accounts. For IRA and Keogh Plan accounts the
amount must be $250. If the exchange is made into an existing account, there is
no minimum requirement.
Only exchange orders received between 8:00 a.m. and 4:00 p.m. Eastern time
on any business day will ordinarily be accomplished at respective net asset
values determined on that day. Exchange orders received after 4:00 p.m. are
processed on the next business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one AARP Fund to an
existing account in another AARP Fund through the AARP Funds' Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this
free feature over the phone or in writing. Automatic Exchanges will continue
until the shareholder requests by phone or in writing to have the feature
removed, or until the originating account is depleted. The Trusts and the
Transfer Agent each reserve the right to suspend or terminate the privilege of
the Automatic Exchange Program at any time.
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 $10,000 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.
Purchasing Shares by Transact by Phone
To purchase shares by Transact by Phone, a shareholder should call our
service people before 3:00 p.m. Eastern time. Shares will be purchased at the
next business day's closing share price. The shareholder's bank account will be
debited on the second business day following the purchase request.
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. The redemption will be effected
at that night's closing price per share. The shareholder's bank account will be
credited with redemption proceeds on the second or third business day following
the redemption request.
The AARP Funds employ procedures to give reasonable assurance that
telephone instructions are genuine, including recording telephone calls, testing
a caller's identity and sending written confirmation of such transactions. If
an AARP Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "STATEMENTS AND REPORTS," "EXCHANGING"
and "INVESTOR SERVICES" in the Prospectus.)
Automatic Dividend Reinvestment
Investors may elect on their enrollment form whether they wish to receive
any dividends from net investment income or any distributions from realized
capital gains in cash or to reinvest such dividends and distributions in
additional shares of the Fund paying the dividend or distribution. They may
also elect to have these payments invested in shares of any other AARP Fund in
the Program in which they have an account. If no election is made, dividends
and distributions will be reinvested in additional shares. A change of
instructions for the method of payment may be given to the Program at any time
prior to a record date.
Each distribution, whether by check or reinvested in a Fund, will include a
brief explanation of the source of the distribution.
Distributions Direct
Investors may also have dividends and distributions automatically deposited
to their predesignated bank account through the AARP Funds' DistributionsDirect
Program. Shareholders who elect to participate in the DistributionsDirect
Program, and whose predesignated checking account of record is with a member
bank of the Automated Clearing House Network (ACH) can have income and capital
gain distributions automatically deposited to their personal bank account
usually within three business days after the Fund pays its distribution. A
DistributionsDirect request form can be obtained by calling 1-800-253-2277.
Confirmation statements will be mailed to shareholders as notification that
distributions have been deposited.
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, supplementary information, and selected per
share data and capital changes.
Investors receive a brochure entitled Your Guide to Simplified Investment
Decisions when they order an investment kit for the seven AARP Funds which also
contains a prospectus. The Shareholder's Handbook is sent to all new
shareholders to help answer any questions they may have about investing. An IRA
Handbook is sent to all new IRA shareholders. Every month, shareholders will be
sent the newsletter, Financial Focus. Retirement plan shareholders will be sent
a special edition of Financial Focus on a quarterly basis. The newsletters are
designed to help you keep up to date on economic and investment developments,
and any new financial services and features of the Program.
Consolidated Statements
Shareholders with investments in two or more AARP Funds will receive,
without charge, a convenient monthly Consolidated Statement. IRA and Keogh Plan
accounts receive Consolidated Statements quarterly. This statement contains the
market value of all holdings, a complete listing of transactions for the
statement period and a summary of the shareholder's investment program for the
statement period and for the year to date. Information may be obtained by
contacting the AARP Investment Program from Scudder, P.O. Box 2540, Boston,
Massachusetts 02208-2540, or by calling toll free, 1-800-253-2277.
RETIREMENT PLANS
Shares of AARP High Quality Money Fund, AARP GNMA and U.S. Treasury Fund,
AARP High Quality Bond Fund, AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund and AARP Capital Growth Fund ("Eligible Funds") may be purchased in
connection with several types of tax-deferred retirement plans. These plans
were created for members of AARP. Each plan is briefly described below. The
plans provide convenient ways for AARP members to make investments which may be
tax-deductible for their retirement and have taxes on any income from their
investment deferred until their retirement, when they may be in a lower tax
bracket. Additional information on each plan may be obtained by contacting the
AARP Investment Program from Scudder, P.O. Box 2540, Boston, Massachusetts,
02208-2540, or by calling toll free, 1-800-253-2277. Investment professionals
and retirement-benefits experts estimate that prospective retirees will need 70%
to 80% of their current salaries during each year of their retirement, with
adjustment for changes in prices during retirement, to maintain their current
life-style. Investment professionals recommend diversifying investments among
stock, bonds and cash-equivalents when building retirement reserves. It is
advisable for an investor considering any of the plans described below to
consult with an attorney or tax advisor with respect to the terms, suitability
requirements and tax aspects of the plan.
AARP No-Fee Individual Retirement Account (" AARP No-Fee IRA")
Shares of the Eligible Funds may be purchased as the underlying investment
for an AARP No-Fee IRA which meets the requirements of Section 408(a) of
the Internal Revenue Code. Any AARP member with earned income or wages is
eligible to make annual contributions to the AARP No-Fee IRA before the
year the member attains age 70 1/2. An individual may establish an AARP No-
Fee IRA whether or not he or she is an active participant in another
tax-qualified retirement plan, including a tax-sheltered annuity or government
plan.
AARP No-Fee IRA participants may generally contribute to an AARP
No-Fee IRA up to the lesser of $2,000 or 100% of their compensation or
earned income. If both a husband and wife work, each may set up an AARP No-
Fee IRA before the year they attain age 70 1/2, permitting a potential
maximum contribution of $4,000 per year for both persons. If one spouse has no
earnings, each spouse may have an AARP No-Fee IRA and the total maximum
contributions will be $2,250 with no more than $2,000 going to either AARP
No-Fee IRA.
An individual will be allowed a full deduction for contributions to an
AARP No-Fee IRA only if (1) neither the individual, nor his or her
spouse, if they file a joint return, is an active participant in an
employer-maintained retirement plan, or (2) the individual (and his or her
spouse, if applicable) has an adjusted gross income below a certain level
($25,050 for a single individual, with a phase-out of the deduction for adjusted
gross income between $25,050 and $35,000; $40,050 for married individuals filing
a joint return, with a phase-out of the deduction for adjusted gross income
between $40,050 and $50,000). However, an individual not permitted to make a
deductible contribution may nonetheless make a nondeductible contribution to an
AARP No-Fee IRA.
Any AARP member who is entitled to receive a qualifying distribution from a
qualified retirement plan (including a tax-sheltered annuity plan) or another
IRA may make a rollover contribution of all or any portion of the distribution
to the AARP No-Fee IRA, either in a direct rollover or within 60 days
after receipt of the distribution, whether or not the member has attained age 70
1/2. If a qualified rollover contribution is made, the distribution will not be
subject to Federal income tax until distributed from the AARP No-Fee IRA;
however, distributions not directly rolled over might be subject to automatic
20% federal tax withholding.
AARP Mutual Fund Representatives are available to help you transfer your
IRA to the AARP No-Fee IRA. You pay no transfer fees for this service. An AARP
Mutual Fund Representative can help you with the paperwork, contact your present
IRA custodian, help to transfer your funds to the AARP No-Fee IRA, and send you
a confirmation when your transfer is complete.
Earnings on the AARP No-Fee IRA are not subject to current Federal
income tax until distributed; distributions are taxed as ordinary income.
Withdrawals attributable to nondeductible contributions are not taxable
(however, early withdrawals of such amounts are subject to penalty). The assets
in an AARP No-Fee IRA may be withdrawn without penalty after the
participant reaches age 59 1/2 or becomes disabled, and must begin to be
withdrawn by April 1st following the taxable year in which the participant
reaches age 70 1/2.
The table below shows how much individuals would accumulate in a fully tax-
deductible IRA by age 65 (before any distributions) if they contribute $2,000 at
the beginning of each year, assuming average annual returns of 5, 10, and 15%.
(At withdrawal, accumulations in this table will be taxable.)
<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
Starting
Age of Annual Rate
of Return
Contributions 5% 10% 15%
- ------------- ---- ---- ----
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
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. If members eligible to join this Plan choose to
roll over pension and profit-sharing distributions from other tax-qualified
retirement plans, they will retain the right to use the averaging method for
such distributions.
The Plans are prototype plans approved by the Internal Revenue Service.
In general, distributions from all tax-qualified retirement programs,
including IRAs and tax-sheltered annuity programs, must begin by April 1st in
the year following the year in which the participant reaches age 70 1/2, whether
or not he or she continues to be employed. Excise taxes will apply to premature
distributions, and to taxpayers who are required, but fail, to receive a
distribution after reaching age 70 1/2. An additional excise tax may apply to
certain excess retirement accumulations. Special favorable tax treatment for
certain distributions is reduced or phased out, except where grandfathering
provisions apply.
Shares of the Eligible Funds may be purchased also as an investment for an
IRA or tax-qualified retirement plan (including a tax-sheltered annuity plan)
other than those described above, if permitted by the provisions of the relevant
plan.
OTHER PLANS
(See "INVESTOR SERVICES" in the Prospectus.)
Automatic Investment
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts. The minimum pre-authorized investment amount
is $50. New shareholders who open a Gift to Minors Account pursuant to the
Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA)
and who sign up for the Automatic Investment Plan will be able to open a Fund
account for less than $500 if they agree to increase their investment to $500
within a 10 month period. This feature is only available to Gifts to Minors
Account investors.
Automatic Withdrawal Plan
Shareholders who own or purchase $10,000 or more of shares of a AARP Fund
may establish an Automatic Withdrawal Plan with that Fund. The investor can
then receive monthly, quarterly or periodic redemptions from his or her account
for any designated amount of $50 or more. Payments are mailed at the end of
each month. The check amounts may be based on the redemption of a fixed dollar
amount, fixed share amount or percent of account value or declining balance.
The Automatic Withdrawal Plan provides for income dividends and capital gains
distributions, if any, to be reinvested in additional shares. Shares are then
liquidated as necessary to provide for withdrawal payments. Since the
withdrawals are in amounts selected by the investor and have no relationship to
yield or income, payments received cannot be considered as yield or income on
the investment and the resulting liquidations may deplete or possibly extinguish
the initial investment and any reinvested dividends and capital gains
distributions. Requests for increases in withdrawal amounts or to change the
payee must be submitted in writing, signed exactly as the account is registered,
and contain signature guarantee(s) as described under "SIGNATURE GUARANTEES" in
the Prospectus. Any such request must be received by the AARP Fund's transfer
agent by the 15th of the month in which such change is to take effect. An
Automatic Withdrawal Plan may be terminated at any time by the shareholder, the
AARP Funds or their agents on written notice, and will be terminated when all
shares of the Funds under the Plan have been liquidated or upon receipt by the
Funds of notice of death of the shareholder. For more information concerning
this plan, write to the AARP Investment Program from Scudder, P.O. Box 2540,
Boston, MA 02208-2540 or call, toll-free, 1-800-253-2277.
Direct Payment of Regular Fixed Bills
Shareholders who own or purchase $10,000 or more of shares of an AARP Fund
may arrange to have regular fixed bills such as rent, mortgage or other payments
of more than $50 made directly from their account. The arrangements are
virtually the same as for an Automatic Withdrawal Plan (see above). For more
information concerning this plan, write to the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
DIVIDENDS AND YIELD
(See "UNDERSTANDING FUND PERFORMANCE" in the Prospectus.)
Each AARP Fund intends to follow the practice of distributing substantially
all of its investment company taxable income (which includes, for example,
interest, dividends and any excess of net realized short-term capital gains over
net realized long-term capital losses, less deductible expenses), and its net
tax-exempt interest income, if any. Each AARP Fund also intends to follow the
practice of distributing any excess of net realized long-term capital gains over
net realized short-term capital losses after reduction for any capital loss
carryforwards. However, if it appears to be in the best interests of a Fund and
its shareholders, the Fund may retain all or part of such gain for reinvestment.
AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund intend to
pay dividends in March, June, September and December of each year and any net
realized capital gains after the September 30 fiscal year end. The AARP Capital
Growth Fund intends 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 its September 30 fiscal year end. See "TAXES."
Both types of distributions will be made in shares of the respective AARP
Fund and confirmations will be mailed to each shareholder unless a shareholder
has elected to receive cash, in which case a check will be sent.
The net income of each AARP Money Fund, each of the AARP Income Funds and
the AARP Insured Tax Free General Bond Fund, is determined as of the close of
trading on the Exchange (usually 4:00 p.m. Eastern time) on each day on which
the Exchange is open for business. All of the net income so determined normally
will be declared as a dividend daily to shareholders of record as of 4:00 p.m.
on the preceding day, and distributed monthly. Dividends commence on the next
business day after purchase. Dividends which are not paid by check will be
reinvested in additional shares of the particular Fund at the net asset value
per share determined as of a day selected within five days of the last business
day of the month. Checks will be mailed to shareholders no later than the
fourth business day of the following month, and consolidated statements
confirming the month's dividends will be mailed to shareholders electing to
invest dividends in additional shares. Dividends will ordinarily be invested on
the last business day of each month at the net asset value per share determined
as of the close of regular trading on the Exchange.
Should the AARP Money Funds incur or anticipate any unusual or unexpected
significant expense, depreciation or loss which would affect disproportionately
the Fund's income for a particular period, the Trustees of such Fund or the
Executive Committee of the Trustees may at that time consider whether to adhere
to the dividend policy described above or to revise it in the light of the then
prevailing circumstances in order to ameliorate to the extent possible the
disproportionate effect of such expense or loss on then existing shareholders.
Such expenses may nevertheless result in a shareholder's receiving no dividends
for the period during which the shares are held and in receiving upon redemption
a price per share lower than that which was paid.
Similarly, should the AARP High Quality Money Fund incur or anticipate any
unusual or unexpected significant income, appreciation or gain which would
affect disproportionately the Fund's income for a particular period, the
Trustees or the Executive Committee of the Trustees may consider whether to
adhere to the dividend policy described above or to revise it in the light of
the then prevailing circumstances in order to ameliorate to the extent possible
the disproportionate effect of such income, appreciation or gain on the dividend
received by existing shareholders. Such actions may reduce the amount of the
daily dividend received by existing shareholders.
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, 1994 respectively, were 3.94% and 2.64%.
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, 1994
respectively, were 4.02% and 2.68%.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and are
not intended to indicate future performance. Current yield and effective yield
will vary based on changes in market conditions and the level of Fund expenses.
In connection with communicating its current yield and effective yield to
current or prospective shareholders, a Fund also may compare these figures to
the performance of other mutual Funds tracked by mutual Fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
b) The AARP Money Funds, AARP Income Funds, AARP Growth Funds and AARP Insured
Tax Free General Bond Fund
From time to time, quotations of a Fund's total return may be included in
advertisements, sales literature or shareholder reports. This total return
figure is calculated in the following manner:
The total return is the average annualized compound rate of return for,
where applicable, the periods of one year, five years and ten years, all ended
on the last day of a recent calendar quarter. Total return quotations reflect
changes in the price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Total return is calculated by finding the average annualized
compound rates of return of a hypothetical investment over such periods,
according to the following formula (total return is then expressed as a
percentage):
T = (ERV/P)^(1/n) - 1
Where:
T = average annualized compound total rate of
return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value at
the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
<TABLE>
<CAPTION>
Total Return
-------------------------------------------------
One Year Ended Five Years Ended Life of the Fund
09/30/94 09/30/94 Fund(1)
-------------- ---------------- ----------------
<S> <C> <C> <C>
AARP High Quality Money Fund 2.84 % 4.56 % 5.47 %
AARP High Quality Tax Free Money Fund 1.76 3.60 * 4.48 *
AARP GNMA and U.S. Treasury -1.90 7.49 8.54
AARP High Quality Bond -5.55 7.44 8.45
AARP Insured Tax Free General Bond -4.48 7.48 8.35
AARP Balanced Stock and Bond Fund n.a. n.a. -1.99
AARP Growth and Income 7.99 10.44 14.27
AARP Capital Growth -4.70 5.18 13.46
(1) For the period November 30, 1984 (commencement of operations) to September
30, 1994 for each of the above listed Funds except the AARP money Funds;
For the period July 22, 1985 (commencement of operations) to September 30,
1994, for the AARP High Quality Money Fund and for the period November 30,
1984 (commencement of operations) to September 30, 1994, for the AARP High
Quality Tax Free Money 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 life of the Fund and for the five years ended September 30, 1994 for
the AARP High Quality Tax Free Money Fund are representative of the Fund
prior to its conversion date except that the figures have been adjusted to
reflect its conversion to a money market Fund.
</TABLE>
In addition to total return described above, the Funds may quote
nonstandard "cumulative total return."
The cumulative total return is the rate of return on a hypothetical initial
investment of $1,000 for a specified period. Cumulative total return quotations
reflect changes in the price of a Fund's shares and assume that all dividends
and capital gains distributions during the period were reinvested in Fund
shares. Cumulative total return is calculated by finding the rates of return of
a hypothetical investment over such periods, according to the following formula.
(Cumulative total return is then expressed as a percentage):
C = (ERV/P) -1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at
the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------------------------------
One Year Ended Five Years Ended Life of the Fund
09/30/94 09/30/94 Fund(1)
------------- --------------- ---------------
<S> <C> <C> <C>
AARP Balanced Stock and Bond Fund n.a. n.a. -1.99
AARP Growth and Income 7.99% 64.30% 267.13%
AARP Capital Growth -4.70 28.71 242.58
(1) For the period November 30, 1984 (commencement of operations) to
September 30, 1994.
</TABLE>
c) The AARP Income Funds and AARP Insured Tax Free General Bond Fund
From time to time, quotations of an AARP Fund's yield may be included in
advertisements, sales literature or shareholder reports. This yield is
calculated in the following manner.
The yield is the net annualized 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.
<TABLE>
<CAPTION>
Yield for the 30-day period
Fund ended September 30, 1994
----------------------------- ------------------------------
<S> <C>
AARP GNMA and U.S. Treasury 6.76%
AARP High Quality Bond 6.31
AARP Insured Tax Free General Bond 5.01
</TABLE>
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.
<TABLE>
<CAPTION>
Equivalent Taxable Yields
period ending September 30, 1994
-----------------------------------
Fund Tax Bracket: 28% 31%
<S> <C> <C>
AARP High Quality Tax 3.67% 3.83%
Free Money
AARP Insured Tax Free 6.96% 7.26%
General Bond
</TABLE>
(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,
Salomon Brothers World Government Bond Index.
Statistical and other information, as provided by the Social Security
Administration may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Evaluation of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of, or
selections from, editorials or articles about these Funds. Sources for AARP
Fund performance information and articles about the AARP Funds may include, but
are not limited to, the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by MasterFund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
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/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity, and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
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.
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 business weekly that periodically reports
mutual fund performance data.
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.
TRUST ORGANIZATION
(See "FUND ORGANIZATION" in the Prospectus.)
Each of the AARP Funds is a separate series of a Massachusetts business
trust. AARP GNMA and U.S. Treasury Fund and AARP High Quality Bond Fund are
series of AARP Income Trust. AARP High Quality Tax Free Money Fund and AARP
Insured Tax Free General Bond Fund are series of AARP Tax Free Income Trust
which changed its name from AARP Insured Tax Free Income Trust on August 1,
1991. AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP
Capital Growth Fund are series of AARP Growth Trust. Each of the above Trusts
was established under a separate Declaration of Trust dated June 8, 1984. AARP
High Quality Money Fund is a separate series of the AARP Cash Investment Funds,
which was established under a Declaration of Trust dated January 20, 1983. The
original name of AARP Cash Investment Funds was Master Investment Services Fund.
That name was changed to AARP Money Fund Trust on February 6, 1985, and to its
present name on May 24, 1985. Each Trust's shares of beneficial interest of
$.01 (AARP High Quality Tax Free Money Fund $.001) par value per share are
issued in separate series. AARP Cash Investment Funds has three series in
addition to AARP High Quality Money Fund that are not currently offered. None of
the other Trusts has an existing series which is not currently being offered.
Other series may be established and/or offered by the Trusts in the future.
Each share of a series represents an interest in that series which is equal to
each other share of that series.
The assets received for the issue or sale of the shares of each series and
all income, earnings, profits and proceeds thereof, subject only to the rights
of creditors, are specifically allocated to that series and constitute the
underlying assets of that series. The underlying assets of each series are
segregated on the books of account of the Trust, and are to be charged with the
liabilities of that series. The Trustees have determined that expenses with
respect to all series in a Trust are to be allocated in proportion to the net
asset value, or such other reasonable basis, of the respective series in that
Trust except where allocations of direct expenses can otherwise be more fairly
made. The officers of each Trust, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to all the
series in a Trust. Each Trust's Declaration of Trust provides that allocations
so made to each series shall be binding on all persons. While each Declaration
of Trust provides that liabilities of a series may be satisfied only out of the
assets of that series, it is possible that if a series were unable to meet its
obligations, a court might find that the assets of other series in the Trust
should satisfy such obligations. In the event of the dissolution or liquidation
of a Trust, the holders of the shares of each series are entitled to receive as
a class the underlying assets of that series available for distribution to
shareholders.
Shareholders are entitled to one vote per share. Separate votes are taken
by each series on all matters except where the Investment Company Act of 1940
requires that a matter be decided by the vote of shareholders of all series of a
Trust voting together or where a matter affects only one of the series, in which
case only shareholders of that series shall vote thereon. For example, a change
in investment policy for a series would be voted upon only by shareholders of
the series involved. Additionally, approval of each Trust's investment advisory
agreement is a matter to be determined separately by each series in that Trust.
Approval of the agreement by the shareholders of one series in a Trust is
effective as to that series whether or not enough votes are received from the
shareholders of other series in the Trust to approve such agreement as to the
other series.
The Trustees of each Trust have the authority to establish additional
series and to designate the relative rights and preferences as between the
series. All shares issued and outstanding of each series that is offered by a
Trust will be fully paid and non-assessable by the Trust, and redeemable as
described in this Statement of Additional Information and in the Prospectus.
Each Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against litigation in which they may be involved because of their
offices with the Trust except if it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the Trust. However,
nothing in any of the Declarations of Trust protects or indemnifies a Trustee or
officer against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
MANAGEMENT OF THE FUNDS
(See "FUND ORGANIZATION" in the Prospectus.)
Each Trust has retained Scudder, Stevens & Clark, Inc., a Delaware
corporation (the "Fund Manager"), to perform management and investment advisory
services for the Funds pursuant to Investment Management and Advisory Agreements
with each Trust ("Management Agreement") dated February 1, 1994.
Each Management Agreement provides that the Fund Manager will regularly
provide, or cause to be provided, to the AARP Funds investment research, advice
and supervision and furnish continuously an investment program for the AARP
Funds consistent with each Fund's investment objective and policies.
The Fund Manager assumes responsibility for the compensation and expenses
of all officers and executive employees of each Trust and makes available or
causes to be made available, without expense to the Trusts, the services of such
of its partners, directors, officers and employees as may duly be elected
officers or Trustees of a Trust, subject to their individual consent to serve
and to any limitations imposed by law, and pays the Trusts' office rent and
provides, or causes to be provided, investment advisory, research and
statistical facilities and related clerical services. For these services the
AARP Funds pay the Fund Manager a monthly fee consisting of a base fee and an
individual Fund fee. The base fee is based on average daily net assets of all
Funds in the AARP Investment Program, as follows:
<TABLE>
<CAPTION>
Program Assets Annual Rate at Each
(Billions) Asset Level
- ------------------- -------------------
<S> <C>
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
</TABLE>
Total program assets as of September 30, 1994 were approximately $12 billion.
All AARP Funds pay a flat individual Fund fee based on the net assets of that
Fund.
The individual Fund fees are as follows:
AARP High Quality Money Fund, 10/1200 of 1% (or approximately .10 of 1% on an
annual basis);
AARP GNMA and U.S. Treasury Fund, 12/1200 of 1% (or approximately .12 of 1% on
an annual basis);
AARP High Quality Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on an
annual basis);
AARP High Quality Tax Free Money Fund, 10/1200 of 1% (or approximately .10 of 1%
on an annual basis);
AARP Insured Tax Free General Bond Fund, 19/1200 of 1% (or approximately .19 of
1% on an annual basis);
AARP Balanced Stock and Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on
an annual basis);
AARP Growth and Income Fund, 19/1200 of 1% (or approximately .19 of 1% on an
annual basis);
AARP Capital Growth Fund, 32/1200 of 1% (or approximately .32 of 1% on an annual
basis);
The advisory fees for the fiscal years ended September 30, 1992, 1993 and
up to January 31, 1994 under the previous Investment Management and Advisory
Agreements and under the present Investment Management Agreement from February
1, 1994 to September 30, 1994 were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------------ ------------ -------------
<S> <C> <C> <C>
AARP High Quality Money Fund $1,696,363 $1,358,702 $1,244,322
AARP GNMA and U.S. Treasury Fund 18,362,296 26,404,563 26,198,841
AARP High Quality Bond Fund 1,368,152 2,344,628 2,952,999
AARP High Quality Tax Free Money Fund 623,633 637,451 568,107
AARP Insured Tax Free General Bond Fund 6,185,276 8,631,469 9,944,429
AARP Balanced Stock and Bond Fund* * * 365,435
AARP Growth and Income Fund 2,728,603 5,405,394 9,533,476
AARP Capital Growth Fund 2,096,199 3,176,921 4,184,437
</TABLE>
Each Management Agreement provides that the Fund Manager will reimburse the
AARP Funds or the Trust for annual expenses in excess of the lowest expense
limitation imposed by the states in which the Funds of the particular Trust are
at the time offering their shares for sale, although no payments are required to
be made by the Fund Manager pursuant to this reimbursement provision in excess
of the annual fee paid by the funds of a Trust to the Fund Manager. Management
has been advised that the lowest such limitation is currently 2 1/2% of the
first $30,000,000 of such net assets, 2% of the next $70,000,000 of such net
assets and 1 1/2% of such net assets in excess of $100,000,000. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitation. The Fund Manager has agreed that
its obligation to reimburse the Funds will not be restricted to the amounts of
the management fees. Such agreement may be modified or withdrawn without
shareholder approval.
The expense ratios, net of voluntary and statutory fee waivers and
reimbursements of expenses, for the periods ended September 30, 1992, 1993 and
1994 were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------------ ------------ -------------
<S> <C> <C> <C>
AARP High Quality Money Fund 1.15% 1.31% 1.13%
AARP GNMA and U.S. Treasury Fund .72 .70 .66
AARP High Quality Bond Fund 1.13 1.01 .95
AARP High Quality Tax Free Money Fund .95 .93 .90
AARP Insured Tax Free General Bond Fund .74 .72 .68
AARP Balanced Stock and Bond Fund* * * 1.31
AARP Growth and Income Fund .91 .84 .76
AARP Capital Growth Fund 1.13 1.05 .97
</TABLE>
For the fiscal years ended September 30, 1992, 1993 and 1994, the
reimbursements by the Fund Manager based on the expense limitation then in
effect were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------------ ------------ -------------
<S> <C> <C> <C>
AARP High Quality Money Fund $139,576 -- --
AARP GNMA and U.S. Treasury Fund -- -- --
AARP High Quality Bond Fund -- -- --
AARP High Quality Tax Free Money Fund 231,118 $ 278,471 $ 8,083
AARP Insured Tax Free General Bond Fund -- -- --
AARP Balanced Stock and Bond Fund* * * --
AARP Growth and Income Fund -- -- --
AARP Capital Growth Fund -- -- --
</TABLE>
*AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
If reimbursement is required, it will be made as promptly as practicable
after the end of each Trust's fiscal year. However, no fee payment will be made
to the Fund Manager during any fiscal year which will cause year-to-date
expenses to exceed the cumulative pro rata expense limitation at the time of
such payment. The amortization of organizational costs is described herein
under "ADDITIONAL INFORMATION - Other Information."
Under the Management Agreements, each Trust is responsible for all of its
other expenses including organizational expenses; clerical salaries; fees and
expenses incurred in connection with membership in investment company
organizations; brokers' commissions; any fees for portfolio pricing paid to a
pricing agent; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the cost of preparing share
certificates, if any, and any other expenses including clerical expenses of
issue, redemption or repurchase of shares; the expenses and fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees of the
Trust who are not affiliated with the Fund Manager, Scudder, Stevens & Clark,
Inc., AARP Financial Services Corporation or AARP; the cost of preparing and
distributing reports and notices to shareholders; and the fees and disbursements
of custodians. Each Trust may arrange to have third parties assume all or part
of the expenses of sale, underwriting and distribution of shares of the Trust.
Each Trust is also responsible for its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees with respect thereto. The custodian
agreement for each Trust provides that the custodian shall compute the net asset
value for that Trust.
The Fund Manager has voluntarily agreed to waive management fees or
reimburse the AARP High Quality Tax Free Money Fund to the extent necessary so
that the total annualized expenses of the Fund do not exceed 0.90% of the
average daily net assets until February 1, 1996. The Fund Manager retains the
ability to be repaid by the Fund if expenses fall below the specified limit
prior to the end of the fiscal year. These expense limitation arrangements can
decrease the Fund's expenses and improve its performance. During the fiscal
year ended September 30, 1994, these agreements resulted in a reduction of
management fees paid by the Fund of $8,083.
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 Investment Company Act of 1940, as
amended ("Rule 12b-1 plan") providing for the Trust (or the Funds or some other
party) to assume some or all of such expenses, or (iii) such expenses are
required to be paid by Scudder, Stevens & Clark, Inc. To the extent such
expenses of distribution are not to be borne by a principal underwriter, or are
not permitted to be paid by the Trust (or a Fund or such other party) pursuant
to a Rule 12b-1 plan, they are to be assumed by the Fund Manager. (The adoption
of a Rule 12b-1 plan by a Trust would require the approval of the Trustees,
including a majority of those Trustees who are not interested persons of the
Trust, and of a majority of the outstanding voting securities of each Fund.)
Each Management Agreement will remain in effect until August 31, 1995 and
from year to year thereafter only if its continuance is specifically approved at
least annually by the vote of a majority of those Trustees who are not parties
to such Agreement or "interested persons" of the Fund Manager, Scudder, Stevens
& Clark, Inc. or the particular Trust cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or, with respect to each Fund, by a majority of the outstanding voting
securities of that Fund. In the event a Management Agreement is approved by the
shareholders of one of the Funds but not by the shareholders of the other Fund,
the Management Agreement will continue in effect as to the former Fund but not
the latter. The Management Agreements were last approved by the Trustees
(including a majority of the Trustees who are not "interested persons") on
November 15, 1993 and by the shareholders on January 13, 1994. Each Agreement
may be terminated at any time without payment of penalty by either party on
sixty days' written notice, and automatically terminates in the event of its
assignment.
Scudder, Stevens & Clark, Inc. is one of the most experienced investment
management firms in the United States. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual Fund to
the public. In 1953, Scudder introduced Scudder International Fund, the first
Fund available in the U.S., investing internationally in securities of issuers
in several foreign countries. The principal source of the Fund Manager's income
is professional fees received from providing continuous investment advice, and
the firm derives no income from banking, brokerage or underwriting of
securities. Today, it provides investment counsel for many individuals and
institutions, including insurance companies, colleges, industrial corporations,
and financial and banking organizations. In addition, it manages Montgomery
Street Income Securities, Inc., Scudder California Tax Free Trust, Scudder Cash
Investment Trust, Scudder Development Fund, Scudder Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment
Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia
Fund, Inc., Scudder New Europe Fund, Inc., Scudder Portfolio Trust, Scudder
State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust,
Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder
World Income Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil
Fund, Inc., The First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund,
Inc., and The Latin America Dollar Income Fund, Inc. Some of the foregoing
companies or trusts have two or more series.
The Fund Manager maintains a large research department, which conducts
continuous studies of the factors that affect the condition of various
industries, companies and individual securities. In this work, the Fund Manager
utilizes certain reports and statistics from a wide variety of sources,
including brokers and dealers who may execute portfolio transactions for the
Fund and for clients of the Fund Manager, but conclusions are based primarily on
investigations and critical analyses by its own research specialists.
Certain investments may be appropriate for more than one Fund and also for
other clients advised by the Fund Manager. Investment decisions for each Fund
and for other clients are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment and the size of their investments
generally. Frequently, a particular security may be bought or sold for only one
Fund or client or in different amounts and at different times for more than one
but less than all Funds or other clients. Likewise, a particular security may
be bought for one or more Funds or clients when one or more other Funds or
clients are selling the security. In addition, purchases or sales of the same
security may be made for two or more Funds or clients on the same date. In such
event such transactions will be allocated among the Funds and/or clients in a
manner believed by the Fund Manager to be equitable to each. In some cases,
this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a Fund. Purchase and sale orders for a Fund may
be combined with those of other Funds or clients of the Fund Manager in the
interest of most favorable net results to the particular Fund.
Each Management Agreement provides that the Fund Manager shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds in connection with matters to which the respective agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Fund Manager in the performance of its duties or from
reckless disregard by the Fund Manager of its obligations and duties under the
respective agreement.
In reviewing the terms of each Management Agreement and in discussions with
the Fund Manager concerning such agreements, the Trustees of each Trust who are
not "interested persons" of that Trust have been represented by independent
counsel at the Trust's expense. Dechert Price & Rhoads acts as general counsel
for the Trusts.
Pursuant to a Member Services Agreement with the Fund Manager, dated
February 1, 1994, AARP Financial Services Corp. ("AFSC") provides the Fund
Manager with nondistribution related service and advice primarily concerning
designing and tailoring the AARP Investment Program from Scudder and its Funds
to meet the needs of AARP's members on an ongoing basis. AARP Financial
Services Corp. receives, as compensation for its services, a Monthly Member
Services fee. The fee paid to AFSC is calculated on a daily basis and depends
on the level of total assets of the AARP Investment Program. The fee rate
decreases as the level of total assets increases. The fee rate for each level
of assets is .07 of 1% for the first $6 billion, .06 of 1% for the next $10
billion and .05 of 1% thereafter.
The Member Services Agreement will remain in effect until August 31, 1995
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 November 15,
1993 and by shareholders on January 13, 1994. The Member Services Agreement may
be terminated at any time without payment of penalty by the Funds on sixty days'
written notice, or by AFSC upon six months' notice to the Funds and to the Fund
Manager, and automatically terminates in the event of its assignment or the
assignment of the Management Agreement.
Pursuant to a Service Mark License Agreement, dated November 30, 1984
(February 18, 1985 in the case of AARP Cash Investment Funds), among the Trusts,
the Fund Manager and AARP, use of the AARP service marks by a Trust and its
Funds will be terminated, unless otherwise agreed to by AARP, upon termination
of that Trust's Management Agreement.
Officers and employees of the Fund Manager from time to time may have
transactions with various banks, including the AARP Funds' custodian bank. It
is the Fund Manager's opinion that the terms and conditions of those
transactions which have occurred were not influenced by existing or potential
custodial or other Fund relationships.
None of the officers or Trustees of a Trust may have dealings with that
Trust as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Funds.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Position Principal Underwriter,
Name and Address with Trusts Occupation** Scudder Investor
- ---------------- ---------- ------------ Services, Inc.
-------------------
--
<C> <C> <C> <C>
Cuyler W. Findlay#* Chairman of the Managing Director Senior Vice
Board and of Scudder, President and
Trustee Stevens & Clark, Director
Inc.
Horace B. Deets+* Vice Chairman Executive -
and Trustee Director, American
Association of
Retired Persons
Linda Coughlin#* President and Managing Director Director
Trustee of Scudder,
Stevens & Clark,
Inc.
Adelaide Attard Trustee Gerontology -
270-28N Grand Central ( 1, 2,4) Consultant;
Parkway formerly
Floral Park, NY Commissioner,
County of Nassau,
New York, Dept. of
Senior Citizen
Affairs (1971-
1991); formerly
Chairperson,
Federal Council on
Aging (1981-1986)
Cyril F. Brickfield+* Trustee (2,3,4), Honorary President -
Honorary Trustee and Special
(1) Counsel, American
Association of
Retired Persons
Robert N. Butler, Trustee (2,4) Brookdale -
M.D. Professor of
211 Central Park West Geriatrics and
Apt. 7F Adult Development,
New York, NY Mount Sinai School
of Medicine (1982
to present);
Director, National
Institute on
Aging, National
Institute of
Health (1976-1982)
Mary Johnston Evans Trustee (1,3,4) Corporate -
920 Fifth Ave. Director, Senior
New York, NY Member of The
Conference Board,
Inc.
Edgar R. Fiedler Trustee (1,2,3) Vice President and -
845 Third Ave. Economic
New York, NY Counsellor, The
Conference Board,
Inc.
Lt. Gen. Eugene P. Trustee (2,3) International -
Forrester Trade Consultant
1101 S. Arlington (1983 to present);
Ridge Rd. Lt. General
Arlington, VA (Retired), U.S.
Army; Corporate
Director
Wayne F. Haefer* Trustee (2,3,4) Director, -
Membership
Division of AARP;
Secretary,
Employee's Pension
and Welfare Trusts
of AARP and
Retired Persons
Services, Inc.
William B. Macomber Trustee (3,4) Formerly Teacher, -
27 Monomoy Rd. History and
Nantucket, MA Government,
Nantucket H.S.,
Nantucket, MA;
formerly
President, The
Metropolitan
Museum of Art and
U.S. Ambassador to
Turkey and Jordan
George L. Maddox, Jr. Trustee (2,3) Chairman, Duke -
P.0. Box 2920 University Council
Duke Univ. Medical on Aging and Human
Center Development;
Durham, NC Professor of
Sociology,
Departments of
Sociology and
Psychiatry, Duke
University
Robert J. Myers Trustee (1,2,4) Actuarial -
9610 Wire Ave. Consultant (1983 -
Silver Spring, MD present); formerly
Chairman,
Commission on
Railroad
Retirement Reform
(1988-90); Deputy
Commissioner, U.S.
Social Security
Administration
(1981-1982);
Member, National
Commission on
Social Security
(1978-1981);
formerly Executive
Director, National
Commission on
Social Security
Reform
(1982-1983);
Director, NASL
Series Fund, Inc.;
Director North
American Funds
Joseph S. Perkins+ Trustee Director, American -
Association of
Retired Persons;
Corporate
Retirement
Manager, Polaroid
Company
James H. Schulz Trustee (2,3,4) Professor of -
163 Scruton Pond Road Economics and
Barrington, NH 03825 Kirstein Professor
of Aging Policy,
Policy Center on
Aging, Florence
Heller School,
Brandeis
University
Gordon Shillinglaw Trustee (1,3,4) Professor Emeritus -
196 Villard Ave. of Accounting,
Hastings-on-Hudson, Columbia
NY University
Graduate School of
Business
Edward V. Creed## Vice President Principal of -
Scudder, Stevens &
Clark, Inc.
Thomas W. Joseph## Vice President Principal of Vice President,
Scudder, Stevens & Director, Treasurer
Clark, Inc. and Assistant Clerk
David S. Lee## Vice President Managing Director President,
and Assistant of Scudder, Assistant Treasurer
Treasurer Stevens & Clark, and Director
Inc.
Douglas M. Loudon# Vice President Managing Director -
of Scudder,
Stevens & Clark,
Inc.
Thomas F. McDonough## Vice President Principal of Clerk
and Assistant Scudder, Stevens &
Secretary Clark, Inc.
Pamela A. McGrath## Vice President Principal of -
and Treasurer Scudder, Stevens &
Clark, Inc.
Edward J. O'Connell# Vice President Principal of Assistant Treasurer
and Assistant Scudder, Stevens &
Treasurer Clark, Inc.
Kathryn L. Quirk# Vice President Managing Director Vice President
and Secretary of Scudder,
Stevens & Clark,
Inc.
Howard Schneider# Vice President Managing -
Director of
Scudder, Stevens &
Clark, Inc.
Cornelia M. Small# Vice President Managing Director -
of Scudder,
Stevens & Clark,
Inc.
1) AARP Cash Investment Funds 3) AARP Tax Free Income Trust
2) AARP Income Trust 4) AARP Growth Trust
* Messrs. Brickfield, Deets, Findlay, Haefer, Perkins 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 Investment Company Act of 1940, as amended).
** 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, 1994 , 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, 1994 no other
person owned beneficially more than 5% of the outstanding shares of any of the
Trusts except that the American Association of Retired Persons held
19,000,000 shares in the AARP High Quality Money Fund, 5.84% of
the outstanding shares.
REMUNERATION
Several of the officers and Trustees of the Trusts may be officers or
employees of Scudder, Stevens & Clark, Inc., Scudder Service Corporation,
Scudder Investor Services, Inc., or Scudder Trust Company and will participate
in the fees received by such entities. No individual affiliated with AARP will
participate directly in any such fees. The Trusts pay no direct remuneration to
any officer of the Trusts. However, each of the Trustees who is not affiliated
with Scudder, Stevens & Clark, Inc. or AARP will be paid by the Trust(s) for
which he or she serves as Trustee. Each of these unaffiliated Trustees will
receive an annual fee of $2000 from each Fund for which he or she serves plus
$270 for each Trustees' meeting and $200 for each audit committee meeting or
meeting held for the purpose of considering arrangements between the Fund and
the Fund Manager or any of its affiliates attended. Each unaffiliated Trustee
also receives $100 per committee meeting, other than an audit committee meeting,
attended. If any such meetings are held jointly with meetings of one or more
mutual funds advised by the Fund Manager, a maximum fee of $800 for meetings of
the Board, meetings of the unaffiliated members of the Board for the purpose of
considering arrangements between the Fund and the Fund Manager or any of its
affiliates or the audit committees of such Funds, and $400 for all other
committee meetings or meetings of the unaffiliated members of the Board is paid,
to be divided equally among the Funds. For the year ended September 30, 1994,
the Trustees' fees and expenses for six of the Funds , and for the
period from February 1, 1994 (commencement of operations) to September 30, 1994
for the AARP Balanced Stock and Bond Fund, were as follows:
</TABLE>
<TABLE>
<S> <C>
AARP High Quality Money Fund $20,362
AARP GNMA and U.S. Treasury Fund 30,128
AARP High Quality Bond Fund 30,128
AARP High Quality Tax Free Money 30,653
Fund
AARP Insured Tax Free General Bond 30,653
Fund
AARP Balanced Stock and Bond Fund 18,050
AARP Growth and Income Fund 28,587
AARP Capital Growth Fund 28,587
</TABLE>
The following Compensation Table provides, in tabular form, the following data:
Column (1): all Trustees who receive compensation from the Trusts.
Column (2): aggregate compensation received by a Trustee from all the series of
a Trust.
Columns (3) and (4): pension or retirement benefits accrued or proposed be paid
by the Trusts. The AARP Trusts do not pay their Trustees such benefits.
Column (5): total compensation received by a Trustee from the Trusts, plus
compensation received from all Funds that are advised by the Fund Manager (the
"Fund Complex") for which a Trustee serves. The total number of Funds from
which a Trustee receives such compensation is also provided.
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1994
- --------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Aggregate Compensation from
(c)
AARP Tax
Free (d)
(b) Income AARP Growth
AARP Trust Trust
Income consisting consisting
Trust of two of three
(a) consisting Funds: Funds: AARP
AARP Cash of two AARP High Balanced
Investment Funds: Quality Stock and
Fund AARP GNMA Tax Free Bond Fund, Pension or Total
consisting and U.S. Money Fund AARP Growth Retirement Compensation
of one Treasury and AARP and Income Benefits Estimated from the
Fund: AARP Fund and Insured Fund and Accrued as Annual AARP Trusts
High AARP High Tax Free AARP Part of Benefits and Fund
Name of Person, Quality Quality General Capital Fund Upon Complex Paid
Position Money Fund Bond Fund Bond Fund Growth Fund Expenses Retirement to Trustee
- ------------------ ---------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Adelaide Attard, - $ 7,750 - $ 13,640 N/A N/A $ 21,390
Trustee (5 funds)
Robert N. Butler, - $ 7,290 - $ 11,750 N/A N/A $ 19,040
Trustee (5 funds)
Mary Johnston $ 3,893 - $ 7,187 $ 12,420 N/A N/A $ 35,000
Evans, Trustee (7 funds)
Edgar R. Fiedler, $ 3,740 $ 7,610 $ 7,280 - N/A N/A $ 51,750
Trustee (6 funds)
Eugene P. - $ 8,030 $ 8,500 - N/A N/A $ 16,530
Forrester, Trustee (4 funds)
William B. - - $ 7,792 $ 12,398 N/A N/A $ 20,190
Macomber, Trustee (5 funds)
George L. Maddox, - $ 8,030 $ 8,500 - N/A N/A $ 16,530
Jr., Trustee (4 funds)
Robert J. Myers, $ 3,594 $ 7,369 - $ 11,787 N/A N/A $22,750
Trustee (6 funds)
James H. Schulz, - - $ 7,392 $ 12,998 N/A N/A $ 20,390
Trustee (5 funds)
Gordon $ 3,959 - $ 7,719 $ 12,892 N/A N/A $ 89,570
Shillinglaw, (14 funds)
Trustee
</TABLE>
DISTRIBUTOR
Each of the Trusts has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), a Massachusetts corporation, which is
wholly-owned by Scudder, Stevens & Clark, Inc., a Delaware corporation. The
underwriting agreements dated September 4, 1985 will remain in effect until
August 31, 1995 and from year to year thereafter only if their continuance is
approved annually by a majority of the members of the Board of Trustees of each
Trust who are not parties to such agreement or interested persons of any such
party and either by vote of a majority of the Board of Trustees of each Trust or
a majority of the outstanding voting securities of each Trust.
Under each Trust's principal underwriting agreement, the Trust is
responsible for: the payment of all fees and expenses in connection with the
preparation and filing with the SEC of its registration statement and prospectus
and any amendments and supplements thereto; the registration and qualification
of shares for sale in the various states, including registering the Trust as a
broker or dealer; the fees and expenses of preparing, printing and mailing
prospectuses (see below for expenses relating to prospectuses paid by the
Distributor), notices, proxy statements, reports or other communications
(including newsletters) to shareholders of the Trust; the cost of printing and
mailing confirmations of purchases of shares and the prospectuses accompanying
such confirmations; any issue taxes or any initial transfer taxes; a portion of
shareholder toll-free telephone charges; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); and the cost of printing and postage of business reply envelopes.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of shares of the
Funds to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Funds to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
customer service representatives, a portion of the cost of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by each Trust.
Note: Although each Trust does not currently have a Rule 12b-1 Plan and
shareholder approval would be required in order to adopt one, the underwriting
agreements provide that the Trust will also pay those fees and expenses
permitted to be paid or assumed by that Trust pursuant to a Rule 12b-1 Plan, if
any, adopted by each Trust, notwithstanding any other provision to the contrary
in the underwriting agreement and each Trust or a third party will pay those
fees and expenses not specifically allocated to the Distributor in the
underwriting agreement.
As agent, the Distributor currently offers shares of the Funds to investors
in all states. Each underwriting agreement provides that the Distributor
accepts orders for shares at net asset value because no sales commission or load
is charged the investor. The Distributor has made no firm commitment to acquire
shares of any of the Funds.
TAXES
(See "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" in the Prospectus.)
Each AARP Fund has qualified and elected to be taxed as a regulated
investment company under Subchapter M of the United States Internal Revenue Code
(the "Code"), as amended, since its inception and intends to continue to so
qualify. (Such qualification does not involve supervision of management or
investment practices or policies by a government agency.) In any year in which
a Fund so qualifies and distributes at least 90% of its investment company
taxable income, and at least 90% of its net tax-exempt income, if any, the Fund
generally is not subject to Federal income tax to the extent that it distributes
to shareholders its investment company taxable income and net realized capital
gains in the manner required under the Code.
Each AARP Fund must distribute its taxable income according to a prescribed
formula and will be subject to a 4% nondeductible excise tax on amounts not so
distributed. The formula requires a Fund to distribute each calendar year at
least 98% of its ordinary income (excluding tax-exempt income) for the calendar
year, at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 of such year, and any ordinary income and capital gains for
prior years that was not previously distributed.
To qualify under Subchapter M, gains from the sale of stock, securities and
certain options, futures and forward contracts held for less than three months
must be limited to less than 30% of each Fund's annual gross income. Moreover,
short-term gains (i.e., gains from the sale of securities held for one year or
less) are taxed as ordinary income when distributed to shareholders. Options,
futures and forward activities of the AARP Funds may increase the amount of the
short-term gains and gains that are subject to the 30% limitation.
The determination of the nature and amount of investment company taxable
income of a Fund will be based solely on the transactions in, and on the income
received and expenses incurred by or allocated to, the Fund. Each AARP Fund
intends to offset any realized net capital gains against any capital loss
carryforward before making capital gains distributions to shareholders.
Distributions of any investment company taxable income (which includes
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss, less expenses) are taxable to shareholders as ordinary
income.
Generally, each Fund will distribute any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss). If a Fund retains its net capital gains for investment, requiring
Federal income tax to be paid thereon by the Fund, the Fund intends to elect to
treat such capital gains as having been distributed to its shareholders. As a
result, shareholders (a) will be required to include in income for Federal
income tax purposes, as long-term capital gains, their proportionate share of
such undistributed amounts and (b) will be entitled to credit their
proportionate share of the Federal income tax paid thereon by the Fund against
their Federal income tax liability. In the case of shareholders whose long-term
capital gains would be taxed at a lower rate, the amount of the credit for tax
paid by a Fund in excess of the shareholder's actual tax on capital gains may be
applied to reduce the net amount of tax otherwise payable by such shareholders
in respect of their other income or, if no tax is payable, the excess may be
refunded. For Federal income tax purposes, the tax basis of shares owned by a
shareholder of a Fund will be increased by an amount equal to the difference
between its pro rata share of such gains and its tax credit. If a Fund retains
net capital gains, it may not be treated as having met the excise tax
distribution requirement.
Distributions of net capital gains are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of the Fund have been
held by such shareholders. Any loss realized upon the redemption of shares held
at the time of redemption for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains by a Fund will be taxable as described above, whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share
received equal to the net asset value of a share of the Fund on the reinvestment
date.
Distributions by a Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a return of capital upon
distribution which will nevertheless be taxable to them.
Shareholders who redeem, sell or exchange shares of a Fund may realize gain
or loss if the proceeds are more or less than the shareholder's purchase price.
Such gain or loss generally will be a capital gain or loss if the Fund shares
were capital assets in the hands of the shareholder, and generally will be long-
or short-term, depending on the length of time the Fund shares were held.
However, if a shareholder realizes a loss on the sale of a share held at the
time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period. A gain realized on a redemption,
sale or exchange will not be affected by a reacquisition of shares. A loss
realized on a redemption, sale or exchange, however, will be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by a Fund upon payment of a premium in connection
with the purchase of a put or call option. The character of any gain or loss
recognized (i.e., long-term or short-term) will generally depend in the case of
a lapse or sale of the option on the Fund's holding period for the option and in
the case of an exercise of a put option on the Fund's holding period for the
underlying security. The purchase of a put option may constitute a short sale
for federal income tax purposes, causing an adjustment in the holding period of
the underlying security or a substantially identical security of the Fund. If a
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as
a short-term capital gain or loss. If a call option written by a Fund is
exercised, the character of the gain or loss depends on the holding period of
the underlying security. The exercise of a put option written by a Fund is not
a taxable transaction for the Fund.
Many futures contracts, certain foreign currency forward contracts and all
listed nonequity options (including options on debt securities, options on
futures contracts, options on securities indices and options on broad-based
stock indices) will constitute "section 1256 contracts." Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or losses. Also, section 1256 contracts held by the
Funds at the end of each taxable year (and, for purposes of the 4% excise tax,
on October 31) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60% long-term and 40% short-term capital gain or loss. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options, and
similar financial instruments entered into or acquired by a Fund will be treated
as ordinary income.
Positions of a Fund which consist of at least one stock and at least one
stock option or other position with respect to a related security which
substantially diminishes the Fund's risk of loss with respect to such stock
could be treated as a "straddle" which is governed by Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by a Fund.
Positions of a Fund which consist of at least one position not governed by
Section 1256 and at least one futures contract, foreign currency forward
contract or nonequity option governed by Section 1256 which substantially
diminishes the Fund's risk of loss with respect to such other position will be
treated as a "mixed straddle." Although mixed straddles are subject to the
straddle rules of Section 1092 of the Code, certain tax elections exist for them
which reduce or eliminate the operation of these rules. Each Fund will monitor
its transactions in options and futures and may make certain tax elections in
connection with these investments.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Proposed regulations have been issued which may allow the Fund to make an
election to mark to market its shares of these foreign investment companies in
lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Fund would report as ordinary
income the amount by which the fair market value of the foreign company's stock
exceeds the Fund's adjusted basis in these shares. No mark to market losses may
be recognized. The effect of the election would be to treat excess
distributions and gain on dispositions as ordinary income which is not subject
to a Fund level tax when distributed to shareholders as a dividend.
Alternatively, the Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by those countries.
Certain of the debt securities acquired by the Funds may be treated as debt
securities that were originally issued at a discount. Original issue discount
represents interest for Federal income tax purposes and can generally be defined
as the difference between the price at which a security was issued and its
stated redemption price at maturity. Although no cash income is actually
received by the Funds, original issue discount earned in a given year generally
is treated for Federal income tax purposes as income earned by the Funds, and
therefore is subject to the distribution requirements of the Code. The amount
of income earned by the Funds is determined on the basis of a constant yield to
maturity which takes into account at least semi-annual or annual compounding
(depending on the date of the security) of accrued interest.
In addition, some of the debt securities may be purchased by the Funds at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of many debt securities,
including tax-exempt securities having market discount will be treated as
ordinary income to the extent it does not exceed the accrued market discount on
such debt security. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Funds at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Funds, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest.
The Funds will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. All such distributions and proceeds may be subject to withholding
of Federal income tax at the rate of 31% in the case of non-exempt shareholders
who fail to furnish the Funds with their taxpayer identification numbers and
with required certifications regarding their status under Federal income tax
laws. Withholding may also be required if a Fund is notified by the IRS or a
broker that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions or proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld. Investors may
wish to consult their tax advisers about the applicability of the backup
withholding provisions.
In addition to Federal taxes, shareholders of the Funds may be subject to
state and local taxes on distributions from the Funds. Under the laws of
certain states, distributions of investment company taxable income are taxable
to shareholders as dividend income even though a substantial portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by the resident of such state, would be exempt from such
state's income tax. Shareholders should consult their own tax advisers with
respect to the tax status of distributions from the Funds in their own state and
localities.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, Trusts and estates). Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and foreign
tax consequences of ownership of shares of the Fund, including the likelihood
that such a shareholder would be subject to a U.S. withholding tax at a rate of
31% (or at a lower rate under a tax treaty) on amounts constituting ordinary
income to him or her.
Special Information Regarding AARP High Quality Tax Free Money Fund and
AARP Insured Tax Free General Bond Fund: Each of the AARP Tax Free Income Funds
intends to qualify to pay "exempt-interest dividends" to its shareholders. Each
Fund will be so qualified if, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of securities of states,
U.S. possessions, their political subdivisions, and the District of Columbia,
the interest on which is exempt from Federal tax. To the extent that the Funds'
dividends distributed to shareholders are derived from earnings on interest
income exempt from Federal tax and are designated as "exempt-interest dividends"
by the Funds, they will be excludable from a shareholder's gross income for
Federal income tax purposes. "Exempt-interest dividends," however, must be
taken into account by shareholders in determining whether their total incomes
are large enough to result in taxation of up to 85% of their social security
benefits. In addition, interest on certain municipal obligations (private
activity bonds) will be treated as a preference item for purposes of calculating
the alternative minimum tax for individuals and for corporations. Similarly,
income distributed by the Funds, including exempt-interest dividends, may
constitute an adjustment to alternative minimum taxable income of corporate
shareholders. The Funds do not intend to purchase any private activity bonds.
The Funds will inform shareholders annually as to the portion of the
distributions from the Funds which constituted "exempt-interest dividends."
To the extent that the Funds' dividends are derived from interest on their
temporary taxable investments or from an excess of net short-term capital gain
over net long-term capital loss, they are considered ordinary taxable income for
Federal income tax purposes. Distributions, if any, of net long-term capital
gains from the sale of securities are taxable at long-term capital gain rates
regardless of the length of time the shareholder has owned Fund shares.
However, if a shareholder realizes a loss on the sale of a share held at the
time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period. Furthermore, a loss realized by a
shareholder on the sale of shares of the Funds with respect to which
exempt-interest dividends have been paid will be disallowed if such shares have
been held by the shareholder for six months or less (to the extent of
exempt-interest dividends paid).
Under the Code, a shareholder's interest expense deductions with respect to
indebtedness incurred or continued to purchase or carry shares of an investment
company paying exempt-interest dividends, such as either of the AARP Tax-Free
Funds, may be limited. In addition, under rules issued by the Internal Revenue
Service for determining when borrowed Funds are considered used for the purposes
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed Funds even though the borrowed Funds
are not directly traceable to the purchase of shares.
Opinions relating to the validity of municipal securities and the exemption
of interest thereon from Federal income tax are rendered by bond counsel to the
issuer. Neither AARP, the Fund Manager, nor Counsel to the Funds makes any
review of proceedings relating to the issuer of municipal securities or the
bases of such opinions.
The foregoing description regarding the AARP Tax-Free Funds relates only to
Federal income tax law. Investors should consult with their tax advisers as to
exemption from other state or local law. Persons who may be "substantial users"
(or "related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisers before purchasing shares of
the Funds.
BROKERAGE AND PORTFOLIO TURNOVER
Brokerage
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.
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 the custodian of the
AARP Funds for appraisal purposes, or who supply research, market and
statistical information to the Funds or the Fund Manager. The term "research,
market and statistical information" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and concerning the performance
of accounts. The Fund Manager is not authorized, when placing portfolio
transactions for the AARP Funds, to pay a brokerage commission in excess of that
which another broker might have charged for executing the same transaction
solely on account of the receipt of research, market or statistical information.
The Fund Manager will not place orders with brokers or dealers on the basis that
the broker or dealer has or has not sold shares of the Funds. Except for
implementing the policy stated above, there is no intention to place portfolio
transactions with particular brokers or dealers or groups thereof. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available otherwise.
Subject to obtaining the most favorable results, the Fund Manager may place
particular transactions through the Distributor, with the net commission or fee
being credited against the fee payable to the Fund Manager. The Distributor,
however, does not intend to engage in a general brokerage business. Also
subject to obtaining the most favorable net results, the Fund Manager may place
brokerage transactions with Bear, Stearns & Co. A credit against the custodian
fee due to State Street Bank and Trust Company equal to one-half of the
commission on any such transaction will be given on any such transaction. The
Fund did not enter into any such transactions during its fiscal year.
Although certain research, market and statistical information from brokers
and dealers can be useful to the AARP Funds and to the Fund Manager, it is the
opinion of the Fund Manager that such information is only supplementary to its
own research effort since the information must still be analyzed, weighed, and
reviewed by the Fund Manager's staff. Such information may be useful to the
Fund Manager in providing services to clients other than the AARP Funds, and not
all such information is used by the Fund Manager in connection with the AARP
Funds. Conversely, such information provided to the Fund Manager by brokers and
dealers through whom other clients of the Fund Manager effect securities
transactions may be useful to the Fund Manager in providing services to the AARP
Funds.
For the fiscal years ended September 30, 1992, 1993 and 1994, the AARP
Growth and Income Fund paid brokerage commissions of $812,540, $1,369,243 and
$2,319,113 and the AARP Capital Growth Fund paid brokerage commissions of
$832,983, $1,154,049 and $1,156,320, both respectively. For the period
ending September 30, 1994, the AARP Balanced Stock and Bond Fund paid brokerage
commissions of $152,376 . In the fiscal year ended September 30, 1994,
$2,198,322 (95%) of the total brokerage commissions paid by AARP Growth
and Income Fund and $1,061,196 (92%) 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 $621,824,800 for the AARP Capital Growth Fund, (92% of
all brokerage transactions) and $1,400,204,341 (94% 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 period ended September
30, 1994, $138,142 (91%) 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 $84,089,916 for AARP Balanced
Stock and Bond Fund, ( 85% of all brokerage transactions). The balance of
such brokerage was not allocated to any particular broker or dealer or with
regard to the above-mentioned or other special factors.
The Trustees review from time to time whether the recapture for the benefit
of the Funds of some portion of the brokerage commissions or similar fees paid
by the Funds on portfolio transactions is legally permissible and advisable. To
date, no recapture has been effected.
Portfolio Turnover
Fund securities may be sold to take advantage of investment opportunities
arising from changing market levels or yield relationships. Although such
transactions involve additional costs in the form of spreads or commissions,
they will be undertaken in an effort to improve the overall investment return of
a Fund, consistent with that Fund's objectives. The portfolio turnover rate of
a Fund is defined in a Rule of the SEC as the lesser of the value of securities
purchased or securities sold during the year, excluding all securities whose
maturities at the time of acquisition were one year or less, divided by the
average monthly value of such securities owned during the year. The average
annual portfolio turnover rates for the fiscal years ended September 30, 1992,
1993 and 1994, for five of the non-money market Funds were: AARP GNMA and U.S.
Treasury Fund, 74.33%, 105.49% and 114.54%; AARP High Quality Bond Fund, 63.00%,
100.98% and 63.75%; AARP Insured Tax Free General Bond Fund, 62.45%, 47.96% and
38.39%; AARP Growth and Income Fund, 36.40%, 17.44% and 31.82%; AARP Capital
Growth Fund, 89.20%, 100.63% and 79.65%, all respectively. The average annual
portfolio turnover rate for the period ending September 30, 1994 for the AARP
Balanced Stock and Bond Fund was 49.32%.
NET ASSET VALUE
AARP Money Funds
The net asset value per share of the Fund is computed twice daily as of
twelve o'clock noon and the close of regular trading on the Exchange, normally 4
p.m. eastern time, on each day when the Exchange is open for trading. The
Exchange is normally closed on the following national holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. Net asset value is determined by dividing the
total assets of the Fund, less all of its liabilities, by the total number of
shares of the Fund outstanding. The Fund uses the penny-rounding method of
security valuation as permitted under Rule 2a-7 under the 1940 Act. Under this
method, portfolio securities for which market quotations are readily available
and which have remaining maturities of more than 60 days from the date of
valuation are valued at the mean between the over-the-counter bid and asked
prices. Securities which have remaining maturities of 60 days or less are
valued by the amortized cost method; if acquired with remaining maturities of 61
days or more, the cost thereof for purposes of valuation is deemed to be the
value on the 61st day prior to maturity. Other securities are appraised at fair
value as determined in good faith by or on behalf of the Trustees of the Fund.
For example, securities with remaining maturities of more than 60 days for which
market quotations are not readily available are valued on the basis of market
quotations for securities of comparable maturity, quality and type.
Determinations of net asset value per share for the Fund made other than as of
the close of the Exchange may employ adjustments for changes in interest rates
and other market factors.
AARP Non-Money Market Funds
The net asset value of shares of the Fund is computed as of the close of
regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of the Fund, less all liabilities, by the total
number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent
bid quotation. An equity security which is traded on the National Association
of Securities Dealers Automated Quotation ("NASDAQ") system is valued at its
most recent sale price. Lacking any sales, the security is valued at the high
or "inside" bid quotation. The value of an equity security not quoted on the
NASDAQ System, but traded in another over-the-counter market, is its most recent
sale price. Lacking any sales, the security is valued at the Calculated Mean.
Lacking a Calculated Mean, the security is valued at the most recent bid
quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded over-
the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
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, 1994, are attached to this Statement of
Additional Information, 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
provides for indemnification out of the Trust property of any shareholder held
personally liable for the claims and liabilities to which a shareholder may
become subject by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Trust itself would be unable to meet its
obligations. No series of one Trust is liable for the obligations of another
series in the AARP Complex.
Ratings of Corporate Bonds
The three highest ratings of Moody's for corporate bonds are Aaa, Aa and A.
Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds rated Aa
are judged to be of high quality by all standards. Together with the Aaa group,
they comprise what are generally known as high-grade bonds. Moody's states
that Aa bonds are rated lower than the best bonds because margins of protection
or other elements make long-term risks appear somewhat larger than for Aaa
securities. Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Although factors giving
security to principal and interest on bonds rated A are adequate, other elements
may be present which suggest a susceptibility to impairment sometime in the
future.
The three highest ratings of S&P for corporate bonds are AAA (Prime), AA
(High-grade) and A. Bonds rated AAA have the highest rating assigned by S&P to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rating issues only in small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
more susceptible to the adverse effects of changes in circumstances and economic
conditions.
Ratings of Commercial Paper
The ratings Prime-1 and Prime-2 are the highest commercial paper ratings
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; 6) trend of earnings over a
period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Prime-2 ratings are assigned by Moody's to commercial paper issuers which
have a strong capacity for meeting their obligations in a timely fashion.
However, their financial, economic and managerial capacities will be less than
that of Prime-1 borrowers. Financial characteristics such as earnings, coverage
ratios and capitalization will be more affected by external economic factors
than Prime-1 borrowers. Liquidity is still believed to be ample.
The two highest ratings of S&P for commercial paper are A-1 and A-2.
Commercial paper rated A-1 or better by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements; long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed; the
issuer has access to at least two additional channels of borrowing; basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; the reliability and quality of
management are unquestioned.
S&P will assign an A-2 rating to the commercial paper of companies which
have the capacity for timely payment on issues. However, the relative degree of
safety is less than for issuers rated A-1.
Ratings of Municipal Bonds
The three highest ratings of Moody's for municipal bonds are Aaa, Aa, and
A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they comprise what are generally known as high-grade bonds. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
The three highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High-grade), and A (Good grade). Bonds rated AAA have the highest rating
assigned by S&P to a municipal obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to
pay interest and repay principal and differ from the highest rated issues only
in a small degree. Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition
of the differences between short-term and long-term credit risk. Loans bearing
the designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of Funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
S&P's top ratings for municipal notes are SP-1 and SP-2. The designation
SP-1 indicates a very strong capacity to pay principal and interest. A "+" is
added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The ratings F-1+ and F-1 are the two highest ratings assigned by Fitch.
Among the factors considered by Fitch in assigning these rating are: (1) the
issuer's liquidity; (2) its standing in the industry; (3) the size of its debt;
(4) its ability to service its debt; (5) its profitability; (6) its return on
equity; (7) its alternative sources of financing; and (8) its ability to access
the capital markets. Analysis of the relative strength or weakness of these
factors and others determines whether an issuer's commercial paper is within
these two ratings.
Other Information
Each AARP Fund has a fiscal year ending on September 30.
Portfolio securities of the AARP Funds are held separately, pursuant to a
custodian agreements with each Trust, by State Street Bank and Trust Company of
Boston as Custodian.
Each Trust has shareholder servicing agreements with Scudder Service
Corporation ("SSC"), a wholly-owned subsidiary of Scudder, Stevens & Clark, Inc.
SSC is the transfer agent, dividend disbursing and shareholder service agent for
each Fund. Shareholder service expenses charged by SSC were for AARP High
Quality Money Fund, $1,488,175; AARP GNMA and U.S. Treasury Fund, $9,570,696;
AARP High Quality Bond Fund, $2,008,127; AARP High Quality Tax Free Money Fund,
$403,163; AARP Insured Tax Free General Bond Fund, $2,511,304;
AARP Growth and Income Fund, $2,985,636; and AARP Capital Growth Fund,
$1,339,182, for the fiscal year ended September 30, 1994. Not all of these fees
were paid in full at the fiscal year end.
Shareholder service expenses charged by SSC for the AARP Balanced Stock
and Bond Fund for the period of February 1, 1994 (commencement of operations) to
September 30, 1994, were $355,400.
The firm of Dechert Price & Rhoads of Washington, D.C. is counsel for the
Trusts.
Many of the investment changes in the Funds will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders. These transactions will reflect investment decisions
made by the Fund Manager in light of the objectives and policies of the Funds,
and such factors as its other portfolio holdings and tax considerations, and
should not be construed as recommendations for similar action by other
investors.
Costs incurred in connection with subsequent registrations of shares are
being amortized on a pro-rata basis as the related shares are issued. If other
Funds are added to a Trust, the Trustees will determine whether such Funds
should bear any of such costs.
Each Trust is located at Two International Place, Boston, Massachusetts
02110-4103 (telephone: 1-800-253-2277). Each has filed with the Securities and
Exchange Commission, Washington, D.C. 20549, a Registration Statement under the
Securities Act of 1933, as amended, with respect to the shares of the Funds
offered by the Prospectus. The Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statements, certain parts of which are omitted in accordance with Rules and
Regulations of the SEC. The Registration Statements may be inspected at the
principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C. and
copies thereof may be obtained from the SEC at prescribed rates.
The following chart demonstrates that tax-free yields are equivalent to
higher taxable yields due to their tax-exempt status. For example, tax-free
interest of 5% is the equivalent of 6.94% taxable in a 28% tax bracket. Please
refer to the chart for more examples.
Tax-Exempt Income vs. Taxable Income
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the
1994 calendar year.
<TABLE>
<CAPTION>
1994 Taxable Income Brackets To Equal Hypothetical
Tax-Free Yields of 5%, 7%
and 9%, a Taxable Investment
Would Have To Earn**
Individual Federal
Return Tax Rates 5% 7% 9%
---------------------- ----------- ------ ------ ------
<S> <C> <C> <C> <C>
$0 - $22, 750 15.0% 5.88% 8.24% 10.59%
$22, 751 - $ 55,100 28.0% 6.94% 9.72% 12.50%
$ 55,101 - $115,000 31.0% 7.25% 10.14% 13.04%
$115,001 - $250,000 36.0% 7.81% 10.94% 14.06%
Over $250,000 39.6% 8.28% 11.59% 14.90%
Joint
Return
---------------------
$0 - $ 38,000 15.0% 5.88% 8.24% 10.59%
$ 38,001 - $ 91,850 28.0% 6.94% 9.72% 12.50%
$ 91,851 - $140,000 31.0% 7.25% 10.14% 13.04%
$140,001 - $250,000 36.0% 7.81% 10.94% 14.06%
Over $250,000 39.6% 8.28% 11.59% 14.90%
** These illustrations assume the Federal alternative minimum tax is not
applicable, that an individual is not a "head of household" and claims one
exemption and that taxpayers filing a joint return claim two exemptions.
Note also that these federal income tax brackets and rates do not take into
account the effects of (i) a reduction in the deductibility of itemized
deductions for taxpayers whose federal adjusted gross income exceeds
$ 111,800 ($ 55,900 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
$ 111,800 (for single individuals) or $ 167,700 (for married
individuals filing jointly). The effective federal tax rates and
equivalent yields for such taxpayers would be higher than those shown
above.
</TABLE>
Example:*
Based on 1994 federal tax rates, a married couple filing a joint
return with two exemptions and taxable income of $40,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
There is no guarantee that a Fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
* Net amount subject to federal income tax after deductions and exemptions,
exclusive of the alternative minimum tax.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio, of each AARP
Fund, together with the Report of Independent Accountants and Supplementary
Information are incorporated by reference and attached hereto on pages 22
through 103 inclusive in the Annual Report to the Shareholders of the AARP Funds
dated September 30, 1994, and are hereby deemed to be a part of this Statement
of Additional Information.
<PAGE>
Annual Report to Shareholders
September 30, 1994
Chairman's Letter to Shareholders
Understanding Mutual Fund Investment Performance
AARP Fund Reports
Portfolio Holdings and Financial Statements
AARP Investment Program
from Scudder
Table of Contents
Chairman's Letter to Shareholders 2
Understanding Mutual Fund Investment Performance 7
AARP Fund Reports 22
AARP High Quality Money Fund 23
AARP High Quality Tax Free Money Fund 25
AARP GNMA and U.S. Treasury Fund 27
AARP High Quality Bond Fund 30
AARP Insured Tax Free General Bond Fund 33
AARP Balanced Stock and Bond Fund 36
AARP Growth and Income Fund 39
AARP Capital Growth Fund 42
AARP Funds' Investment Portfolios 46
Financial Statements 88
Financial Highlights 94
Notes to Financial Statements 98
Report of Independent Accountants 103
Officers and Trustees 104
Service Information 107
Chairman's Letter to Shareholders
Dear Shareholders,
This Annual Report covers the period from October 1, 1993 to September 30,
1994 -- a period in time that has been quite difficult for investors. Most
investments -- including some of the AARP Mutual Funds -- provided
disappointing returns as the bond and stock markets reacted to rising short-
and long-term interest rates and concerns about inflation as the U.S.
economy strengthened. As you read through the Report, you will see one-year
total returns that are well below those you have enjoyed in the past (yet
in some cases above the market averages), and share price declines that may
have prompted you to raise questions regarding your investments.
It is understandable that many of you are concerned about the way your
investments performed during the period covered by this Report. That is why
we have added a special section this year that is devoted to understanding
mutual fund performance -- the returns and risks of your investments. The
scope of the section ranges from putting performance into historic context
to interpreting mutual fund rankings, and understanding the risks involved
with money funds, bond funds, and stock funds. We have also defined
terminology that you may have been reading about lately: derivatives,
duration, credit quality. We encourage you to read that section before you
read the actual Fund Reports, so you are better able to put this
performance information into perspective.
In this letter, I'd like first to address why the markets behaved the
way they did this year and conclude by updating you on some Program-
specific matters.
The Economy
The financial markets have been turbulent during most of 1994. Ironically,
this turbulence has occurred as the U.S. economy moved from a hesitant
recovery to a solid expansion. Many of you may be puzzled as to why an
improving economy hasn't led to better market performance.
Economic growth often triggers worries about inflation because if
growth is too fast, it uses up the economy's "spare capacity." Spare labor
capacity is people looking for jobs but not finding them, measured by the
unemployment rate. Spare production capacity is a factory producing less
than it can, measured by the factory operating rate. When there is no more
spare capacity, producers begin to ask for higher prices and have to begin
to pay higher wages to attract scarce labor. That is the beginning of
inflation.
To ward off inflation, the Federal Reserve Board (the Fed) tries to
keep economic growth consistent with how fast capacity is growing. If the
Fed thinks the economy is growing too fast, it raises short-term interest
rates to slow the economy down. Since the Fed thought the economy was
growing too quickly, it raised the Federal Funds rate (the rate the banks
charge each other for overnight loans) five times since February.
The rate increases began on February 4, 1994, when the Fed raised the
Federal Funds rate from 3.00% to 3.25%. This was the first time in five
years the Fed raised interest rates. On March 10, 1994, the Federal Funds
rate rose to 3.50% and again to 3.75% on April 18, 1994, and yet again to
4.25% on May 17, 1994. The latest hike as of this Report was on August 16,
1994 when the Federal Funds rate rose to 4.75%.
With the increase in the Federal Funds rate, as well as other complex
factors such as trade tensions and market speculation by certain investors,
short- and long-term interest rates also rose. For the period covered by
this Report, short-term rates, as measured by the three-month U.S. Treasury
bill, rose from 3% to 4.67%. Long-term interest rates, as measured by the
30-year U.S. Treasury bond, rose from 6.02% to 7.81%.
Interest Rates and the Markets
Rising interest rates had a negative impact on the bond market because as
interest rates rise, bond prices fall. In fact, this was the worst 12-month
period for long-term bonds since 1950. From their peak in October 1993 to
their trough in September 1994, 30-year U.S. Treasury bond prices declined
approximately 22%.
The stock market was also negatively impacted by a rise in interest
rates, indicating that stock investors are greatly influenced by events in
the bond market. Even without rising interest rates, however, many
investment professionals felt the stock market was due for what is commonly
referred to as a "correction."
While this volatility in the stock market seemed severe to many of you
because it followed a period of extremely low volatility, this correction
was not the worst in history. From its high in late January 1994 to its low
in April 1994, the Dow Jones Industrial Average (the Dow) fell
approximately 10%. Since the end of World War II, however, there have been
nine major market declines of more than 20%. One was in a single day on
October 19, 1987, when the Dow dropped 23%, and another was during 1973 to
1974 when the market fell 45%.
What to Expect
Looking ahead to 1995, it is our view that there will be significant global
economic growth, which will include emerging and former communist
countries. We believe the U.S. economy will continue to grow modestly.
Renewed expansion is likely to be accompanied by some inflationary
pressures. However, we expect global competition, cautious monetary policy,
and enhanced productivity to prevent a sudden increase in inflation.
Against this backdrop, we expect both short-term and long-term interest
rates to rise moderately. Moreover, we believe that stocks and bonds should
provide long-term positive real (inflation-adjusted) returns in line with
historical levels.
What This Means to You
As we have always stressed -- and it is true now more than ever -- it is
important that you remain patient, diversify your assets, and take a long-
term view toward investing. Rather than looking at the poor performance of
one investment, look at the performance of your entire portfolio. If you
have an investment time horizon of one to three years or more and can
accept that the bond and stock markets will have short-term volatility,
recent events should have little impact on your primary investment goal. Of
course, if your personal situation has changed or you have realized that
you are not comfortable with fluctuation, a reappraisal of your investment
goals may be in order. Remember that diversification, or allocating your
assets in a mix of different investments such as stocks, bonds, and money
market investments, can be a sensible strategy to provide you with a degree
of protection from market volatility.
The AARP Investment Program from Scudder -- Two Milestones to Commemorate
This year marks the 75th anniversary of the founding of Scudder, Stevens &
Clark, Inc. investment adviser for the AARP Mutual Funds. Over the years,
Scudder's investment perspective and dedication to research and fundamental
investment disciplines have helped Scudder become one of the largest and
most respected investment managers in the world. It was this reputation
that attracted AARP to Scudder ten years ago, another anniversary to
commemorate. The AARP Investment Program from Scudder was established in
accordance with specific criteria requiring a commitment to providing
value, delivering levels of superior service, and meeting high
communication standards. AARP works closely with Scudder to insure the
Program's high standards are met.
It is this shared commitment to quality on the part of AARP and
Scudder that has attracted growing numbers of AARP members to the Program.
As of September 30, 1994, there were more than 720,000 investors
participating in the Program and nearly $11.7 billion in assets under
management.
With each new shareholder comes a different need. That is why the
Program prides itself on the introduction of new services and features that
will help you meet those needs. In addition to the services outlined on the
back page of this Report, which are constantly being reviewed and enhanced,
the Program has introduced the following over the past year.
* The AARP Balanced Stock and Bond Fund
After considerable research, we determined that many AARP members were
interested in a conservatively managed Fund that could offer them a
mix of both stocks and bonds. Therefore, we were pleased to offer our
newest AARP Mutual Fund to shareholders on February 1, 1994 -- the
AARP Balanced Stock and Bond Fund. You have read about this Fund
through the current Prospectus, the Mid-Year Report, and other
communications. In addition, you can find information about it
beginning on page 36 of this Report.
* Helpful Publications
We published two additional educational Guides during the year on
subjects that AARP members have told us are important to them. "State
Tax Laws: A Guide For Investors Aged 50 And Over" provides breakdowns
of each state's tax structure. Also included is a glossary that
briefly explains some of the more technical tax terms you will
encounter, as well as easy-to-read grids that summarize the
breakdowns. "Managing Your Money In Retirement: A Guide For Investors
Aged 50 And Over" covers topics that may affect your finances during
retirement, and is a companion piece to "Planning For Retirement : A
Guide For Investors Aged 50 And Over." For your free copy of these
Guides please call us at 1-800-253-2277.
* Funds Centers Now Available to AARP Members
Local offices in Boston, Boca Raton, and Scottsdale are now available
to assist AARP members who have investment questions. These Funds
Centers provide face-to-face assistance from knowledgeable AARP Mutual
Fund Representatives who are specially trained to understand your
investment objectives. So if you need help in allocating your assets,
have questions about planning for retirement, or want to learn more
about the AARP Mutual Funds, stop in and see us. For directions,
please call us at 1-800-253-2277.
Scudder Funds Center
4141 North Scottsdale Road,
Suite 105 (Located in the Scottsdale Financial Center II)
Scottsdale, Arizona 85251
Monday -- Friday 8:30 a.m. to 5:00 p.m.
Scudder Funds Center
4400 Federal Highway, Suite #130
Boca Raton, Fl 33431
Monday -- Friday, 8:00 a.m. to 5:00 p.m.
Scudder Funds Center
166 Federal Street
Boston, Ma 02110
Monday -- Friday, 8:00 a.m. to 6:00 p.m.
I'd like to close by reiterating that we are aware of how difficult the
past year has been for investors. However, we would also like to stress
that while most of the AARP Mutual Funds were negatively impacted by this
historically unusual environment, all of the Funds adhered to their
individual objectives. As you read through the interviews with the
portfolio management teams, pay close attention to their investment
strategies. You should feel comfortable that while returns -- as compared
to past history -- may not have been favorable, the AARP Mutual Funds
remained prudently managed with the AARP members' investment objectives in
mind.
Sincerely,
/s/Cuyler W. Findlay
Cuyler W. Findlay
Chairman,
AARP Investment Program from Scudder
September 30, 1994
Understanding Mutual Fund Investment Performance:
The Elements of Return and Risk
Between the late 1980s and the end of 1993, investing in stocks and bonds
seemed like an easy decision. With few exceptions, the markets went up for
most of that five year period. Then came 1994, and we were all reminded
that the markets go down as well as up. It is a good time, therefore, to
take another look at mutual fund performance, which involves the elements
of return and risk. You can't consider one without the other.
By design, a mutual fund -- an investment company that pools money
invested by many individuals with a "mutual" investment objective -- can be
less risky than investing in individual securities. The reason is that most
mutual funds are diversified, or invested in numerous securities. If one
security fares poorly, then only a portion of the fund will be adversely
affected. Keep in mind, however, that it is not the number of securities in
a mutual fund that reduces risk, but the selection of those securities. In
addition, the securities must be in line with the fund's objectives.
Another way a mutual fund can help reduce risk is through professional
investment management. Most of us don't have the time or expertise to
continually manage a portfolio of stocks and bonds on our own. In contrast,
a portfolio management team is spending every day on the investment process-
- -sifting through corporate annual reports, interviewing corporate
management, and making buy and sell decisions in a reasoned and researched
way. But even with professional management and diversification, a mutual
fund investment will fluctuate in value.
Let us look at the two factors that make up a mutual fund's
performance: how much it returns, and how risky it is.
EVALUATING A MUTUAL FUND:
Its Return
To evaluate the return of a mutual fund, you must look at the income
(dividends) the fund distributes, any increases or decreases in the value
of fund shares (also referred to as market price changes), plus any capital
gains paid to shareholders (distributions of capital gains realized by the
fund). The combination of these components comprise a fund's total return.
It is important not to confuse total return with yield. The yield of a
fund reflects the approximate dividend paid divided by the current market
share price, also known as net asset value, or the market worth of one
share of a mutual fund.
Income returns are generally the most important feature of bond funds,
which are typically designed to produce more current income. Growth and
income funds and balanced funds also may pursue dividend income from stocks
as well as interest income from bonds. Income generally represents the
investment performance of money market funds.
Increases or decreases in the value of fund shares often account for
most of the investment performance of growth funds, which generally invest
in stocks for their long-term appreciation potential. Bond fund performance
also reflects changes in share price. Money market funds are designed to
produce income returns and a stable share price.
When total return figures for a mutual fund are calculated, it is
assumed that all income and capital gains have been reinvested, rather than
taken as cash throughout the life of the investment. Keep in mind that the
total return that you receive on a particular investment may be different
from the total return figures that appear in advertisements, newsletters,
and other publications. That is because the time period used in these
publications may differ from the period of time you've owned your shares.
Returns can be calculated on a cumulative basis or an average
annualized return basis. A fund's cumulative total return will tell you how
much a dollar invested on a particular date would be worth at the end of
the period, assuming that distributions are reinvested. For example, from
9/30/89 to 9/30/94, the Standard & Poor's 500 Stock Price Index (S&P 500)
posted a cumulative total return of 54.89%. (A $1.00 investment on 9/30/89
would have been worth $1.55 on 9/30/94.)
Average annualized total return is a percentage that represents the
average annual compounded rate of return over a specific time period. The
S&P 500's 54.89% 5-year cumulative return, for example, translates into an
average annualized total return of 9.14%.
Compounding has an important effect on investment returns over time.
Compounding is the process whereby investment returns accumulate value over
time not only on the money you originally invested, but also on returns
made during the life of an investment. With compounding, $1,000 earning 7%
annually will be worth $1,070 after one year, $1,144.90 after two years
($1,070 times 1.07), and $1,225.04 after three years ($1,144.90 times
1.07), assuming you leave all your money invested. Whether you choose to
reinvest your dividends depends on your need for current income.
Comparing Your Fund's Return to a Benchmark
Typically, a fund's average annualized total return will be compared to
some unmanaged benchmark index. For stocks, the benchmarks include the Dow
Jones Industrial Average (the Dow) or the S&P 500. The Dow, the oldest and
most widely-quoted of all market indicators, is comprised of 30 large well-
known corporations such as American Express, AT&T and IBM. The Dow, which
represents about 15% of the market value of stocks listed on the New York
Stock Exchange, is calculated based on the closing prices of the 30
component stocks on any given day. The S&P 500 is a broader measure of
stock performance. It includes 500 stocks traded on the over-the-counter
market and listed exchanges, and represents approximately 16% of the stocks
listed on the New York Stock Exchange and 74% of New York Stock Exchange
market value.
For bonds, standard benchmarks include the 30-Year U.S. Treasury Bond,
which is the main yardstick against which most long-term bond prices and
interest rates are measured; the Lehman Brothers Aggregate Bond Index,
which reflects the entire market for investment-grade treasury, corporate,
and mortgage-backed bonds with maturities longer than one year; and the
Lehman Brothers Municipal Bond Index, which is representative of investment
grade municipal bonds of maturities longer than one year.
As you compare a fund's performance to a benchmark, keep in mind that
indices such as the S&P 500 or the Dow are not managed and therefore have
no management or operating expenses associated with them. (These are
expenses that are incurred by all mutual funds to pay costs associated with
the fund's management and operations, i.e., investment management,
telephone service, legal fees, auditors, etc.) Total operating expenses
typically range from 0.25% to 2.5% of the fund's average net assets, and
affect a fund's total return. You can find a fund's operating expenses and
other fees in both the financial highlights table of the annual report and
in the prospectus.
How to Interpret Mutual Fund Rankings and Ratings
Most of the major business publications, such as Barrons, Business Week,
Forbes, Fortune, Kiplinger's, and Money, show rankings and/or ratings of
mutual fund performance on a periodic basis. There are also Morningstar
Inc. and Lipper Analytical Services Inc., two widely recognized independent
rating services. Each publication and rating service uses different
approaches and calculations to evaluate fund performance.
With so many evaluations available, you should note the distinction
between a ranking and a rating, especially since these figures are
prominently featured in fund advertising and sales literature. A ranking is
a nonjudgmental mathematical process in which similar funds are categorized
based on their performance. You will see Lipper ranking mutual funds within
particular categories such as GNMA funds, Growth and Income funds, etc.
Ratings, based on a mathematical evaluation that involves return,
risk, and other possible factors, emphasize some fund characteristics over
others. For example, Morningstar rates funds according to total returns and
a risk factor that reflects fund performance relative to three-month U.S.
Treasury Bill returns.
Considering one ranking or rating of your mutual fund, therefore,
might not provide a complete picture of a mutual fund's performance. Funds
perform differently in different investment environments, and every fund's
absolute and relative performance changes depending on which time period is
used as a frame of reference. Very few funds performed well during the
first half of 1994, when the total return of the S&P 500 was negative 3.4%
and the total return of the Lehman Brothers Aggregate Bond Index was
negative 3.9%. Performance ratings and rankings, therefore, are just one
piece of the puzzle in considering a fund.
Putting Performance In Historical Context
Part of the investment decision-making process is understanding how
different types of securities have performed over long periods of time.
This may help you ride through short-term fluctuations in the value of your
mutual fund. Historically, stocks, as measured by the S&P 500, produced an
average annualized return of 12.1% between 1945 and 1993, which assumes
reinvestment of all dividends and capital gains. Bonds, as measured by the
Salomon Brothers High-Grade Long-Term Corporate Bond Total Rate of Return
Index, produced an average annualized total return of 5.6% -- much less
than stocks, but typically with much less volatility. In contrast, three-
month U.S. Treasury Bills produced a total return of 4.7%, and inflation
averaged 4.4% during this time period.
As this information indicates, you are generally better off if you are
able to maintain a long-term view and are willing to accept the inevitable
fluctuations that go along with investing.
EVALUATING A MUTUAL FUND:
Its Risk
When evaluating the performance of a mutual fund, it is not enough to just
look at the return. Measuring performance means you must look at return and
risk together. But what do we mean by risk? For the purposes of this
discussion, risk can be defined as the possibility of suffering degrees of
loss. As in all aspects of life, there is no way to completely eliminate
risk from your financial affairs. Put your money under your pillow? The
house could burn down. Put the money in the bank? True, accounts up to
$100,000 are federally insured. But "playing it safe" like this actually
exposes you to the risk that your purchasing power will be eroded by
inflation. Consider the purchasing power of the U.S. dollar since 1970. A
dollar in 1970 would only buy 25 cents worth of goods today. In 1994,
inflation has been generally about 3%, as has the return from some insured,
fixed-rate Certificates of Deposit (CDs). If you pay income taxes, your CD
returns would have been closer to 2%. You are not keeping up with
inflation. To put it another way, putting your money in the bank can leave
you vulnerable to purchasing power risk.
Price risk is the possibility that your investment will fluctuate up
and down in value, which poses a risk to your principal. If you want to
avoid price risk, you'll either put your money in an insured, fixed-rate
savings account or invest in a money market fund where there is low risk
that the value of your principal will vary from year to year. The only way
your account will grow, however, is by reinvesting the relatively low
interest or dividends you would have received from CDs or money market
funds.
On the other hand, stock and bond funds involve varying levels of
price risk. Their share prices can fluctuate significantly, depending upon
the types of securities in the portfolio. However, the value of stock funds
has generally risen over the long term, and bonds have returned significant
value over time, primarily through the income they generate. Price risk is
less and less relevant as your time horizon expands. But if you need the
money in the short term, then the risk of price volatility can be
significant. Typically, mutual funds that invest in smaller companies or
emerging markets such as the Pacific Basin and Latin America tend to
fluctuate more in price than do investments in established companies based
in the United States.
If you invest in bonds, you should also be concerned about credit
risk. This refers to a bond issuer's inability, or perceived inability, to
honor its obligations to repay its debts. A portfolio manager relies on
ratings agencies such as Standard & Poor's (S&P) or Moody's Investors
Service when purchasing bonds, although some managers have the ability to
rate bonds independently. The bonds of companies that receive a below
"investment grade" rating are generally referred to as "junk" bonds. They
usually pay higher interest than investment grade bonds to compensate for
their increased credit risk. As with corporate bonds, there is a spectrum
of credit risk for municipal bonds, since the credit risk for these bonds
is a function of the financial and political stability of the issuing
municipality. For U.S. Treasury bonds, there is almost no risk because the
federal government guarantees their payment.
There are, of course, other types of risk involved with different
investments. We will look at the risks of investing in money market funds,
bond funds, and stock funds in more detail in the sections that follow.
A Word about Derivatives
Many of you have heard or read about derivatives, and how they are used by
financial organizations including mutual funds. Because much has been
written about them, it is worthwhile to take a brief look at what they are
and whether they pose additional risks to your mutual fund investment.
The term "derivative" is commonly defined as a financial instrument
whose value is "derived" from, or based on, an underlying security, asset,
or index. Derivatives began in the 19th century as risk-transfer contracts
that provided protection against price changes in specific agricultural
products and livestock.
"Derivatives" cover a wide variety of instruments. Options, futures,
and forward contracts are derivative contracts that originated with the
commodities markets. The value of these derivatives goes up and down as the
value of their underlying assets goes up and down. There are also
derivative securities that derive their value from a security, index, or
asset. An example of a derivative security is a structured note. In recent
years, exotic and specialized derivatives such as "synthetic securities"
have been introduced. The prices of these instruments may be based on
fairly common investments including stocks and government bonds, but they
can be reformulated in such a way as to make them have different levels of
risk.
Derivatives are subject to the same fundamental relationship between
risk and potential return as are all investments. The higher the risk of a
derivative, the greater its potential return. The lower the risk of the
derivative, the lower its potential return. When used by a mutual fund,
derivatives can reduce or increase risk in the same way that any security
in the portfolio can. Derivatives are often used to help manage risk and to
protect against the potential of large losses or to help increase your
potential returns, although there is no assurance that this will indeed
occur. Much depends on how they are used in the context of an overall fund
portfolio -- but a mutual fund's investment in them should be consistent
with its investment strategy. (For a more detailed discussion of
derivatives, please refer to the October 1994 issue of Financial Focus.)
What is Your Tolerance for Risk?
Evaluating the risk of an investment involves understanding your own
tolerance for risk. Do you know what it will take to make you feel secure,
let you sleep at night, and not worry about tomorrow? With every
investment, from the safest U.S. Treasury issue to the most speculative
stock, there is a fundamental relationship between risk and potential
return. If you choose less risky investments you must expect a lower
return. To understand your risk tolerance, you may want to make a list of
your short- and long-term needs and understand what your investment time
horizon is (the period of time over which you plan to meet your investment
goals). You may also want to consider your current employment situation (a
retiree is likely to be more conservative than someone still working) and
your comfort level in watching the value of your investment change.
Measuring the Risk of a Mutual Fund
Of course, even understanding the risk/ return relationship of an
investment may not ease the uncertainty of share price fluctuation in a
mutual fund. You want to know how to measure the risks of an investment
before you invest. Mutual funds are required to mail a prospectus to you
that explains the risks of purchasing shares in the fund. Many mutual fund
companies have made great strides to make sure that these documents are
written simply. Even with the disclosures, however, risk is very difficult
to quantify. Unlike return, risk lacks a benchmark against which to
establish public understanding.
A standardized way of measuring risk-adjusted returns -- rates of
return adjusted for the amount of risk taken -- is becoming more and more
important to both individual investors and portfolio managers. Risk is
measured by portfolio managers in many ways, such as duration (see page
17), Beta (see page 20), and standard deviation (see page 20). But bear in
mind that each risk measure has its shortcomings because there is no one
complete way to measure risk. For the individual investor, realizing that a
fund's return alone does not give you the whole performance picture is the
appropriate starting point. Understanding where a fund stands in the
risk/return spectrum -- money funds on one end, aggressive growth funds on
the other -- is also critical. And, finally, understanding the usefulness
of risk-management techniques discussed next should be an ongoing practice
through the life of an investment.
Managing Risk through Diversification and Dollar Cost Averaging
A way to help manage the price risk of a mutual fund investment -- and help
you sleep at night -- is to understand some important risk management
techniques. The first one is diversification. As mentioned in the
beginning, mutual fund assets are typically diversified, or spread, among
numerous securities. This diversification provides you with the opportunity
to participate in the earning potential of many diverse securities. It can
also help to reduce risk, because if one security fares poorly, it is often
offset by another security that was not affected.
By spreading your assets among several types of mutual funds, you add
further diversification to your investments because different types of
funds are likely to perform differently under similar economic conditions.
Another way that you can help reduce your risk is by employing the
strategy of dollar cost averaging. By investing a fixed amount of money at
regular intervals, you buy more shares when prices are low and fewer shares
when prices are high. Using this systematic approach, you have a much
better chance of buying shares at a low average cost than by trying to
determine if the market is at its high or low. Remember, though, that while
dollar cost averaging is generally viewed as a prudent way to help reduce
the effects of share price fluctuation, it does not ensure a profit and
does not protect against a loss in declining markets. Such a plan involves
continuous investment in securities regardless of fluctuating share price
levels. In addition, you should consider your tolerance to continue
purchasing through periods of low price levels.
EVALUATING A MUTUAL FUND:
Putting Risk and Return Together
As we have seen in this report, it is impossible to completely eliminate
risk when investing your money. However, the stock and bond markets have
been remarkably resilient over the long term. Many people do better when
they commit to a long-term horizon and diversify their portfolio across
many securities.
The following sections take a closer look at the returns and risks of
money funds, bond funds, and stock funds.
Evaluating Returns and Risks of Money Funds
Many of you first invested in mutual funds in the late 1970s when you
bought money market funds. At that time, the interest rates that banks and
thrifts could pay were limited by federal regulations. Money market funds
paid higher returns by pooling investors' money and purchasing higher-
yielding money market instruments that most individuals could not buy on
their own, such as Treasury bills, negotiable CDs (those limited to
$100,000), repurchase agreements, banker's acceptances, and commercial
paper. Today, of course, money market funds aren't yielding 17%, as they
were in 1981. And most people don't view money market funds as the mainstay
of their investment plan when the average fund may have a yield of about
4%. The typical investor uses a money market fund as a stable holding
place, or for short-term expenses. Nevertheless, you should still
understand how the returns and risks of money market funds work.
Money Market Returns: Income Only
Unlike bond and stock funds, money market funds offer just one return:
income. Because money funds seek to maintain a constant share price value
of $1.00 per share, there is generally no capital gain or loss component.
The income (generally referred to as yield) from a money market fund is
reflected by the interest paid on the securities in which the fund invests.
A money market fund will generally quote its most recent 7-day yield, which
provides a current picture of the fund's returns.
Typically, one money market fund won't pay much more than another,
because the securities in which they invest are generally similar in yield
and duration. Some differences that might exist are often explained
primarily by the expense ratios -- total expenses (e.g., management fees
and operating expenses) divided by average assets in the fund. A fund's
prospectus reports the money market fund's operating, portfolio management,
and marketing expenses if a fund charges a 12b-1 fee. A 12b-1 fee pays the
marketing cost of attracting future shareholders. (Many mutual funds do not
charge 12b-1 fees.) Because money market fund yields are relatively low,
expenses can significantly affect the fund's return.
What are the Risks of Money Funds?
While money funds strive to maintain a constant share price value of $1.00
per share, which means they typically have no price fluctuation, there can
be no assurance that the stable share price value will be maintained. In
addition, your investments are not insured or guaranteed by the U.S.
government, as are bank CDs up to $100,000. The other risks of money funds
are spelled out below:
* Purchasing Power Risk
If all you did was invest in money market funds when short-term
interest rates are low, as they have been in the recent past, then you
probably wouldn't keep up with inflation. Even with a modest 3%
inflation rate, the inflation-adjusted after-tax return of a taxable
money market fund yielding 3% is negative 1%, assuming a combined
federal and state income tax rate of 33%. The same is true if you keep
your money in a CD -- although at least bank CDs are available with
longer-term maturities that can pay higher interest rates. Money
market funds have a maximum average maturity of 90 days, and so the
yield will be modest when interest rates are low.
* Credit Risk
As with any debt security, there is always a chance of default.
However, money market fund managers purchase high-quality short-term
investments that are considered to have very little credit risk. In
addition, the fund manager typically purchases dozens of securities to
help reduce the risk to the fund from any default.
* Income Risk
This is the risk you face as an investor that the income you receive
from a money fund will decline should interest rates go down. When
interest rates dropped in the early 1990s, holders of money market
funds were not happy (although people taking out loans or mortgages
were). Those depending upon money market funds for their income
expenses found that the return from their funds dropped sharply. When
you invest in a money market fund, you take the risk that when
interest rates fall, your income will also decline.
Some Questions to Ask Yourself about Investing in a Money Market Fund
To judge the performance -- return and risk levels -- of a particular money
market mutual fund, ask yourself these questions, which should be answered
in the annual or mid-year reports, or the prospectus:
1. What is the quality of the securities in the fund?
2. How did the fund perform over the last year, five years, and since
inception?
3. What is the risk/return relationship of the fund? (It should be low
risk/low return.)
4. What has been the fund's investment strategy over the past year?
5. What does the portfolio manager say about the direction of interest
rates and the fund's performance?
Evaluating Returns and Risks of Bond Funds
Most people choose to invest in bonds to earn a steady stream of income.
Since 1945, the total return of fixed-income securities has been less than
half the total returns of stocks. However, bonds have had much less
fluctuation in their value than stocks. In addition, there have been
periods when the total returns of bonds have been very competitive with the
total returns of stocks.
There are many types of bond funds. Each offers different risks and
opportunities for return. They include U.S. Government securities funds,
Government National Mortgage Association (GNMA) funds, corporate bond
funds, municipal bond funds, international bond funds, and high-yield (also
known as junk) bond funds.
What are the Risks of Bond Funds?
Investors seeking income should bear in mind that bond funds have more risk
than money market funds, insured, fixed-rate CDs, and other savings
vehicles, due to the following risks:
* Interest Rate Risk
Interest rate risk is the decline in the principal value of your bond
investment as interest rates rise. As you may know, when interest
rates rise, bond prices fall. When interest rates fall, bond prices
rise. That relationship holds for almost all types of bonds. Between
1989 and 1993, interest rates fell steadily and bond prices boomed. In
1994, the reverse happened and bonds declined in value.
* Credit Risk
Credit risk refers to a bond issuer's inability or perceived inability
to repay its debt. Within a bond fund, a bond issuer's inability to
honor its obligations could cause the fund's shares to lose value.
However, because the fund diversifies its investments among different
bonds from an array of issuers, the effect of one downgrade in rating
(or even default) on the share price of the entire fund is not nearly
as great as it would be for an investor who had only invested in a few
bonds.
There is no credit risk associated with U.S. Treasury securities.
Mortgage-backed securities, except those backed by the full faith and
credit of the U.S. government such as GNMAs, do have some credit risk.
Municipal, or tax-free, bonds -- IOUs issued by state and local
governments to build hospitals, schools, sewer systems, etc. -- have
varying degrees of risk, and have defaulted on rare occasions. (They
should not be confused with bonds issued by the federal government.)
Generally, corporate bonds also have varying degrees of credit risk,
and can and do default -- particularly high-yield bonds. International
bonds are only as strong as the government or corporation that issues
them.
Many bonds that are not guaranteed by the federal government may be
rated by S&P and Moody's Investor Service. Credit risk can be reduced
substantially by a well-diversified portfolio. Some bond funds invest
in more than one hundred issues to help reduce the damage that would
be done if a single security were to be downgraded or default. Some
mutual funds employ analysts who research each and every bond issuer
that might be held in a portfolio in an attempt to make sure its
financial status remains strong.
* Call Risk
Call risk is the risk that a bond issuer will prematurely redeem its
high-yielding debt before its maturity date. Premature redemption of a
bond through a call feature tends to occur after a period of declining
interest rates. If a bond was issued when interest rates were high and
rates subsequently decline, it may be advantageous for the issuer to
sell new bonds at the lower interest rate. The proceeds from the new
lower-rate bonds can then be used to redeem the older higher-rate
bonds. Of course, premature redemption of debt generally hurts the
bondholders who lose the higher yields. To help protect a fund against
call risk, many portfolio managers may buy non-callable securities.
* Currency Risk
Also known as foreign-exchange rate risk, this is the risk to a U.S.
investor who purchases a bond in which the issuer promises to make
payments in a foreign currency. The investor does not know what the
resulting cash flow of the bond will be in U.S. dollars because it
depends on the foreign exchange rate at the time the cash flow is
received.
International bond funds are a relatively new category for the
individual investor. It would be almost impossible for individual
investors to buy foreign bonds except through investment in a mutual
fund. In many cases, foreign governments or corporations have been
willing to pay much higher interest rates in return for your
investment capital. In some cases, the bond issuers have to pay more
because their track record is short. In other cases, there is a risk
that while the foreign country is holding your assets, the U.S. dollar
will appreciate in value relative to the local currency. Once again,
sophisticated money managers employed by mutual fund companies are
knowledgeable about how to deal with such currency risk, and they can
help insulate the portfolio to some extent by using sophisticated
foreign currency "hedging" techniques.
* Inflation Risk
All securities are subject to inflation risk, but it is often felt
hardest by bonds, with their fixed income streams. The reason is that
interest and principal payments are made in the future when the
purchasing power of the dollar is likely to diminish. Part of the
interest payment from a fixed income security is compensation for
inflation risk. The amount in excess of inflation is called the real
interest rate. For example, if a U.S. Treasury security yields 6% and
inflation is 2.5%, then the real interest rate is 3.5%.
* Reinvestment Risk
Bond fund investors, like those in money funds, also face the
possibility that interest rates will fall and that money will have to
be reinvested at lower interest rates (although the principal value
should have appreciated in a lower interest rate environment.) For
funds invested in bonds with longer-term maturities, the impact on
income should be reduced.
Can You Measure the Risk of Bond Funds?
You will often see a bond fund's interest rate risk measured by the average
maturity of the holdings in the portfolio. Maturity is simply the number of
years until a bond pays back its principal. For most bond funds, the longer
the maturity, the greater the movement in the value of the bonds as
interest rates change. The problems with considering maturity as a measure
of a bond fund's interest rate risk, however, is that it reflects only the
timing of the payment of the bond's face value at maturity. For example, a
15-year 5% bond has the same maturity as a 15-year 8% bond. Yet to say that
their identical maturity means they have identical risk ignores the fact
that a larger portion of the 8% bond's return will be collected sooner
(through higher coupon payments) than in the case of the 5% bond.
For the individual investor, it is important to understand the concept
of "duration," which is a much better measure of interest rate risk because
it takes into account interest payments as well as the amount paid at
maturity. Duration measures how a bond fund may react to a 1 percentage
point change in interest rates. For example, if a bond has a duration of 4
years, it should lose about 4% of its value if interest rates rise by 1
percentage point (6.00% rising to 7.00%, for example). Similarly, if you
take half of a fund's duration you can get a good idea of how that bond
fund will react if rates change by half of a percentage point. For
instance, a bond fund with a duration of 4 years will lose roughly 2% of
its value if rates climb half of a percentage point and gain 2% of its
value if interest rates fall by half of a percentage point.
Before looking at the duration of a bond fund, of course, it is
important to identify your goals and choose a category of bond funds that
could help you meet those goals. Once you have identified the category, you
may use duration as follows to decide which fund within the category is
right for you.
* Investors seeking greater stability should look for a bond fund with
lower duration. A lower duration is typical of bond funds whose
portfolios invest in short-term securities.
* Investors looking for higher returns and who are comfortable with
greater fluctuation should look for a high duration figure. A higher
duration is typical of bond funds investing in long-term, generally
more fluctuating securities.
Though duration is a good measure of interest rate risk, it has its
limitations. Duration assumes that both short-term and long-term interest
rates rise and fall by the same amount, which is not always the case.
Duration does not consider credit, call, and currency risks. Also, duration
changes as interest rates change, so you should check your fund's duration
periodically.
Some Questions to Ask Yourself about Investing in a Bond Fund
To judge the performance -- the return and risk levels -- of a bond fund,
ask yourself these questions, which should be answered in the fund's annual
or mid-year reports, or the prospectus:
1. How has the fund performed during the past year, five years, and since
inception?
2. What has been the investment strategy over the past year?
3. What is the risk/return relationship of the fund? (Government Bond and
GNMA funds generally have low-moderate risk and return; corporate,
international, and tax-exempt bond funds generally have moderate risk
and return; high-yield bond funds have high risk with the potential
for high returns.)
4. What are the fund's quality standards?
5. How is the fund managed for risk?
6. How much fluctuation has the fund experienced? How much fluctuation is
it meant to have based on its objective?
Evaluating Returns and Risks of Stock Funds
In contrast to investors in bonds, who are primarily looking for income,
most investors in stocks are looking for capital growth as well as
dividends. Mutual funds investing in stocks are classified according to the
degree to which they are seeking growth compared to dividends. For example,
funds that invest in electric utilities would be classified as equity
income funds because utilities pay high dividends, and their capital
appreciation potential is more limited. At the other end of the spectrum
are funds that invest in new companies or emerging markets such as Latin
American equities. These funds are not expected to pay sizable dividends.
Rather, investors hope that the investment in the funds will appreciate in
value significantly. The greater the growth expectations, the greater the
risks of revaluation or earnings disappointments.
As discussed on page 9, the long-term returns from the stock market
have typically exceeded the rate of inflation and the returns from money
market investments and bonds by a wide margin (depending on the time period
chosen), but the short-term volatility has been much greater as well.
What are the Risks of Stock Funds?
As expected, the potential high returns of stock funds are accompanied by
significant risks such as the following:
* Security Risk
A fund that only invests in "blue chip" stocks -- stocks issued by
large, well-established companies that have a history of paying
dividends consistently regardless of economic conditions -- generally
does not run the risk of a company in the portfolio falling on hard
times. But occasionally, it does happen. IBM's stock fell from about
$150 to $50 in a few years when the large computer maker was unable to
make a rapid transition away from large mainframe machines that were
no longer in large demand. More typically, mutual funds worry about
securities of companies that don't have a long track record of
success. Funds that invest in "small capitalization" companies --
those companies with a market capitalization, or total value, of less
than $500 million -- have to keep a close watch on that type of
company's management, financial statements, and other factors.
* Sector Risk
This is the risk that stocks of certain industries, investment styles,
countries, etc. will go out of favor from time to time. Funds that
invest in a broad range of categories, however, are less likely to be
adversely affected by sector risk. Certain mutual funds that invest in
specific industries have the most sector risk. Some investors buy
sector funds instead of buying individual stocks in that industry. For
example, they might buy a pharmaceutical industry sector fund rather
than buying Merck stock because they believe that the industry is
going to do well, but they're less sure about their ability to select
an individual company. However, a sector fund can fluctuate
significantly, as can funds that invest in a single country or region.
* Market Risk
When the entire stock market is declining in value, it's very
difficult for a stock fund to show a positive return. Funds that
emphasize aggressive growth and risk tend to fall even further than
the average, whereas funds that emphasize dividend income tend to be
more stable.
* Currency Risk
Currency risk, also known as foreign exchange risk (see pages 16 and
17 for a more detailed explanation), is a consideration not only for
stock funds invested off shore but for domestic funds that have
holdings in international companies.
Can You Measure the Risk of Growth Funds?
There are a few ways to measure the risk of mutual funds that invest in
stocks, although these techniques are complex. They include the following:
* The Price-Earnings Ratio
The price-earnings ratio, also known as the P/E ratio, equals the
price of a stock divided by its annual earnings per share (the amount
of money a company earns divided by the number of shares outstanding).
Let's say a company earns $1 per share and its stock price is $15. The
P/E ratio of the company is therefore 15. The P/E ratio of a fund is
essentially the weighted average of the P/E ratios of each stock in
the portfolio. Stocks with earnings growth tend to sell at a higher
P/E ratio than the market as a whole, as investors are willing to pay
more for growing earnings than they would for relatively flat
earnings. The higher the P/E ratio of the portfolio, the more risky
the fund may be because earnings disappointment often causes investors
to sell.
* Beta & Standard Deviation
Beta measures a stock's volatility -- or a fund's volatility -- in
relation to the market as a whole. A fund that buys blue chip stocks
will probably have a Beta close to one -- because its performance will
be similar to that of the S & P 500. A fund that invests in new,
smaller companies will probably have a Beta greater than one, since
these securities have greater fluctuations in share price. Funds that
don't move with the market averages are considered less risky and have
Betas less than one. Interestingly, international funds have low Betas
because they don't always move in concert with the U.S. stock market.
In that one measure of risk, international funds may help lower the
risk of a diversified portfolio.
Standard deviation is a measure of the volatility of past performance,
and may be an indicator of the range of possible future performance.
The standard deviation of performance can be calculated for each
security and for the portfolio as a whole. The greater the deviation,
the greater the risk. Simply put, standard deviation measures a fund's
consistency. Funds with high standard deviations have performed more
erratically in the past.
You should be able to find out a fund's Beta or standard deviation by
calling your mutual fund company directly.
Some Questions to Ask Yourself about Investing in a Stock Fund
To judge the performance -- risk and return levels -- of your stock fund,
ask yourself the following questions, which should be answered in the
fund's annual or mid-year reports, or the prospectus:
1. How has the fund performed over the past year, five years, and since
inception?
2. What are the largest sectors in the portfolio?
3. What has been the investment strategy over the past year?
4. How much fluctuation has the fund experienced? How much fluctuation is
it expected to have?
5. How is the fund managed for risk?
6. How is the fund expected to perform over the coming year?
AARP Fund Reports
The following pages contain a summary of each Fund in the AARP Investment
Program from Scudder. Each section contains a description of the Fund's
investment objective and an interview with the portfolio management team.
Also included are the one-year total return figures, five-year total return
figures, cumulative total return figures, and returns since inception.
Because a one-year total return could be high or low depending on market
conditions over a 12-month period, it is useful to have the perspective of
the five-year returns and returns since inception, since they represent a
longer investment time frame. Within each Fund description (except for the
AARP money funds), one-year total return is broken down into two
components: distribution of income and capital change. Distribution of
income is defined as reinvested income dividends. Capital change is defined
as the change in the price per share including any reinvested capital gains
distributions.
You will also note that all of the AARP Mutual Funds, except the money
funds, have been compared to market indices. We are providing these
comparisons to comply with the Securities and Exchange Commission's (SEC)
disclosure requirements. Under these requirements, all mutual funds are
required to compare their performance over the past ten years (or the
period of existence, if shorter) to that of a broad-based securities market
index.
It is important to note, however, that these indices have limited
relevance to the performance of mutual funds. They are hypothetical and do
not reflect, for example, the deduction of any servicing, investment
management, or administration expenses.
Also, some of the AARP Mutual Funds are unique in the high quality of
their investment portfolios and the emphasis in some cases on seeking to
reduce share price fluctuation. This, in turn, has a significant impact on
performance. Therefore, when comparing an AARP Mutual Fund's performance
with that of a major market index, remember that any comparison may be of
limited value.
AARP High Quality Money Fund
At a Glance
Fund Overview
This high-quality Fund is designed to preserve your principal while you
earn money market returns. The AARP High Quality Money Fund has quality
standards high enough to have secured a AAAm rating from Standard & Poor's
(S&P)*, a leading national independent rating firm. The Fund seeks to
maintain a $1.00 share price, although there may be circumstances under
which this goal cannot be achieved. It is important to note that unlike
bank savings accounts, the Fund is not insured or guaranteed by the U.S.
Government and the yield of the Fund will fluctuate.
* The rating for the Fund is historical and is based on an analysis of
the portfolio's credit quality, market price exposure, and management.
For Whom the Fund is Designed
This Fund may be appropriate for investors who have short-term needs or who
do not want the risk of investing in stocks or bonds. These investors
include those seeking money market income to meet regular day-to-day needs,
those who need immediate access to their assets through free checkwriting,
and those who want to diversify their assets with an investment providing
safety and stability.
Q How has the Fund performed over the past year?
A As with all money funds, the performance of the AARP High Quality
Money Fund mirrored what happened to short-term interest rates. Short-
term interest rates, as measured by three-month U.S. Treasury Bills,
rose over the past six months due to actions by the Federal Reserve
Board (see Chairman's Letter). On September 30, 1993 short-term rates
were 3.00%; as of September 30, 1994 they were 4.67%. Reflecting this
trend, the Fund's 7-day net annualized yield as of September 30, 1994
was 3.94% up from 1.97% on September 30, 1993. The Fund's one year
total return was 2.84%, which is made up entirely of income. The five-
year cumulative total return was 24.95%; the five-year average
annualized total return was 4.56%; the cumulative total return since
inception on July 22, 1985 was 63.18%; and the average annualized
total return since inception was 5.47%. Of course, past performance is
not a guarantee of future results, and yield will fluctuate.
Q What has been the Fund's investment strategy?
A To help take advantage of rising interest rates, the Fund shortened
its average maturity to approximately 24 days, which is shorter than
the Fund's 55-day average maturity as of September 30, 1993. This gave
the Fund greater flexibility to capture higher yields. As of September
30, 1994, approximately 85% of the portfolio was invested in
securities with maturities of one month or less or in floating rate
instruments that reset in one month or less. The largest sector in
which the Fund was invested was in U.S. Government Agency floating
rate instruments. These securities allow the Fund to "float" with the
market as interest rates rise, thereby helping increase the Fund's
yield.
Q Why is the AARP High Quality Money Fund a good investment choice for
me?
A Most money funds are considered a good investment if you require
liquidity and stability of principal or if you need a place to put
assets over the short-term until you determine your longer term goals.
In addition to these features, the AARP High Quality Money Fund has
quality standards high enough to have secured a AAAm rating from S&P.
This is the highest rating S&P issues a Fund of this type.
Q Do you use "derivatives"? If so, why?
A Floating rate instruments comprise 57% of the portfolio. We use these
floating rate instruments to boost the Fund's yield potential, without
exposing the Fund to undue risk. However, we do not use derivatives in
a speculative fashion, which was the cause of problems in other money
funds in recent months. (Please refer to page 11 for more information
on the topic of derivatives.)
Q What should I expect from the Fund in the upcoming year?
A We expect slow and modest upward movements in short-term interest
rates. If this occurs, the yield of the AARP High Quality Money Fund
should follow and move upward slightly as well. The Fund should remain
a good alternative for your short-term assets and if you are seeking
stability of principal.
AARP High Quality Tax Free Money Fund
At a Glance
Fund Overview
The AARP High Quality Tax Free Money Fund is designed to offer you
stability of principal, along with income free from federal taxes.1 The
quality of the Fund is high enough to be one of a few tax-free money funds
to secure a AAAm rating from Standard & Poor's (S&P), a leading national
independent rating firm.2 The AARP High Quality Tax Free Money Fund is
designed to maintain a $1.00 share price, although there may be
circumstances under which this goal cannot be achieved. It is important to
note that, unlike bank savings accounts, the Fund is not insured or
guaranteed by the U.S. Government and the yield will fluctuate.
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.
For Whom the Fund is Designed
This Fund may be appropriate for investors in high tax brackets who have
short-term investment needs or who do not want the risk of investing in
stocks or bonds. These investors include those seeking tax-free money
market income to meet regular day-to-day expenses, those needing immediate
access to their assets through free checkwriting, and those creating a
diversified portfolio who want a portion of their assets in a conservative
investment designed to offer safety and stability.
Q How has the Fund performed over the past year?
A Over the past year, the Fund provided shareholders with modest returns
and a rising yield. The Fund's 7-day net annualized yield as of
September 30, 1994 was 2.64%. This was up from its 2.03% yield on
September 30, 1993. The Fund's one year total return was 1.76%, which
is made up entirely of income. The five-year cumulative total return
was 19.32%; the five-year average annualized total return was 3.60%,
the cumulative total return since inception was 53.38%; and the
average annualized total return since inception on November 30, 1984
was 4.48%.
Please note that the five-year and since inception figures include the
performance of the AARP Insured Tax Free Short Term Fund, which
changed its name and objective to the AARP High Quality Tax Free Money
Fund on August 1, 1991. Of course, past performance is not a guarantee
of future results, and yield will fluctuate.
Q What has been the Fund's investment strategy?
A Earlier this year, we decreased the average maturity of the Fund,
which gave the Fund greater flexibility to capture higher yields.
Starting in July, we began to lengthen that average maturity again. As
of September 30, 1994 the average maturity of the Fund was 51 days.
The longer average maturity has provided shareholders with a more
competitive yield. We will not move longer than that because the
average maturity of the Fund cannot exceed 60 days if we are to
maintain the S&P's AAAm rating. This is the highest rating S&P issues
a Fund of this type.
Q Why is the AARP High Quality Tax Free Money Fund a good investment
choice for me?
A Most money funds are considered a good investment if you require
liquidity and stability of principal or if you need a place to put
assets over the short-term until you determine your longer term goals.
In addition, all securities in the AARP High Quality Tax Free Money
Fund are rated within the two highest quality ratings of at least one
of the three leading national independent rating firms: Fitch
Investors Service Inc., Moody's Investors Service Inc., or S&P. For
those funds rated by S&P, there are particular guidelines with which
each fund must comply in order to maintain its AAAm rating. For
further safety, within the universe of securities meeting the S&P
criteria, Scudder credit analysts approve only a small percentage of
that universe. Therefore, the number of securities that we have to
choose from is much smaller and in many cases of better quality than
other tax-free money funds.
Q Do you use "derivatives"? If so, why?
A Tender option bonds comprise approximately 2% of the portfolio. They
are designed to mimic existing securities in the short-term
marketplace. We do not use derivatives in a speculative fashion, which
was the cause of problems with other money funds. (Please refer to
page 11 for more information on the topic of derivatives.)
Q What should I expect from the Fund in the upcoming year?
A We expect slow and modest upward movements in short-term interest
rates. The short-term municipal market should follow that trend. We
will strive to keep the average maturity long in order to provide
shareholders with a slightly higher yield. Therefore, the Fund should
continue to provide shareholders in high tax brackets with an
alternative for their short-term investment needs.
AARP GNMA and U.S. Treasury Fund
At a Glance
Fund Overview
The AARP GNMA and U.S. Treasury Fund seeks to produce monthly income from a
conservatively managed high-quality portfolio. Although your principal is
not insured or guaranteed as it is with an insured fixed-rate Certificate
of Deposit (CD) or savings account, the Fund is designed to help reduce
share price fluctuation. While the securities in the Fund are guaranteed as
to the timely payment of principal and interest, the guarantee is not
related to the Fund's yield or share price, both of which will fluctuate
daily.
For Whom the Fund is Designed
The Fund is suitable for conservative investors who want high current
income and a degree of protection from bond market price risk. Investors
should be seeking to invest for the longer term and be comfortable with
fluctuation in the value of their principal and yield.
<TABLE>
<CAPTION>
GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS AARP GNMA AND U.S. LEHMAN BROTHERS
ENDED SEPTEMBER 30 TREASURY FUND++ MORTGAGE GNMA INDEX+
- ------------------- ------------------- --------------------
<S> <C> <C>
1 YEAR $9,810 $9,878
5 YEAR $14,348 $14,974
LIFE OF FUND* $22,228 $26,997
TOTAL RETURN
CUMULATIVE
- ----------
1 YEAR -1.90% -1.22%
5 YEAR 43.48% 49.74%
LIFE OF FUND* 122.28% 169.97%
AVERAGE ANNUAL
- --------------
1 YEAR -1.90% -1.22%
5 YEAR 7.49% 8.40%
LIFE OF FUND* 8.54% 10.63%
</TABLE>
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS ENDED SEPTEMBER 30++
(CHART DATA)
<TABLE>
<CAPTION>
AARP GNMA AND U.S. LEHMAN BROTHERS
TREASURY FUND MORTGAGE GNMA INDEX
------------------ -------------------
<S> <C> <C>
Nov-84 10,000 10,000
Sep-85 11,177 11,720
Sep-86 12,699 13,811
Sep-87 12,895 14,079
Sep-88 14,322 16,197
Sep-89 15,492 18,029
Sep-90 16,864 19,733
Sep-91 19,246 23,011
Sep-92 21,399 25,640
Sep-93 22,659 27,330
Sep-94 22,228 26,997
</TABLE>
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION
YEARLY PERIODS ENDED SEPTEMBER 30++
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE $14.95 $15.72 $16.19 $15.96 $14.73
INCOME DIVIDENDS $1.31 $1.26 $1.22 $1.15 $0.93
CAPITAL GAINS $ -- $ -- $ -- $ -- $ --
DISTRIBUTIONS
(TOTAL RETURN -
CHART DATA)
FUND RETURN 8.86% 14.12% 11.19% 5.89% -1.90%
INDEX RETURN 9.45% 16.61% 11.43% 6.59% -1.22%
<FN>
+ The unmanaged Lehman Brothers Mortgage GNMA Index is a market value
weighted measure of all fixed-rate securities backed by mortgage pools
of the GNMA. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not
reflect any fees or expenses.
++ All performance is historical and assumes reinvestment of all
dividends and capital gains and is not indicative of future results.
Investment return and principal value will fluctuate so an investor's
shares when redeemed may be worth more or less than when purchased.
* The Fund commenced operations on November 30, 1984.
</FN>
</TABLE>
Q How has the Fund performed over the past year?
A The period from October 1, 1993 through September 30, 1994 proved to
be a difficult time for bond investors. In fact, as stated in the
Chairman's letter, this was the worst 12-month period for long-term
bonds since 1950. Rising interest rates offered the challenge of
managing the Fund's dual objectives -- to moderate share price
fluctuation and provide the income that AARP members desire. Long-term
interest rates, as measured by the 30-year U.S. Treasury Bond, rose
from 6.02% to 7.81%. As a result, the value of the securities held by
the Fund declined. The Fund's one-year total return ended September
30, 1994 was -1.90%, with 5.81% representing distributions of income
and -7.71% representing capital change. As illustrated in the graph on
page 27, this total return underperformed the Lehman Brothers Mortgage
GNMA Index. However, it is important to note that the AARP GNMA and
U.S. Treasury Fund is managed in a more conservative fashion than many
other GNMA funds. In fact, the AARP GNMA and U.S. Treasury Fund was
cited in the September 30, 1994 issue of Morningstar, a leading
national independent investment rating organization, for its above-
average performance with below-average risk. Morningstar compares
performance and risk relative to other mutual funds in its class that
have been in existence for at least three years.1
In addition, the Fund continued to provide higher yields than insured
fixed-rate 12-month CDs. According to Banxquote, a weekly financial
rate reporter, the nationally averaged yield on the 12-month CD as of
September 30, 1994 was 3.50% -- significantly lower than the 6.76%
yield on the AARP GNMA and U.S. Treasury Fund. (Keep in mind that
yield does not take into consideration the share price fluctuation of
the Fund. The principal value of a CD remains constant.)
1. Morningstar's proprietary ratings reflect historical risk-
adjusted performance as of September 30, 1994. The ratings are
subject to change every month. Past performance is no guarantee
of future results.
Q What has been the Fund's investment strategy?
A Earlier this year our investment strategy became more cautious due to
the turbulence in the bond market. To help moderate share price
fluctuation, we moved a greater share of the Fund's assets into U.S.
Government securities with shorter maturities. By the middle of March,
we had invested approximately 40% of the Fund in cash equivalents and
U.S. Treasury securities with shorter maturities. As you may be aware,
it has been an ongoing strategy to keep a portion of the Fund's assets
in shorter maturity bonds to help dampen share price fluctuation. Of
course, we could have further attempted to reduce share price
fluctuation by moving even more of the Fund' assets into U.S. Treasury
securities. However, that would have further lowered the Fund's yield
and adversely impacted thousands of AARP Investment Program
shareholders who depend heavily on the monthly income the Fund
provides.
During the last few months, we moved some of the assets that were in
these shorter maturity investments into GNMA securities. This strategy
increased the yield of the Fund. As of September 30, 1994, 68% of the
portfolio was in GNMA securities with coupons ranging from 7% to 16%.
The remainder of the portfolio was in short-term U.S. Treasury
obligations and cash equivalents with maturities of one year or less.
Q Why did the share price of the Fund decline during this period?
A As with all bond funds, the AARP GNMA and U.S. Treasury Fund's share
price moves up and down because of the movement in interest rates. In
general, when interest rates rise, the value of bond mutual fund
shares falls, and vice versa. Therefore, the value of the Fund's
shares declined in recent months because interest rates rose
significantly. However, we feel that we adhered to our objective of
producing high current income while keeping the price of the Fund's
shares more stable than that of a potentially higher- yielding long-
term bond. In fact, during February and March -- which were two of the
most turbulent months for the bond market in recent years -- the
Fund's share price declined a little over 4%, while the price of the
30-year U.S. Treasury Bond declined over 8%.
Q Do you use "derivatives"? If so, why?
A On occasion, the Fund will use derivatives for bona fide hedging
purposes in a conservative fashion. For example, over the period
covered by this report, we invested in just one derivative contract, a
call option that represented less than 1% of the assets in the
portfolio. (Please refer to page 11 for information on the topic of
derivatives.)
Q What should I expect from the Fund in the upcoming year?
A We believe that the bond market will remain turbulent throughout the
year. We believe both short-term and long-term interest rates should
rise moderately. As the changing interest rate environment has
demonstrated, yields will inevitably fluctuate with changing economic
conditions, as will bond prices. If you are an investor interested in
income, you are generally best served if you stay invested through the
bond market's short-term ups and downs. We believe the long-term
outlook for the bond market remains promising.
AARP High Quality Bond Fund
At a Glance
Fund Overview
The AARP High Quality Bond Fund offers you the opportunity for higher
returns than you can expect from the AARP GNMA and U.S. Treasury Fund. In
pursuing higher returns, fluctuation in the value of your principal may
also be greater. The Fund has quality standards that are among the highest
of any general bond fund currently available, with at least 80% of the
portfolio invested in AAA-rated and AA-rated issues, and the other 20% in
nothing less than A-rated bonds.
For whom the Fund is Designed
The Fund is suitable for investors who want high returns with moderate risk
from a high-quality portfolio. Investors should be seeking to invest for
the longer term and be comfortable with fluctuation in the value of their
principal and yield.
<TABLE>
<CAPTION>
GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS AARP HIGH QUALITY LEHMAN BROTHERS
ENDED SEPTEMBER 30 BOND FUND++ AGGREGATE BOND INDEX+
- ------------------ ------------------ --------------------
<S> <C> <C>
1 YEAR $9,445 $9,678
5 YEAR $14,317 $14,945
LIFE OF FUND* $22,052 $26,126
TOTAL RETURN
CUMULATIVE
1 YEAR -5.55% -3.22%
5 YEAR 43.17% 49.45%
LIFE OF FUND* 120.52% 161.26%
AVERAGE ANNUAL
1 YEAR -5.55% -3.22%
5 YEAR 7.44% 8.36%
LIFE OF FUND* 8.45% 10.26%
</TABLE>
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS ENDED SEPTEMBER 30++
(CHART DATA)
<TABLE>
<CAPTION>
AARP HIGH QUALITY LEHMAN BROTHERS
BOND FUND AGGREGATE BOND INDEX
------------------ --------------------
<S> <C> <C>
Nov-84 10,000 10,000
Sep-85 10,940 11,498
Sep-86 12,428 13,830
Sep-87 12,417 13,867
Sep-88 13,954 15,711
Sep-89 15,403 17,481
Sep-90 16,206 18,803
Sep-91 18,707 21,810
Sep-92 20,870 24,547
Sep-93 23,349 26,996
Sep-94 22,052 26,126
</TABLE>
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION
YEARLY PERIODS ENDED SEPTEMBER 30++
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE $14.63 $15.71 $16.44 $17.19 $15.05
INCOME DIVIDENDS $1.17 $1.10 $1.03 $0.93 $0.85
CAPITAL GAINS $ -- $ -- $ -- $0.18 $0.38
DISTRIBUTIONS
(TOTAL RETURN -
CHART DATA)
FUND RETURN 5.21% 15.44% 11.56% 11.88% -5.55%
INDEX RETURN 7.56% 15.99% 12.55% 9.98% -3.22%
<FN>
+ The unmanaged Lehman Brothers Aggregate Bond Index is a market value
weighted measure of all 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 November 30, 1984.
</FN>
</TABLE>
Q How has the Fund performed over the past year?
A Like most bond funds during the period from October 1, 1993 through
September 30, 1994, the AARP High Quality Bond Fund was adversely
affected by the rise in long-term interest rates.(As stated in the
Chairman's letter, this was the worst 12-month period for long-term
bonds since 1950.) Long-term interest rates, as measured by the 30-
year U.S. Treasury Bond, rose from 6.02% on September 30, 1993 to
7.81% on September 30, 1994. As a result, the value of the securities
held by the Fund declined. The Fund's performance reflected the lower
value of bonds. The one-year total return was -5.55%, with 4.91%
representing distributions of income and -10.46% representing capital
change. As illustrated on the previous page, the Fund's total return
underperformed the Lehman Brothers Aggregate Bond Index return of -
3.22% for the same time period. The primary reason for the
underperformance was that the average maturity in the portfolio was
longer than that of the index during this period of rising interest
rates. (Refer to page 17 for information on average maturity.) It is
also important to note that the AARP High Quality Bond Fund restricts
the use of less than high-quality bonds.
Q What has been the Fund's investment strategy?
A We continued to maintain a "barbell" strategy within the Fund; 25% of
the Fund was invested in long-term bonds (maturing in 15 years or
more), and another 25% was invested in short-term bonds (maturing in
one year or less). Although this strategy tended to reduce overall
portfolio yield, it has helped the performance of the Fund during this
period of rising interest rates. Non-callable bonds (bonds that cannot
be redeemed at the option of the issuer) were also favored to sustain
the Fund's income stream.
The Fund also maintained its objective of investing in high-quality
securities. As of September 30, 1994, 81% of the portfolio was
invested in AAA or AA securities. The other 19% of the portfolio was
placed in A-rated securities or securities of an equivalent quality.
Q How does the Fund's portfolio differ from that of the AARP GNMA and
U.S. Treasury Fund?
A The AARP High Quality Bond Fund invests in a broader array of
securities than the AARP GNMA and U.S. Treasury Fund. The Fund invests
in Government, corporate, and other fixed income securities, whereas
the AARP GNMA and U.S. Treasury Fund invests primarily in securities
that are issued or guaranteed by the U.S. Government. The Fund also
invests in securities with longer maturities. The AARP High Quality
Bond Fund has the potential to offer shareholders a greater total
return than the AARP GNMA and U.S. Treasury Fund. It will also have
greater share price fluctuation.
Q Do you use "derivatives"? If so, why?
A The Fund may use derivative contracts in a conservative fashion.
However, they have been used infrequently. As of September 30, 1994,
2% of the Fund's assets were invested in futures, which were used in
an attempt to protect the Fund against a rise in interest rates.
(Please refer to page 11 for more information on the topic of
derivatives.)
Q What should I expect from the Fund in the upcoming year?
A We believe that the bond market will remain turbulent throughout the
year, with a rise in both short- and long-term interest rates.
However, while investors will most likely have to cope with movements
up and down in both share price and yield over the near-term, the long-
term outlook for the bond market remains promising.
AARP Insured Tax Free General Bond Fund
At a Glance
Fund Overview
The AARP Insured Tax Free General Bond Fund seeks to pay high monthly
income that is free from federal taxes.* The Fund invests in a portfolio of
high-grade municipal securities, most of which 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.
* 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.
For Whom the Fund is Designed
The Fund is suitable for investors in higher tax brackets who want high
income that is free from federal income taxes. Investors should be seeking
to invest for the longer term and be comfortable with fluctuation in the
value of their principal and yield.
<TABLE>
<CAPTION>
GROWTH OF $10,000 INVESTMENT
AARP INSURED TAX
YEARLY PERIODS FREE GENERAL BOND LEHMAN BROTHERS
ENDED SEPTEMBER 30 FUND++ MUNICIPAL BOND INDEX+
- ------------------- ------------------- ---------------------
<S> <C> <C>
1 YEAR $9,552 $9,756
5 YEAR $14,344 $14,685
LIFE OF FUND* $21,846 $25,262
TOTAL RETURN
CUMULATIVE
1 YEAR -4.48% -2.44%
5 YEAR 43.44% 46.85%
LIFE OF FUND* 118.46% 155.62%
AVERAGE ANNUAL
1 YEAR -4.48% -2.44%
5 YEAR 7.48% 7.98%
LIFE OF FUND* 8.35% 10.02%
</TABLE>
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS ENDED SEPTEMBER 30++
(CHART DATA)
<TABLE>
<CAPTION>
AARP INSURED TAX FREE LEHMAN BROTHERS
GENERAL BOND FUND MUNICIPAL BOND INDEX
------------------- ---------------------
<S> <C> <C>
Nov-84 10,000 10,000
Sep-85 10,509 11,313
Sep-86 12,397 14,102
Sep-87 12,032 14,176
Sep-88 13,763 16,016
Sep-89 15,230 17,406
Sep-90 15,974 18,590
Sep-91 18,186 21,041
Sep-92 20,007 23,240
Sep-93 22,871 26,202
Sep-94 21,846 25,562
</TABLE>
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION
YEARLY PERIODS ENDED SEPTEMBER 30++
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE $16.12 $17.30 $17.88 $19.00 $16.93
INCOME DIVIDENDS $1.04 $1.00 $0.93 $0.90 $0.86
CAPITAL GAINS $0.25 $ -- $0.17 $0.43 $0.40
DISTRIBUTIONS
(TOTAL RETURN -
CHART DATA)
FUND RETURN 4.89% 13.85% 10.01% 14.31% -4.48%
INDEX RETURN 6.80% 13.19% 10.45% 12.74% -2.44%
<FN>
+ The unmanaged Lehman Brothers Municipal Bond Index is a market value
weighted measure of approximately 15,000 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.
* The Fund commenced operations on November 30, 1984.
</FN>
</TABLE>
Q How has the Fund performed over the past year?
A The performance of the Fund was adversely affected by rising interest
rates. As you know, rising interest rates cause bond prices to
decline. Consequently, the Fund's one-year total return ended
September 30, 1994 was -4.48%, with 4.49% representing distributions
of income and -8.97% representing capital change. As illustrated in
the graph on page 33, the total return underperformed the Lehman
Brothers Municipal Bond Index.
Q What has been the Fund's investment strategy?
A Despite the volatility in the bond market over the past year, we
maintained a positive long-term outlook for the municipal bond market.
The investment strategy, therefore, remained largely unchanged during
the period from October 1, 1993 to September 30, 1994. The Fund
continued to invest in bonds with maturities of less than 20 years.
Moreover, we maintained a balance between bonds with good call
protection (securities that cannot be easily redeemed at lower
interest rates) and premium bonds (those selling above the face value
of a bond). During this time, the Fund continued to stress non-
callable municipals bonds, with over 70% of the portfolio invested in
these securities. Non-callable bond prices tend to do better over time
than callable bond prices.
Within the portfolio, the largest sector of the Fund was in insured*
hospital bonds, which we believe are undervalued bonds. Approximately
18% of the portfolio was invested in this type of bond. The Fund also
had 19% invested in Illinois municipal bonds because of their
attractive yields.
* Remember that this insurance does not apply to the value of your
shares or the yield of the Fund, both of which will fluctuate.
Q Should an investor in a lower tax bracket consider investing in this
Fund?
A The way to compute whether a tax-free investment is suitable for you
is to calculate the taxable equivalent yield and compare it to a
taxable investment of comparable quality. In order to calculate the
taxable equivalent yield, you can use the following formula:
Tax-free yield
- ----------------- = Taxable equivalent yield
1 minus your
federal tax bracket
For example, let's compare a tax-free investment offering 4.11% to a
taxable investment offering 5.39%. At a glance, it appears that the
taxable investment offers more yield. However, for an investor in the
31% tax bracket, the 4.11% is worth more.
4.11%
- ---------- = 5.96%
1 - (31%)
Therefore, 4.11% tax free is equivalent to a 5.96% taxable yield. Of
course, a different tax bracket would result in a different taxable
equivalent yield. Please consult a tax adviser.
Q How does the AARP Insured Tax Free General Bond Fund compare to other
tax-free funds available?
A The AARP Insured Tax Free General Bond Fund is one of a small group of
tax-free funds with insurance on at least 65% of its investments. This
means that at least 65% of the securities held by the Fund are fully
insured as to the payment of face value and interest by private
insurers. As of September 30, 1994, over 90% of the portfolio was
invested in insured securities (or securities escrowed in U.S.
Treasurys which provide the backing of the U.S. Government). Remember
that this insurance does not apply to the value of your shares or the
yield of the Fund, both of which will fluctuate daily. In addition,
the Fund will purchase only securities rated within the top three
ratings by Moody's and Standard & Poor's -- two independent rating
services.
Q Do you use "derivatives"? If so, why?
A Due to our prudent investment approach, we use derivative contracts
primarily for defensive purposes. As of September 30, 1994, 2% of the
Fund's assets were invested in futures, which were used in an attempt
to protect the Fund against a rise in interest rates. (Please refer to
page 11 for more information about the topic of derivatives.)
Q What should individuals expect from the Fund in the upcoming year?
A We believe that the municipal bond market will follow the trend of the
taxable bond market, with short- and long-term interest rates rising
moderately. This will most likely bring a fair amount of turbulence to
investors, who may have to ride out fluctuations in yield and share
price. Over the long term, however, the Fund should continue to
provide shareholders in high tax brackets with high income free from
federal taxes.
AARP Balanced Stock and Bond Fund
At a Glance
Fund Overview
The AARP Balanced Stock and Bond Fund seeks to offer you long-term growth
of capital and quarterly income while attempting to keep the value of its
shares more stable than other potentially higher returning balanced mutual
funds. The Fund pursues these objectives by investing in a combination of
stocks, bonds, and cash reserves.
For Whom the Fund is Designed
This Fund, which was introduced on February 1, 1994, is suitable for
investors who are seeking long-term growth of their assets, but want less
risk than an investment solely in stocks. Investors should be seeking to
invest for the longer term and be comfortable with the value of their
principal fluctuating up and down.
<TABLE>
<CAPTION>
GROWTH OF $10,000 INVESTMENT
AARP BALANCED STANDARD & POOR'S LEHMAN BROTHERS
PERIOD FROM FEB.1 STOCK AND BOND 500 STOCK PRICE AGGREGATE BOND
TO SEPT. 30, 1994 FUND++ INDEX+ INDEX+
----------------- ---------- ---------- ----------
<S> <C> <C> <C>
LIFE OF FUND* $9,922 $9,801 $9,543
TOTAL RETURN
CUMULATIVE
LIFE OF FUND* -0.78% -1.99% -4.57%
</TABLE>
(LINE CHART TITLE) GROWTH OF $10,000 INVESTMENT
MONTHLY PERIODS FEBRUARY 1 SEPTEMBER 30, 1994++
(CHART DATA)
<TABLE>
<CAPTION>
AARP BALANCED STOCK STANDARD & POOR'S 500 LEHMAN BROTHERS
AND BOND FUND STOCK PRICE INDEX AGGREGATE BOND INDEX
-------------------- -------------------- --------------------
<S> <C> <C> <C>
1/1/94 10,000 10,000 10,000
2/28/94 9,873 9,728 9,826
3/31/94 9,520 9,304 9,583
4/30/94 9,587 9,423 9,507
5/31/94 9,727 9,577 9,506
6/30/94 9,623 9,343 9,485
7/31/94 9,805 9,649 9,674
8/31/94 10,073 10,045 9,685
9/30/94 9,922 9,801 9,543
</TABLE>
(BAR CHART TITLE) INVESTMENT RETURNS AND PER SHARE INFORMATION
<TABLE>
<CAPTION>
SEPT. 30, 1994
<S> <C>
NET ASSET VALUE $14.64
INCOME DIVIDENDS $0.24
CAPITAL GAINS DISTRIBUTIONS $ --
(TOTAL RETURN - CHART DATA)
FUND RETURN (%)++ -0.78%
S&P 500 STOCK PRICE INDEX RETURN(%)+ -1.99%
AGGREGATE BOND INDEX RETURN(%)+ -4.57%
<FN>
+ The unmanaged Lehman Brothers Aggregate Bond Index is a market value
weighted measure of all treasury issues, agency issues, corporate bond
issues and mortgage securities. The unmanaged Standard & Poor's 500
Stock Price Index is a market value weighted measure of 500 widely
held common stocks listed on the New York Stock Exchange, American
Stock Exchange, and Over-the-Counter market. Index returns are
calculated monthly and assume reinvestment of dividends. Unlike Fund
returns, Index returns do not reflect any fees or expenses.
++ All performance is historical and assumes reinvestment of all
dividends and capital gains and is not indicative of future results.
Investment return and principal value will fluctuate so an investor's
shares when redeemed may be worth more or less than when purchased.
* The Fund commenced operations on February 1, 1994.
</FN>
</TABLE>
Q How has the Fund performed over the past year?
A The Fund was introduced on February 1, 1994 at a Net Asset Value (NAV)
of $15.00. As of September 30, 1994 the Fund's NAV declined to
$14.64. Shareholders received three dividend payments during this
period totalling $0.24. The Fund's cumulative total return of -0.78%
outperformed the unmanaged Lehman Brothers Aggregate Bond Index of -
4.57%, and the unmanaged S&P 500 Stock Price Index of -1.99%. (Please
note that these return figures are for the time period from February
1, 1994 through September 30, 1994. Performance is historical and
assumes reinvestment of all dividends and capital gains and is no
guarantee of future results. Investment return and principal will
fluctuate so that an investor's shares when redeemed may be worth more
or less than when purchased.)
Q What has been the Fund's investment strategy?
A In general, the stock portion of the Fund uses an approach similar to
the AARP Growth and Income Fund. The Fund will usually invest in
stocks of companies that we believe to have favorable long-term
outlooks and have above-average dividend yields. As of September 30,
1994, approximately 47% of the Fund's assets were invested in stocks.
Since the stock portion of the Fund is managed by the same individuals
and with the same strategy as the AARP Growth and Income Fund, refer
to the AARP Growth and Income Fund Report on page 40 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 can include corporate
issues, U.S. Government securities, mortgage-backed obligations, and
other fixed-income securities. At least 75% of these securities will
be securities rated within the three highest quality ratings (AAA, AA,
A) by Moody's or Standard & Poor's, independent rating organizations.
As of September 30, 1994, approximately 26% of the Fund's assets were
invested in bonds, with the remainder in cash equivalents. Since the
bond portion of the Fund is managed by the same individuals and with
the same strategy as the AARP High Quality Bond Fund, refer to the
AARP High Quality Bond Fund Report on page 31 for more information on
the types of bonds that the Fund invested. (At all times, at least 30%
of the Fund's assets will be a combination of bonds and cash
equivalents.)
Q Do you use "derivatives"? If so, why?
A There may be occasions when investing in derivatives is a prudent
decision for the Fund. For example, we may enter into forward
contracts to hedge foreign currency exposure. (Please refer to page 11
for more information on the topic of derivatives.)
Q What can I expect from the Fund in the upcoming year?
A Over the near term, we intend to remain approximately 50% invested in
stocks. We will also leave a significant percentage of the fund's
assets in cash equivalents to provide liquidity in order to take
advantage of opportunities in the stock and bond markets. It is our
strong conviction that stocks are the asset class of choice for
investors with longer term horizons. Therefore, we will continue to
concentrate on trends within the stock market and how they may affect
the Fund. We believe that we can outperform the market by continuing
to focus on companies whose prospects appear favorable and whose stock
valuations and dividend yields are attractive. For the portion
invested in stocks, the Fund will continue to invest new assets in
securities that offer the potential of long-term growth of capital
while providing current income.
AARP Growth and Income Fund
At a Glance
Fund Overview
The AARP Growth and Income Fund is a conservatively managed stock fund that
provides the potential for long-term growth and quarterly income, while
still seeking to moderate risk. It invests in stocks yielding above-average
dividends that may offer the opportunity for long-term growth.
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 seeking to invest for the longer term and be comfortable with
fluctuation to their principal that is associated with investing in stocks.
<TABLE>
<CAPTION>
GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS AARP GROWTH AND STANDARD & POOR'S 500
ENDED SEPTEMBER 30 INCOME FUND++ STOCK PRICE INDEX+
- ------------------ ------------------- -------------------
<S> <C> <C>
1 YEAR $10,799 $10,368
5 YEAR $16,430 $15,489
LIFE OF FUND* $36,713 $39,350
TOTAL RETURN
CUMULATIVE
1 YEAR 7.99% 3.68%
5 YEAR 64.30% 54.89%
LIFE OF FUND* 267.13% 293.50%
AVERAGE ANNUAL
1 YEAR 7.99% 3.68%
5 YEAR 10.44% 9.14%
LIFE OF FUND* 14.27% 14.95%
</TABLE>
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS ENDED SEPTEMBER 30++
(CHART DATA)
<TABLE>
<CAPTION>
AARP GROWTH AND STANDARD & POOR'S 500
INCOME FUND STOCK PRICE INDEX
---------------- ------------------
<S> <C> <C>
Nov-84 10,000 10,000
Sep-85 11,353 11,535
Sep-86 14,646 15,196
Sep-87 19,174 21,795
Sep-88 17,120 19,100
Sep-89 22,345 25,405
Sep-90 20,067 23,057
Sep-91 25,523 30,243
Sep-92 28,479 33,585
Sep-93 33,998 37,951
Sep-94 36,713 39,350
</TABLE>
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION
YEARLY PERIODS ENDED SEPTEMBER 30++
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE $22.30 $26.97 $28.67 $32.91 $34.13
INCOME DIVIDENDS $1.15 $1.17 $0.90 $0.87 $1.13
CAPITAL GAINS $0.08 $0.05 $0.48 $0.30 $0.21
DISTRIBUTIONS
(TOTAL RETURN -
CHART DATA)
FUND RETURN -10.19% 27.19% 11.59% 19.38% 7.99%
INDEX RETURN -9.24% 31.09% 11.04% 12.97% 3.68%
<FN>
+ The unmanaged Standard & Poor's 500 Stock Price Index is a market
value weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange, American Stock Exchange, and Over-the-Counter
market. Index returns are calculated monthly and assume reinvestment
of dividends. Unlike Fund returns, Index returns do not reflect any
fees or expenses.
++ All performance is historical and assumes reinvestment of all
dividends and capital gains and is not indicative of future results.
Investment return and principal value will fluctuate so an investor's
shares when redeemed may be worth more or less than when purchased.
* The Fund commenced operations on November 30, 1984.
</FN>
</TABLE>
Q How did the Fund perform over the past year?
A Though the stock market was relatively stable for the last quarter of
1993, it has declined for most of 1994. This was due in most part to a
continual rise in interest rates and concerns about the direction of
the economy. Despite a declining market, the AARP Growth and Income
Fund performed well.
The Fund's total return was 7.99% for the one-year period ended
September 30, 1994. This total return represented 3.62% in
distributions of income and 4.37% in capital change. The Fund's total
return outperformed the Standard & Poor's 500 Stock Price Index return
of 3.68%, as illustrated in the graph on the previous page.
The Fund has been cited in various publications for its favorable
performance. The September 30, 1994 issue of Morningstar, a leading
national independent investment rating organization, cited the Fund
for its above-average performance and low risk. Morningstar compares
performance and risk of the Fund relative to other mutual funds in its
class that have been in existence for at least three years.1 The Fund
also appeared as one of the nine funds that the June 1994 issue of
Kiplingers' Personal Finance Magazine highlighted as "Funds You Can
Count On." Remember that past performance is no guarantee of future
results.
1. Morningstar's proprietary ratings reflect historical risk-
adjusted performance as of September 30, 1994. The ratings are
subject to change every month.
Q What has been the Fund's investment strategy?
A The AARP Growth and Income Fund has had a consistent investment
strategy over the past several years. We continue to target stocks of
companies that we believe have healthy balance sheets, are estimated
to perform well in a strengthening economy, and have dividend yields
that are at least 20% above the average market yield at the time of
purchase.
Q What were your best investment decisions over the year?
A There are two components to successful investing: choosing the winners
and avoiding the losers. In addition to some of the winners that will
be discussed later, one of the best investment decisions was avoiding
the domestic electric utility sector. Domestic electric utilities have
declined by about 30% over the past year. Despite the high relative
yields of these stocks, the portfolio management team of the AARP
Growth and Income Fund felt the fundamentals of these stocks were
deteriorating rather than improving. While the fundamentals of some of
these companies may improve or the prices may decline to a low enough
level to buy them, we believe that our decision to avoid this sector
was one of our best decisions over this period.
Q What were the largest industry sectors in the portfolio over the past
year?
A Our largest sector is manufacturing, representing approximately 22% of
the Fund's portfolio. Chemical companies such as Lyondell
Petrochemical, Dow Chemical, Dupont, and paper companies such as Boise
Cascade and Federal Paper Board were expected -- and have succeeded --
to perform well in a strengthening economy.
Another large sector in the portfolio is healthcare, representing
approximately 14%. We have increased our exposure from 3% a year ago
to 14% as of this report for a number of reasons. Many of the stocks
in this sector were undervalued due to investors' concerns about
healthcare reform and stiff price competition due to the emergence of
generic products. Moreover, a trend toward consolidation of the
healthcare industry has led to such recent events as Eli Lilly's
proposal to buy the PCS Division of McKesson Corp., and American Home
Products' proposal to buy American Cyanamid. Both McKesson and
American Cyanamid were large holdings in the portfolio which benefited
from these announced mergers.
Q What securities were eliminated from the portfolio? Why?
The Fund's portfolio management team employs a disciplined process for
sales as well as purchases. If a stock's yield drops below 75% of the
S&P 500's yield or if the fundamental outlook for the company has
changed, the holding is sold. This approach led to the elimination of
British Telecom, Browning Ferris, Equifax, and W.R. Grace. Proceeds
from these sales were used to purchase stocks that have more
attractive total return prospects.
Q Do you invest in foreign stocks? If so, what percentage of the
portfolio?
A Participating in opportunities outside the U.S. increases
shareholders' return potential while reducing overall risk through
diversification. That is why the Fund maintained approximately 20% of
its assets in foreign securities. Purchases of Smithkline Beecham and
Tele Danmark have proven successful for the Fund. Other purchases that
have proven successful investments over the past year were Elf
Aquitaine, a French energy company and the convertibles of Empresas
ICA, a preeminent Mexican construction company.
(Please note that portfolio changes should not be considered
recommendations for action by individual investors.)
Q Do you use "derivatives"? If so, why?
A There may be occasions when investing in derivatives is a prudent
decision for the Fund. For example, we may enter into forward
contracts to hedge foreign currency exposure. (Please refer to page 11
for more information on the topic of derivatives.)
Q What should I expect from the Fund in the upcoming year?
A We believe that the AARP Growth and Income Fund can outperform the
market by continuing to focus on companies whose prospects appear
favorable and whose stock valuations and dividend yields are
attractive. Our long-term view is that stocks will continue to
outperform both money market instruments and fixed income securities.
AARP Capital Growth Fund
At a Glance
Fund Overview
The AARP Capital Growth Fund is designed to help aggressive investors take
advantage of the high growth potential of the stock market. Because of the
opportunity you'll have for high growth of your investment over the long
term, there is greater potential for fluctuation in the value of your
shares than with other AARP Mutual Funds.
For Whom the Fund is Designed
The Fund is suitable for aggressive investors seeking high long-term growth
of their principal. Investors should be seeking to invest for the longer
term (five years or more) and be comfortable with the short-term
fluctuation to their principal that is associated with investing in stocks.
<TABLE>
<CAPTION>
GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS AARP CAPITAL STANDARD & POOR'S 500
ENDED SEPTEMBER 30 GROWTH FUND++ STOCK PRICE INDEX+
- ------------------ ------------------ ------------------
<S> <C> <C>
1 YEAR $9,530 $10,368
5 YEAR $12,871 $15,489
LIFE OF FUND* $34,258 $39,350
TOTAL RETURN
CUMULATIVE
1 YEAR -4.70% 3.68%
5 YEAR 28.71% 54.89%
LIFE OF FUND* 242.58% 293.50%
AVERAGE ANNUAL
1 YEAR -4.70% 3.68%
5 YEAR 5.18% 9.14%
LIFE OF FUND* 13.46% 14.95%
</TABLE>
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT
YEARLY PERIODS ENDED SEPTEMBER 30++
(CHART DATA)
<TABLE>
<CAPTION>
AARP CAPITAL STANDARD & POOR'S 500
GROWTH FUND STOCK PRICE INDEX
------------- -----------------
<S> <C> <C>
Nov-84 10,000 10,000
Sep-85 11,300 11,535
Sep-86 14,303 15,196
Sep-87 19,598 21,795
Sep-88 18,532 19,100
Sep-89 26,616 25,405
Sep-90 19,447 23,057
Sep-91 27,771 30,243
Sep-92 28,866 33,585
Sep-93 35,946 37,951
Sep-94 34,258 39,350
</TABLE>
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION
YEARLY PERIODS ENDED SEPTEMBER 30++
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE $23.32 $30.23 $30.30 $36.20 $31.74
INCOME DIVIDENDS $0.19 $0.59 $0.23 $0.14 $0.05
CAPITAL GAINS $1.93 $1.79 $0.94 $1.21 $2.90
DISTRIBUTIONS
(TOTAL RETURN -
CHART DATA)
FUND RETURN -26.94% 42.81% 3.94% 24.53% -4.70%
INDEX RETURN -9.24% 31.09% 11.04% 12.97% 3.68%
<FN>
+ The unmanaged Standard & Poor's 500 Stock Price Index is a market
value weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange, American Stock Exchange, and Over-the-Counter
market. Index returns are calculated monthly and assume reinvestment
of dividends. Unlike Fund returns, Index returns do not reflect any
fees or expenses.
++ All performance is historical and assumes reinvestment of all
dividends and capital gains and is not indicative of future results.
Investment return and principal value will fluctuate so an investor's
shares when redeemed may be worth more or less than when purchased.
* The Fund commenced operations on November 30, 1984.
</FN>
</TABLE>
Q How did the Fund perform over the past year?
A Though the stock market was relatively stable for the last quarter of
1993, it has declined for most of 1994. This was due in most part to a
continual rise in interest rates and concerns about the direction of
the economy. The AARP Capital Growth Fund has been affected by this
volatility as well as some weakness in the cable stocks, in which the
Fund is heavily invested (see investment strategy below). The Fund's
one year total return was -4.70% as of September 30, 1994. The total
return represented .12% in distributions of income and -4.82% in
capital change. The Fund's one-year total return underperformed the
Standard & Poor's 500 Stock Price Index return of 3.68%, as
illustrated in the graph on the previous page.
Q What has been your investment strategy?
A The Fund has maintained an investment commitment to four industries:
communications, cable television, technology, and entertainment.
During most of 1993 the Fund's performance benefitted greatly by the
appreciation of its cable holdings, as several large investments and
joint ventures between telephone and cable companies were announced.
However, the cable industry was adversely impacted in the first half
of 1994 by new regulation of cable television rates as well as the
breakup of the Bell Atlantic/TCI merger. In the past few months, cable
television stocks have recovered somewhat as consolidation in the
industry continued and as investor confidence in the future growth of
the industry firmed.
In addition to the areas outlined above, the Fund also invested in
industries that perform well during periods of economic growth. The
auto industry is a case in point. Therefore, the Fund increased its
exposure to companies such as Ford and Chrysler.
Q What were some of your better investment decisions during the fiscal
year?
A Despite the less-than-favorable performance of the four industries
mentioned above, we still believe that the cable, entertainment,
technology, and communications industries are sound investment
decisions for the long-term. We continue to believe that the
fundamental forces that have brought about the convergence of the
telephone and cable industries remain intact. Moreover, cable has the
technology to benefit from the emergence of the "information super
highway" and it has the capability to generate significant new sources
of revenues from the telephone business in the not-too-distant future.
We also believe our investment in the auto industry (Ford and
Chrysler) and drug companies (Schering-Plough and Warner-Lambert) will
add to the Fund's performance over the long term.
(Please note that portfolio changes should not be considered
recommendations for action by individual investors.)
Q Have you eliminated any major holdings from the portfolio?
A Sales from the Fund's holdings included Mattel Inc. and Teradyne, two
companies that had appreciated significantly and from which the Fund
benefited. The Fund reduced its investment in wholesalers
Price/Costco, which appreciated significantly, and Student Loan
Marketing Association, which became a disappointing investment.
Q Do you invest in foreign stocks? If so, what percentage of the
portfolio?
A Through the Fund's broad and flexible policy, we use foreign stocks to
increase opportunity and help reduce risk through diversification. At
the end of the past fiscal year, approximately 13% of the Fund was
invested in foreign securities. Specifically, the team invested in
stocks of companies based in Latin America, Canada, Europe, and Asia.
The portfolio management team repositioned the Fund's foreign holdings
by reducing exposure in Mexico and purchasing NTT Communications -- a
Japanese telecommunications company and Autoliv, a Swedish company
that produces air bags and seat belts. We believe that penetration of
air bags in Europe is at a very low level and that it will increase
dramatically over the next few years. This company dominates that
business.
Q Do you use "derivatives"? If so, why?
A Derivatives are occasionally used in the Fund primarily for hedging
purposes. (Please refer to page 11 for more information on the topic
of derivatives.)
Q What should I expect from the Fund in the coming year?
A The AARP Capital Growth Fund remains committed to its long-term
investment strategy. Despite a rough first half of 1994, we are
beginning to see some recovery of many stocks that have been out of
favor. While the management team cannot predict future returns of the
stock market, improving economic growth and our commitment to the key
industries outlined earlier we believe could prove favorable for long-
term investors.
<PAGE>
<TABLE>
AARP HIGH QUALITY MONEY FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 4.3%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
14,380,000 Repurchase Agreement with State Street Bank and Trust Company
dated 9/30/94 at 4.7% to be repurchased at $14,385,632 on 10/3/94,
collateralized by a $14,215,000 U.S. Treasury Note, 8.5%, 8/15/95
(COST $14,380,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,380,000
-----------
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 29.8%
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL 20.3%
Banks 4.8%
16,000,000 Barclays U.S. Funding Corp., 4.53%, 10/03/94 . . . . . . . . . . . . . . . . . . . . 15,995,973
-----------
Other Financial Companies 7.7%
16,000,000 Asset Securitization Cooperative Group, 5.05%, 12/15/94 . . . . . . . . . . . . . . . 15,817,000
10,000,000 Associates Corp. of North America, 4.75%, 10/05/94 . . . . . . . . . . . . . . . . . 9,994,722
-----------
25,811,722
-----------
Consumer Finance 7.8%
16,000,000 American Express Credit Corp., 4.78%, 10/13/94 . . . . . . . . . . . . . . . . . . . 15,974,507
10,000,000 General Electric Capital Corp., 4.78%, 10/12/94 . . . . . . . . . . . . . . . . . . . 9,985,394
-----------
25,959,901
-----------
DURABLES 9.5%
Automobiles 4.8%
16,000,000 Ford Motor Credit Co., 4.78%, 10/14/94 . . . . . . . . . . . . . . . . . . . . . . . 15,972,382
-----------
Construction/Agricultural Equipment 4.7%
16,000,000 John Deere Capital Corp., 5%, 1/18/95 . . . . . . . . . . . . . . . . . . . . . . . . 15,734,041
-----------
TOTAL COMMERCIAL PAPER (COST $99,512,423) . . . . . . . . . . . . . . . . . . . . . . 99,474,019
-----------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATION 3.1%
- ---------------------------------------------------------------------------------------------------------------------------
10,000,000 U.S. Treasury Note, 8.5%, 5/15/95 (COST $10,288,076) . . . . . . . . . . . . . . . . 10,167,200
-----------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES 44.6%
- ---------------------------------------------------------------------------------------------------------------------------
20,000,000 Federal National Mortgage Association, 5.44%, 7/14/99* . . . . . . . . . . . . . . . 19,990,000
10,000,000 Student Loan Marketing Association, 5.52%, 4/17/95* . . . . . . . . . . . . . . . . . 10,020,000
25,000,000 Student Loan Marketing Association, 5.14%, 4/16/96* . . . . . . . . . . . . . . . . . 24,961,500
20,000,000 Student Loan Marketing Association, 5.295%, 11/27/96* . . . . . . . . . . . . . . . . 20,070,000
38,690,000 Student Loan Marketing Association, 5.32%, 1/23/97* . . . . . . . . . . . . . . . . . 38,686,131
10,000,000 Student Loan Marketing Association, 5.27%, 10/30/97* . . . . . . . . . . . . . . . . 10,047,900
25,000,000 Student Loan Marketing Association, 5.44%, 7/12/99* . . . . . . . . . . . . . . . . . 25,000,000
-----------
TOTAL U.S. GOVERNMENT AGENCIES (COST $148,764,516) . . . . . . . . . . . . . . . . . 148,775,531
-----------
- ---------------------------------------------------------------------------------------------------------------------------
MEDIUM-TERM AND SHORT-TERM NOTES 17.4%
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL 12.0%
Banks
15,000,000 Banc One Texas, Note, 4.92%, 6/2/95* . . . . . . . . . . . . . . . . . . . . . . . . 15,000,000
15,000,000 PNC Bank, Ohio, Note, 5.02%, 6/15/95* . . . . . . . . . . . . . . . . . . . . . . . . 14,933,821
10,000,000 Trust Company Bank of Georgia, Note, 3.65%, 11/15/94 . . . . . . . . . . . . . . . . 9,984,325
-----------
39,918,146
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS 5.4%
5,000,000 Anaheim, CA, Certificate of Participation, 4.875%, 10/3/94 . . . . . . . . . . . . . 4,999,997
13,000,000 SMM Trust, 5.55%, 3/17/95* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,967,648
-----------
17,967,645
-----------
TOTAL MEDIUM-TERM AND SHORT-TERM NOTES ($57,993,228) . . . . . . . . . . . . . . . . 57,885,791
-----------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $330,938,243) (a) . . . . . . . . . . 99.2 330,682,541
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 0.8 2,755,518
----- -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 333,438,059
===== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income tax
purposes of $330,938,243 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . . $ 137,900
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . . (393,602)
----------
Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(255,702)
==========
* Floating rate notes are securities whose interest rates vary with a designated market index or market rate, such as the
coupon equivalent of the U.S. Treasury bill rate. These securities are shown at their rate as of September 30, 1994.
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are
comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may
be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's
other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
<TABLE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- -------------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INVESTMENTS -- 100.6%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALABAMA
Birmingham, AL, Health Services, University of Alabama Medical Clinic,
Daily Demand Note, 3.8%, 12/1/26* . . . . . . . . . . . . . . . . . . . 2,000,000 A-1+ 2,000,000
ARIZONA
Agricultural Improvement and Power District, AZ, Salt River Project,
Tax Exempt Commercial Paper:
2.95%, 10/14/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,006,000 A-1+ 3,006,000
3.05%, 11/15/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 A-1+ 3,600,000
Apache County, AZ, Industrial Development Authority, Tucson
Electric Power Co., 1983 Series C, Weekly Demand Note,
3.5%, 12/15/18* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000
Maricopa County, AZ, Pollution Control Revenue, Public Service of
New Mexico, Weekly Demand Note, 3.75%, 11/1/22* . . . . . . . . . . . . 4,000,000 A-1+ 4,000,000
Maricopa County, AZ, Pollution Control Revenue, Southern California
Edison, Series F, Tax Exempt Commercial Paper, 2.9%, 10/12/94 . . . . . 2,600,000 A-1 2,600,000
Pima County, AZ, Industrial Development Authority,
Tucson Electric Power Co., Weekly Demand Note:
3.5%, 10/1/22* . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900,000 A-1+ 2,900,000
1982 Series A, 3.5%, 7/1/22* . . . . . . . . . . . . . . . . . . . . 4,000,000 A-1 4,000,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper,
Weekly Demand Note, 3.8%, 12/1/11* . . . . . . . . . . . . . . . . . . . 1,900,000 A-1+ 1,900,000
CALIFORNIA
California General Obligation, Student Educational Loan Marketing
Corporation, Series 1993, Mandatory Tender Bond, 2.65%, 11/1/94 . . . . 1,300,000 MIG1 1,300,000
California Revenue Anticipation Note, Series A, 5%, 6/28/95 . . . . . . . . 1,250,000 SP-1+ 1,257,253
Los Angeles County Unified School District, CA, Tax and Revenue
Anticipation Note, 4.5%, 7/10/95 . . . . . . . . . . . . . . . . . . . . 1,000,000 SP-1+ 1,006,707
Los Angeles County, CA, Tax and Revenue Anticipation Note,
4.5%, 6/30/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 SP-1+ 2,009,326
COLORADO
Clear Creek County, CO, Colorado Counties Financing Program,
Series 1988, Weekly Demand Note, 3.55%, 6/1/98* . . . . . . . . . . . . 1,800,000 A-1+ 1,800,000
Colorado State, 4.2%, 5/1/95 . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 1,001,660
FLORIDA
Dade County, FL, Water and Sewer System Revenue, Series 1994,
Weekly Demand Note, 3.6%, 10/5/22*(c) . . . . . . . . . . . . . . . . . 3,300,000 A-1+ 3,300,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric
Cooperative Finance Corp., 1984 Series H-1, Weekly Demand Note,
3.65%, 3/15/14* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400,000 A-1+ 4,400,000
GEORGIA
Burke County, GA, Pollution Control Revenue, Ogelthorpe Power Company,
Vogtle Project, Tax Exempt Commercial Paper, 3.2%, 11/14/94 . . . . . . 2,000,000 A-1+ 2,000,000
Gordon County, GA, Development Authority Revenue, Sara Lee Corp.,
Weekly Demand Note, 3.75%, 3/1/02* . . . . . . . . . . . . . . . . . . . 1,400,000 A-1+ 1,400,000
IDAHO
Idaho General Obligation, Tax Anticipation Note, 4.5%, 6/29/95 . . . . . . 1,000,000 SP-1+ 1,004,861
ILLINOIS
Illinois Development Finance Authority, Deerfield Marriott,
Series 1984, Weekly Demand Note, 3.65%, 11/1/14* . . . . . . . . . . . . 1,600,000 MIG1 1,600,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Illinois Educational Facilities Authority, University Pooled Financing
Program, Weekly Demand Note, 3.7%, 12/1/05*(c) . . . . . . . . . . . . . 1,135,000 A-1 1,135,000
Illinois Health Facilities Authority, Highland Park Hospital Revenue,
1991 Series B, Optional Put, 3.75%, 6/1/95(c) . . . . . . . . . . . . . 2,000,000 A-1+ 2,000,000
INDIANA
Indiana Bond Bank, Advanced Funding Program, Series A2,
3.03%, 1/17/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 SP-1+ 2,001,608
Jasper County, IN, Northern Indiana Power, Tax Exempt
Commercial Paper, 3.3%, 11/17/94 . . . . . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000
IOWA
Iowa School Corporation Warrant Certificate, 3.6%, 12/30/94 . . . . . . . . 500,000 SP-1+ 500,234
Louisa County, IA, Pollution Control Revenue, Iowa/Illinois
Power & Light, Tax Exempt Commercial Paper, 3.2%, 10/11/94 . . . . . . . 1,690,000 A-1+ 1,690,000
West Des Moines, IA, Greyhound Lines, Commercial Development
Revenue, Weekly Demand Note, 3.8%, 12/1/14* . . . . . . . . . . . . . . 6,400,000 A-1+ 6,400,000
KENTUCKY
Kentucky Development Finance Authority, Healthcare System,
Appalachian Regional Health Care, Series 1991, Weekly
Demand Note, 3.65%, 9/1/06* . . . . . . . . . . . . . . . . . . . . . . 7,200,000 A-1+ 7,200,000
LOUISIANA
Parish of DeSoto, LA, Pollution Control Revenue, Central Louisiana
Electric Co., 1991 Series B, Weekly Demand Note, 3.6%, 7/1/18* . . . . . 1,900,000 A-1+ 1,900,000
MAINE
Maine Tax Anticipation Note, Series 1994, 4.5%, 6/30/95 . . . . . . . . . . 1,000,000 SP-1+ 1,005,747
MASSACHUSETTS
Massachusetts Bay Transportation Authority:
1984 Series A, Optional Put, 3.75%, 3/1/95 . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000
5%, 9/8/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 SP-1 2,016,191
MINNESOTA
Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982,
Weekly Demand Note, 3.59%, 8/1/12* . . . . . . . . . . . . . . . . . . . 300,000 A-1+ 300,000
Rochester, MN, Health Care Facilities Authority, Mayo Health Clinic,
Tax Exempt Commercial Paper, 3%, 10/4/94 . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000
University of Minnesota Board of Regents, Tax Exempt Commercial Paper:
3.05%, 10/28/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 A-1 600,000
3.15%, 11/10/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000
NEW HAMPSHIRE
New Hampshire Business Finance Authority, Connecticut Light & Power,
Weekly Demand Note, 3.8%, 12/1/22* . . . . . . . . . . . . . . . . . . . 1,700,000 A-1+ 1,700,000
NEW MEXICO
Farmington, NM, Pollution Control Revenue, Arizona Public Service,
Four Corners Project, 1994 Series A, Daily Demand Note,
3.8%, 5/1/24* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 A-1+ 2,000,000
NORTH CAROLINA
North Carolina Medical Care Commission, Hospital Revenue,
Pooled Financing Project, 1986 Series A-2, Weekly Demand Note,
3.85%, 7/1/26*(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,000 MIG1 505,000
OREGON
Klameth Falls, OR, Hydroelectric Facilities Authority,
Salt Caves Project, 1986 Series D, Mandatory Put, 3.75%, 5/1/95 . . . . 2,000,000 SP1+ 2,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oregon General Obligation, 1973 Series G, Weekly Demand Note,
3.8%, 12/1/18* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000 A-1+ 2,100,000
PENNSYLVANIA
Allegheny County, PA, General Obligation, Tender Option Bond,
Weekly Coupon Reset, Series C38, 3.65%, 10/4/94(c) . . . . . . . . . . . 1,000,000 A-1+ 1,000,000
Emmaus, PA, General Authority, Local Government Revenue Bond
Pool Program, Series G4, Weekly Demand Note, 3.85%, 3/1/24* . . . . . . 5,100,000 A-1 5,100,000
Philadelphia, PA, Tax and Revenue Anticipation Note, 4.75%, 6/15/95 . . . . 1,500,000 SP-1 1,508,654
Philadelphia School District, PA, Tax and Revenue Anticipation Note,
4.75%, 6/30/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 SP-1+ 1,505,912
RHODE ISLAND
Rhode Island Housing & Mortgage Finance Corporation, Series 9-A,
Weekly Demand Note, 3.8%, 12/1/95* . . . . . . . . . . . . . . . . . . . 870,000 A-1+ 870,000
TENNESSEE
Clarksville, TN, Public Building Authority, Pooled Financing Revenue,
Weekly Demand Note, 3.6%, 12/1/00*(c) . . . . . . . . . . . . . . . . . 3,400,000 A-1 3,400,000
Franklin, TN, Industrial Development Revenue, Franklin Oaks Apartments,
Weekly Demand Note, 3.35%, 12/1/07* . . . . . . . . . . . . . . . . . . 7,600,000 A-1 7,600,000
Knox County, TN, Industrial Development Board, Monthly Reset Bond,
Series 1984:
Lonas Project, 3.3%, 12/1/14*(c) . . . . . . . . . . . . . . . . . . 1,000,000 MIG1 1,000,000
Professional Plaza, 3.3%, 12/1/14*(c) . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000
Tennessee Local Development Authority, Bond Anticipation Note,
4.5%, 6/1/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700,000 SP-1+ 2,714,469
TEXAS
Port Development Corp., TX, Marine Terminal Refunding Revenue,
Stolt Terminals, Series 1989, Weekly Demand Note, 3.55%, 11/5/14* . . . 2,500,000 A-1+ 2,500,000
University of Texas Board of Regents, Permanent University Fund,
Series A, Tax Exempt Commercial Paper, 3.05%, 10/28/94 . . . . . . . . . 1,600,000 A-1+ 1,600,000
UTAH
Salt Lake City, UT, Pooled Hospital Financing Program,
Tax Exempt Commercial Paper, 2.85%, 10/7/94 . . . . . . . . . . . . . . 5,000,000 A-1+ 5,000,000
WASHINGTON
Seattle, WA, Municipal Light & Power, Series 1993,
Weekly Demand Note, 3.65%, 11/1/18* . . . . . . . . . . . . . . . . . . 1,900,000 A-1+ 1,900,000
Washington General Obligation, Various Purpose, Series B2, Tender Option
Bond, Weekly Coupon Reset, 3.9%, 10/4/94 . . . . . . . . . . . . . . . . 2,100,000 A-1+ 2,100,000
Washington Public Power Supply Authority, Projects #1 & #3, Series 1993,
Weekly Demand Note, 3.9%, 7/1/18* . . . . . . . . . . . . . . . . . . . 1,995,000 A-1+ 1,995,000
WISCONSIN
Wisconsin General Obligation, 4.5%, 6/15/95 . . . . . . . . . . . . . . . . 1,200,000 SP-1+ 1,204,698
WYOMING
Sweetwater County, WY, Pollution Control Revenue Refunding, Pacificorp
Project, 1990 Series A, Weekly Demand Note, 3.8%, 7/1/15* . . . . . . . 2,000,000 A-1+ 2,000,000
-----------
TOTAL MUNICIPAL INVESTMENTS (COST $130,138,320) . . . . . . . . . . . . . . 130,138,320
-----------
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
TOTAL INVESTMENT PORTFOLIO (COST $130,138,320) (a) . . . . . . . . . . 100.6 130,138,320
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (0.6) (728,675)
------ -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 129,409,645
====== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
- -------------------------------------------------------------------------------
* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of
the U.S. Treasury bill rate. Variable rate demand notes are
securities whose interest rates are reset periodically at levels that are
generally comparable to tax-exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit or line of credit from a major bank. Since
these securities are payable on demand, they are valued at 100% of their
principal.
(a) The cost for federal income tax purposes was $130,138,320.
(b) All of the securities held have been determined to be of appropriate
credit quality as required by the Fund's investment objectives. Credit
ratings shown are either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. Unrated
securities (NR) have been determined to be of comparable quality to
rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, or MBIA.
- -------------------------------------------------------------------------------
At September 30, 1994, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $1,309,217 of which
$176,679 expires September 30, 1995, $618,345 expires September 30, 1996,
$170,432 expires September 30, 1997, $19,559 expires September 30, 1999,
$323,801 expires September 30, 2000 and $401 expires September 30, 2001. In
addition, from November 1, 1993 through September 30, 1994, the Fund
incurred approximately $10,343 of net realized capital losses which the Fund
intends to elect to defer and treat as arising in the fiscal year ended
September 30, 1995.
- -------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or lesser than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of Assets
and Liabilities.
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
<TABLE>
AARP GNMA AND U.S. TREASURY FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 0.8%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
45,198,000 Repurchase Agreement with First National Bank of Chicago, dated 9/30/94
at 4.75%, to be repurchased at $45,215,891 on 10/3/94, collateralized by a
$45,970,000 U.S. Treasury Note, 4.125%, 5/31/95 (COST $45,198,000) . . . . . . . 45,198,000
-------------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS 12.0%
- ---------------------------------------------------------------------------------------------------------------------------
250,000,000 3/09/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,362,500
450,000,000 8/24/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,374,000
-------------
TOTAL U.S. TREASURY BILLS (COST $672,688,156) . . . . . . . . . . . . . . . . . . . 671,736,500
-------------
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION SECURITIES* 68.2%
- ---------------------------------------------------------------------------------------------------------------------------
47,171,276 7.00% with various maturities to 1/15/24 . . . . . . . . . . . . . . . . . . . . . . 42,748,969
468,427,860 7.50% with various maturities to 11/15/23 . . . . . . . . . . . . . . . . . . . . . 440,027,079
713,515,557 8.00% with various maturities to 7/15/24 . . . . . . . . . . . . . . . . . . . . . . 692,028,256
676,126,823 8.50% with various maturities to 8/15/24 . . . . . . . . . . . . . . . . . . . . . . 675,065,304
921,714,816 9.00% with various maturities to 8/15/24 . . . . . . . . . . . . . . . . . . . . . . 945,923,893
404,295,556 9.50% with various maturities to 6/15/24 . . . . . . . . . . . . . . . . . . . . . . 424,938,572
475,959,710 10.00% with various maturities to 8/15/22 . . . . . . . . . . . . . . . . . . . . . 509,919,931
437,566 10.25% with various maturities to 12/15/98 . . . . . . . . . . . . . . . . . . . . . 464,367
32,708,666 10.50% with various maturities to 1/20/21 . . . . . . . . . . . . . . . . . . . . . 35,414,020
6,766,305 11.50% with various maturities to 2/15/16 . . . . . . . . . . . . . . . . . . . . . 7,595,175
12,836,831 12.00% with various maturities to 9/15/15 . . . . . . . . . . . . . . . . . . . . . 14,569,466
9,978,771 12.50% with various maturities to 8/15/15 . . . . . . . . . . . . . . . . . . . . . 11,432,224
2,425,138 13.00% with various maturities to 11/15/15 . . . . . . . . . . . . . . . . . . . . . 2,787,254
1,281,981 13.50% with various maturities to 12/15/14 . . . . . . . . . . . . . . . . . . . . . 1,493,508
387,191 14.00% with various maturities to 11/15/14 . . . . . . . . . . . . . . . . . . . . . 453,014
141,617 14.50% with various maturities to 10/15/14 . . . . . . . . . . . . . . . . . . . . . 166,400
303,208 15.00% with various maturities to 10/15/12 . . . . . . . . . . . . . . . . . . . . . 359,301
378,909 16.00% with various maturities to 2/15/12 . . . . . . . . . . . . . . . . . . . . . 450,902
-------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION SECURITIES
(COST $3,913,278,381) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,805,837,635
-------------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES 15.2%
- ---------------------------------------------------------------------------------------------------------------------------
400,000,000 5.500%, 2/15/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,064,000
450,000,000 3.875%, 2/28/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447,259,500
-------------
TOTAL U.S. TREASURY NOTES (COST $848,845,827) . . . . . . . . . . . . . . . . . . . 847,323,500
-------------
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO (COST $5,480,010,364)(a) . . . . . . . . . 96.2 5,370,095,635
NET RECEIVABLE FOR SECURITIES SOLD . . . . . . . . . . . . . . . . . . 3.6 202,951,121
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 0.2 12,438,434
----- -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 5,585,485,190
===== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
- ------------------------------------------------------------------------------------------------------------------------------------
* Effective maturities will be shorter due to amortization and prepayments.
(a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income
tax purposes of $5,480,010,364 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 12,936,874
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (122,851,603)
-------------
Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(109,914,729)
=============
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities, all of which were U.S. Government obligations and U.S. Government Agencies
(excluding short-term investments), for the year ended September 30, 1994, aggregated $5,732,995,798 and $6,779,140,243,
respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
From November 1, 1993 through September 30, 1994, the Fund incurred approximately $304,560,473 of net realized capital
losses which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised
of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be
greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
<TABLE>
AARP HIGH QUALITY BOND FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 23.6%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
31,000,000 American Express Credit Corp., 4.65%, 10/3/94 . . . . . . . . . . . . . . . . . . . . 31,000,000
31,000,000 American Express Credit Corp., 4.6%, 10/3/94 . . . . . . . . . . . . . . . . . . . . 31,000,000
31,705,000 Associates Corp. of North America, 4.98%, 10/3/94 . . . . . . . . . . . . . . . . . . 31,705,000
9,388,000 Ford Motor Credit Co., 4.75%, 10/4/94 . . . . . . . . . . . . . . . . . . . . . . . . 9,388,000
31,000,000 ITT Financial Corp., 4.75%, 10/3/94 . . . . . . . . . . . . . . . . . . . . . . . . . 31,000,000
-----------
TOTAL COMMERCIAL PAPER (COST $134,093,000) . . . . . . . . . . . . . . . . . . . . . 134,093,000
-----------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCIES 34.1%
- ---------------------------------------------------------------------------------------------------------------------------
15,000,000 Federal National Mortgage Association, 9.65%, 8/10/20 . . . . . . . . . . . . . . . . 16,125,000
2,000,000 Resolution Funding Corp., Zero Coupon, 1/15/08 (8.20**) . . . . . . . . . . . . . . . 686,900
2,400,000 Resolution Funding Corp., Zero Coupon, 7/15/08 (8.23**) . . . . . . . . . . . . . . . 788,640
1,800,000 Resolution Funding Corp., Zero Coupon, 1/15/09 (8.25**) . . . . . . . . . . . . . . . 567,288
2,400,000 Resolution Funding Corp., Zero Coupon, 7/15/09 (8.27**) . . . . . . . . . . . . . . . 724,368
2,100,000 Resolution Funding Corp., Zero Coupon, 1/15/10 (8.30**) . . . . . . . . . . . . . . . 605,535
3,800,000 Resolution Funding Corp., Zero Coupon, 7/15/10 (8.31**) . . . . . . . . . . . . . . . 1,050,320
20,000,000 U.S. Treasury Note, 4.25%, 1/31/95 . . . . . . . . . . . . . . . . . . . . . . . . . 19,934,400
10,000,000 U.S. Treasury Note, 7.875%, 7/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . 10,225,000
35,000,000 U.S. Treasury Note, 5.5%, 9/30/97 . . . . . . . . . . . . . . . . . . . . . . . . . . 33,747,700
48,000,000 U.S. Treasury Note, 6.875%, 7/31/99 . . . . . . . . . . . . . . . . . . . . . . . . . 47,220,000
21,000,000 U.S. Treasury Note, 5.875%, 2/15/04 . . . . . . . . . . . . . . . . . . . . . . . . . 18,585,000
55,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/09 (8.15**) . 17,098,400
25,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/09 (8.16**)(b) 7,607,500
35,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 2/15/16 (8.26**) . 6,202,000
35,500,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/16 (8.26**) . 6,164,575
45,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/18 (8.25**) . 6,527,700
-----------
TOTAL U.S. GOVERNMENT & AGENCIES (COST $201,523,586) . . . . . . . . . . . . . . . . 193,860,326
-----------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 15.1%
- ---------------------------------------------------------------------------------------------------------------------------
30,000,000 Federal National Mortgage Association, 7.5%, 8/1/24 . . . . . . . . . . . . . . . . . 28,565,400
29,000,000 Government National Mortgage Association Pass-thru, 8%, 8/15/24 . . . . . . . . . . . 28,130,000
29,000,000 Government National Mortgage Association Pass-thru, 8.5%, 8/15/24 . . . . . . . . . . 28,954,470
-----------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS (COST $85,775,780) . . . . . . . . . . . . . 85,649,870
-----------
- ---------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS 4.5%
- ---------------------------------------------------------------------------------------------------------------------------
19,077,560 Federal Home Loan Mortgage Corp., Separate Trading Registered Principal
only, 5/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,452,824
10,000,000 Prudential Home Mortgage Securities Co., 1993-4 Series A3, 7%, 2/25/23 . . . . . . . 9,787,500
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $26,296,619) . . . . . . . . . . . . 25,240,324
-----------
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S.$ DENOMINATED 6.6%
- ---------------------------------------------------------------------------------------------------------------------------
13,000,000 ABN-AMRO Bank NV, subordinated note, 7.13%, 10/15/2093 . . . . . . . . . . . . . . . 10,413,130
3,500,000 Kingdom of Thailand, 8.7%, 8/1/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,604,790
12,000,000 Province of Ontario, 7.375%, 1/27/03 . . . . . . . . . . . . . . . . . . . . . . . . 11,431,800
8,000,000 Svensk Export Kredit AB, 8.625%, 4/15/26 . . . . . . . . . . . . . . . . . . . . . . 7,620,000
4,300,000 Tokyo Metropolis, Japan, 9.25%, 10/11/98 . . . . . . . . . . . . . . . . . . . . . . 4,561,870
-----------
TOTAL FOREIGN BONDS -- U.S.$ DENOMINATED (COST $41,972,182) . . . . . . . . . . . . . 37,631,590
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 5.3%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTOMOBILE RECEIVABLES 1.0%
6,000,000 Capital Automobile Receivable Asset Trust, Series A-6, 4.9%, 2/15/98 . . . . . . . . 5,943,720
----------
CREDIT CARD RECEIVABLES 0.6%
208,333 Bank of New York Master Credit Card Trust, Series A, 7.95%, 4/15/96 . . . . . . . . . 208,398
3,000,000 Standard Credit Card Trust, Series 1991 1-A, 8.5%, 6/7/96 . . . . . . . . . . . . . . 3,073,110
----------
3,281,508
----------
HOME EQUITY LOANS 2.4%
3,292,300 Fleet Financial Home Equity Trust, 6.65%, 10/16/06 . . . . . . . . . . . . . . . . . 3,260,407
10,892,473 United Companies Financial Corp., Home Loan Trust, Series 1993 B1, 6.075%, 7/25/14 . 10,293,414
----------
13,553,821
----------
MANUFACTURED HOUSING 1.3%
4,500,000 Merrill Lynch Mortgage Investors Inc., Series 1991 D-4, 9.85%, 7/15/11 . . . . . . . 4,591,395
2,540,536 Security Pacific Acceptance Corp., 7.85%, 9/15/11 . . . . . . . . . . . . . . . . . . 2,541,324
----------
7,132,719
----------
TOTAL ASSET BACKED (COST $30,436,473) . . . . . . . . . . . . . . . . . . . . . . . . 29,911,768
----------
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 20.0%
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES 2.6%
15,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/1/22 . . . . . . . . . . . . . . . . . . . . . . 14,759,700
----------
FINANCIAL 3.6%
1,500,000 American Express Credit Corp., 11.625%, 12/12/00 . . . . . . . . . . . . . . . . . . 1,673,437
4,000,000 British Telecom Financial, Inc., 9.375%, 2/15/99 . . . . . . . . . . . . . . . . . . 4,241,720
4,500,000 Grand Metropolitan Investment Corp., 8.125%, 8/15/96 . . . . . . . . . . . . . . . . 4,592,070
10,000,000 Toyota Motor Credit Corp., 5.75%, 6/15/95 . . . . . . . . . . . . . . . . . . . . . . 9,980,300
----------
20,487,527
----------
DURABLES 4.9%
10,000,000 Boeing Co., 6.875%, 10/15/43 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,907,000
15,000,000 Ford Motor Co., 8.875%, 1/15/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,283,950
5,000,000 Ford Motor Credit Co., 6.25%, 2/26/98 . . . . . . . . . . . . . . . . . . . . . . . . 4,808,450
----------
27,999,400
----------
MANUFACTURING 1.8%
10,000,000 Dow Chemical Co., 9%, 4/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,233,000
----------
ENERGY 3.0%
15,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 . . . . . . . . . . . . . . . . . . . . . . . 15,457,050
3,100,000 Halliburton Co., Zero Coupon, 3/13/06 (6.15**) . . . . . . . . . . . . . . . . . . . 1,550,000
----------
17,007,050
----------
TRANSPORTATION 1.0%
5,000,000 Consolidated Rail Corp., 9.75%, 6/15/20 . . . . . . . . . . . . . . . . . . . . . . . 5,571,600
----------
UTILITIES 3.1%
15,000,000 Pacific Bell, 7.125%, 3/15/26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,663,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
4,500,000 Pacific Gas & Electric Co., 1984 Series D, 12.75%, 11/1/17 . . . . . . . . . . . . . 5,007,150
-----------
17,670,900
-----------
TOTAL CORPORATE BONDS (COST $122,093,034) . . . . . . . . . . . . . . . . . . . . . . 113,729,177
-----------
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO (COST $642,190,674) (a) . . . . . . . . . . 109.2 620,116,055
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (9.2) (52,130,148)
----- -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 567,985,907
===== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Effective maturities will be shorter due to amortization and prepayments.
** Yield; (unaudited) bond equivalent yield to maturity; not a coupon rate.
(a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income
tax purposes of $642,190,674 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 1,701,720
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (23,776,339)
------------
Net unrealized depreciation . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(22,074,619)
============
(b) At September 30, 1994, $1,000,000 par value of U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/09,
with a market value of $304,300 was pledged to cover initial margin requirements for open futures contracts.
</TABLE>
<TABLE>
At September 30, 1994, open futures contracts sold short were as follows (Note 1):
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury
Notes . . . . . . . Dec 1994 113 11,701,433 11,465,969
---------- ----------
Total net unrealized appreciation on open futures contracts sold short. . 235,464
----------
The aggregate face value of futures contracts opened and closed during the year ended
September 30, 1994 was $54,312,247 and $58,604,190 respectively.
<FN>
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), aggregated $32,095,358 and $66,909,280,
respectively. Purchases and sales of U.S. Government obligations and U.S. Government Agencies, for the year ended September
30, 1994, aggregated $297,413,576 and $256,338,806, respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
From November 1, 1993 through September 30, 1994, the Fund incurred approximately $16,822,991 of net realized capital losses
which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are
comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be
greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
<TABLE>
AARP INSURED TAX FREE GENERAL BOND FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL INVESTMENTS (UNDER 1 YEAR) -- 9.6%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA
California Revenue Anticipation Note, 3.51%, 6/28/95 (c) . . . . . . . . . 10,000,000 AAA 10,000,000
Sacramento, CA, Municipal Utility District, Electric Revenue, Periodic
Auction Reset, Series D, 4%, 11/15/15* (c) . . . . . . . . . . . . . . . 8,800,000 AAA 8,800,000
Southern California Public Power Authority, Power Project Revenue
Refunding, Palo Verde, Periodic Auction Reset, 3.5%, 7/1/12* (c) . . . . 29,350,000 AAA 29,350,000
COLORADO
Colorado Tax and Revenue Anticipation Note, 4.5%, 6/27/95 . . . . . . . . . 5,000,000 MIG1 5,013,200
FLORIDA
Halifax Hospital Medical Center, FL, Hospital Revenue, Periodic Auction
Reset, Series A, 3.35%, 10/1/19* (c) . . . . . . . . . . . . . . . . . . 10,650,000 AAA 10,650,000
Palm Beach County, FL, Water & Sewer Revenue, Daily Demand Note,
3.8%, 10/1/11* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000 MIG1 2,100,000
ILLINOIS
Illinois Educational Facilities Authority, University Pooled Finance
Program, Weekly Demand Note, 3.7%, 12/1/05* (c) . . . . . . . . . . . . 15,175,000 AAA 15,175,000
MICHIGAN
Detroit, MI, Sewage Disposal System, Revenue Refunding, Periodic Auction
Reset, Series A, 3.35%, 7/1/23* (c) . . . . . . . . . . . . . . . . . . 22,000,000 AAA 22,000,000
MINNESOTA
Minneapolis/St. Paul, MN, Healthcare System, Healthspan, Periodic
Auction Reset, 3.25%, 11/15/17* (c) . . . . . . . . . . . . . . . . . . 5,000,000 A-1+ 5,000,000
NEW YORK
New York City General Obligation, Daily Demand Note, 3.8%, 8/1/21* . . . . 1,900,000 MIG1 1,900,000
PUERTO RICO
Commonwealth of Puerto Rico, Highway & Transportation Authority,
Series W, Periodic Auction Reset, 3.595%, 7/1/10* . . . . . . . . . . . 9,450,000 A 9,450,000
Commonwealth of Puerto Rico, Telephone Authority Revenue,
Series II93-10, Periodic Auction Reset, 3.23%, 1/1/20* (c) . . . . . . . 3,400,000 AAA 3,400,000
TEXAS
North Central Texas, Health Facilities Development Corp., Methodist
Hospital of Dallas, Daily Demand Note, 3.8%, 10/1/15* (c) . . . . . . . 4,000,000 A-1 4,000,000
WASHINGTON
Washington Public Power Supply System, Periodic Auction Reset:
Nuclear Project #1, Series A, 3.75%, 7/1/11* (c) . . . . . . . . . . . . 15,000,000 AAA 15,000,000
Nuclear Project #2, 3.75%, 7/1/10* (c) . . . . . . . . . . . . . . . . . 25,000,000 AAA 25,000,000
WISCONSIN
Wisconsin General Obligation, 4.5%, 6/15/95 . . . . . . . . . . . . . . . . 17,000,000 SP-1+ 17,047,770
-----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS (COST $183,940,472) . . . . . . . . 183,885,970
-----------
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL INVESTMENTS (OVER 1 YEAR) -- 89.2%
- -------------------------------------------------------------------------------------------------------------------------
ALABAMA
Birmingham, AL, Baptist Medical Center, Special Care Facility, Series A,
5.5%, 8/15/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800,000 AAA 2,492,196
Montgomery, AL, Baptist Medical Center, Special Care Facility, Series A,
5.75%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,615,000 AAA 2,443,848
ALASKA
Anchorage, AK, Certificate of Participation, Series A, 7.8%, 2/15/06 (c) . 10,000,000 AAA 10,571,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
<TABLE>
AARP INSURED TAX FREE GENERAL BOND FUND
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
North Slope Borough, AK, General Obligation:
1993 Series B, Zero Coupon, 1/1/03 (c) . . . . . . . . . . . . . . . . . 16,000,000 AAA 9,885,920
Series I, Zero Coupon, 6/30/95 (c) . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,377,920
Series I, 6.55%, 6/30/95 (c) . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,029,400
ARIZONA
Arizona Municipal Finance Program, Certificate of Participation,
Series 25, 7.875%, 8/1/14 (c) . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 4,150,020
Maricopa County, AZ:
Hospital District #1, Hospital Facilities Revenue, 1985 Series A,
9.25%, 6/30/12, Prerefunded 6/30/95 at 102 (c) . . . . . . . . . . . 1,500,000 AAA 1,585,515
School District #28, Kyrene Elementary, Series B,
Zero Coupon, 1/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 AAA 3,493,980
School District #6, Washington Elementary, Series B, 4.1%, 7/1/13 (c) . 2,950,000 AAA 2,178,310
School District #41, Gilbert School, Zero Coupon, 1/1/05 (c) . . . . . . 5,280,000 AAA 2,865,720
School District #68, Alhambra Elementary, Zero Coupon, 7/1/03 (c) . . . 2,860,000 AAA 1,728,012
School District #68, Alhambra Elementary, Zero Coupon, 7/1/04 (c) . . . 2,860,000 AAA 1,617,502
School District #68, Alhambra Elementary, Zero Coupon, 7/1/05 (c) . . . 2,850,000 AAA 1,501,409
Scottsdale, AZ, Industrial Development Authority, Scottsdale Memorial
Hospital, 8.5%, 9/1/17 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,050,000 AAA 1,158,402
CALIFORNIA
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,615,000 AAA 10,657,343
Banning, CA, Wastewater, Certificate of Participation, 8%, 1/1/19 (c) . . . 2,040,000 AAA 2,439,003
California Health Facilities Finance Authority, Hospital Revenue,
Centinela Hospital Medical Center, 9.375%, 9/1/15, Prerefunded 9/1/95
at 102 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,327,300
California Public Works Board, Department of Corrections, Lease
Revenue, Series A:
5.25%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 9,000,000 AAA 8,259,840
5.25%, 12/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,712,510
Secretary of State, 6.2%, 12/1/05 (c) . . . . . . . . . . . . . . . . . 4,520,000 AAA 4,723,400
Secretary of State, 6.3%, 12/1/06 (c) . . . . . . . . . . . . . . . . . 8,095,000 AAA 8,443,975
California Statewide Communities Development Corporation,
Certificate of Participation, Children's Hospital, 5%, 6/1/06 (c) . . . 2,035,000 AAA 1,865,769
Los Angeles County, CA, Capital Asset Leasing, 6%, 12/1/06 (c) . . . . . . 9,000,000 AAA 9,006,660
Los Angeles County, CA, Public Works Finance Authority,
Lease Revenue, Multiple Projects IV, 4.75%, 12/1/10 (c) . . . . . . . . 11,140,000 AAA 9,137,696
Northern California Power Agency, Public Power Revenue,
Geothermal Project #3, 11.5%, 7/1/10, Prerefunded 7/1/95 at 103 . . . . 85,000 AAA 89,604
Northern California Transmission Revenue, Ore Transmission Project,
Series A, 5.1%, 5/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,608,100
Oakland, CA, Redevelopment Agency, Tax Allocation, 6%, 2/1/07 (c) . . . . . 2,000,000 AAA 2,018,900
Palomar Pomerado, CA, Health Systems, Series B, Zero Coupon,
11/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080,000 AAA 1,947,453
Riverside, CA, Transportation Commission, Sales Tax Revenue, Series A:
5.7%, 6/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400,000 AAA 5,327,154
5.75%, 6/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,973,120
5.75%, 6/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,425,000 AAA 2,375,360
San Diego County Water Authority, CA, Certificate of Participation:
5.632%, 4/25/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,300,000 AAA 6,080,130
5.681%, 4/22/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 AAA 4,290,165
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue
Refunding, 6.75%, 7/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,115,540
</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>
San Joaquin, CA, Certificate of Participation, County Public Facilities
Project, 5.5%, 11/15/13 (c) . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 1,788,680
Sweetwater, CA, Water Revenue, 5.25%, 4/1/10 (c) . . . . . . . . . . . . . 13,240,000 AAA 11,852,448
University of California Regents, Multiple Purpose Projects, Series C,
5.125%, 9/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,539,920
DELAWARE
Delaware Health Facilities Authority, Medical Center of Delaware,
6.25%, 10/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,695,000 AAA 2,819,401
DISTRICT OF COLUMBIA
District of Columbia, General Obligation:
Refunding, 1989 Series B, Zero Coupon, 6/1/00 (c) . . . . . . . . . . . 3,500,000 AAA 2,533,755
1993 Series B, 5.4%, 6/1/06 (c) . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 9,380,900
Refunding, 1993 Series B, 5.4%, 6/1/06 (c) . . . . . . . . . . . . . . . 18,905,000 AAA 17,734,591
Refunding, 1993 Series B, 5.5%, 6/1/07 (c) . . . . . . . . . . . . . . . 25,000,000 AAA 23,393,500
Refunding, 1993 Series B, 5.5%, 6/1/08 (c) . . . . . . . . . . . . . . . 21,300,000 AAA 19,531,887
Refunding, 1993 Series B, 5.5%, 6/1/09 (c) . . . . . . . . . . . . . . . 15,150,000 AAA 13,796,045
Refunding, 1993 Series B, 5.5%, 6/1/10 (c) . . . . . . . . . . . . . . . 15,590,000 AAA 14,070,131
Series B, 5.5%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . 2,840,000 AAA 2,586,189
Series B, 5.5%, 6/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,050,000 AAA 932,442
Refunding, 1993 Series B, 5.875%, 6/1/05 (c) . . . . . . . . . . . . . . 4,750,000 AAA 4,692,193
Series B, 6.125%, 6/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 4,079,000
Series A, 7.5%, 6/1/09, Prerefunded 6/1/99 at 102 (c) . . . . . . . . . 5,000,000 AAA 5,571,550
9.9%, 12/1/00, Prerefunded 12/1/95 at 102 (c) . . . . . . . . . . . . . 750,000 AAA 811,860
FLORIDA
Dade County, FL, Health Facilities Authority, Miami Children's Hospital,
5%, 8/1/23, Prerefunded 2/1/10 at 100 . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,662,980
Florida Department of Environmental Preservation, 4.75%, 7/1/12 (c) . . . . 10,000,000 AAA 8,098,800
Florida Municipal Power Agency, Refunding Revenue, Stanton II Project,
Series 1993, 4.5%, 10/1/16 (c) . . . . . . . . . . . . . . . . . . . . . 4,400,000 AAA 3,339,468
Florida Turnpike Authority, Department of Transportation, Series A,
5.25%, 7/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 9,261,300
Orange County, FL, Tax Revenue, Tourist Development, Series A,
5.75%, 10/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 1,972,980
Orlando, FL, Utility Commission, Water & Electric Refunding Revenue,
8.5%, 10/1/09, Prerefunded 10/1/95 at 102 . . . . . . . . . . . . . . . 3,200,000 AAA 3,394,784
Sarasota County, FL, School Board Finance Corp., Lease Revenue:
5%, 7/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800,000 AAA 3,303,720
Refunding, 5%, 7/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,595,000 AAA 4,892,380
GEORGIA
Burke County, GA, Development Authority, Pollution Control Revenue,
Vogtle Project, 11.75%, 11/1/14 (c) . . . . . . . . . . . . . . . . . . 3,150,000 AAA 3,237,192
Clark County, GA, General Obligation, School District, 5.4%, 7/1/07 (c) . . 2,460,000 AAA 2,333,679
Cobb County, GA, Kennestone Hospital Authority, Series A,
5.625%, 4/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,305,000 AAA 4,940,759
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central
Florida, Series C, 5.25%, 8/1/11 (c) . . . . . . . . . . . . . . . . . . 11,225,000 AAA 9,873,510
Municipal Electric Authority of Georgia, 5th Crossover, Project #1,
6.4%, 1/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,544,765
ILLINOIS
Berwyn, IL, Hospital Revenue, MacNeal Memorial Hospital Project,
7%, 6/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 4,146,560
Central Lake County, IL, Joint Action Water Agency, Refunding Revenue:
Zero Coupon, 5/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,245,000 AAA 1,451,729
</TABLE>
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
<TABLE>
AARP INSURED TAX FREE GENERAL BOND FUND
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5.3%, 5/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,120,000 AAA 2,005,647
5.4%, 5/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,280,000 AAA 2,146,711
Chicago, IL, Wastewater Transmission Revenue:
5.3%, 1/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400,000 AAA 2,306,208
5.5%, 1/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,990,000 AAA 11,191,106
5.5%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,220,000 AAA 6,671,569
Chicago, IL, General Obligation:
5%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,760,000 AAA 7,537,454
Series B, 5%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,209,950
Series B, 5.125%, 1/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . 9,550,000 AAA 7,903,962
Series A, 5.375%, 1/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . 15,410,000 AAA 13,481,439
Emergency Telephone System, 5.55%, 1/1/08 (c) . . . . . . . . . . . . . 5,820,000 AAA 5,518,524
Series B, 5%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . 6,820,000 AAA 5,832,328
6.25%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,984,490
Chicago, IL, General Obligation Lease, Board of Education, Series A:
6.25%, 1/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000,000 AAA 22,506,420
6%, 1/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,025,000 AAA 10,417,523
6%, 1/1/20 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,625,000 AAA 34,276,971
6.25%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,800,000 AAA 6,805,780
Chicago, IL, Motor Fuel Tax Revenue, 6.5%, 1/1/16, Prerefunded 1/1/01
at 100 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,118,480
Chicago, IL, Public Building Commission, Building Revenue, Series A:
5.25%, 12/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400,000 AAA 4,697,082
5.25%, 12/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,420,000 AAA 9,266,402
5.25%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,212,160
Board of Education, Zero Coupon, 1/1/06 . . . . . . . . . . . . . . . . 2,430,000 AAA 1,226,397
Chicago, IL, School Finance Authority, Series A, 5%, 6/1/09 (c) . . . . . . 10,425,000 AAA 8,968,211
Chicago O'Hare International Airport, IL, Revenue Refunding, Series C:
5%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,410,000 AAA 13,259,380
5%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500,000 AAA 13,977,810
5%, 1/1/18 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,900,000 AAA 4,737,464
Cook County, IL, General Obligation (c):
Zero Coupon, 11/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,205,000 AAA 1,798,678
Series C, 6%, 11/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,986,100
Decatur, IL, General Obligation, Series 1991, Zero Coupon:
10/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455,000 AAA 860,516
10/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,415,000 AAA 782,552
Decatur, IL, Public Building Commission, General Obligation,
Certificate of Participation:
6.5%, 1/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,725,000 AAA 1,822,790
6.5%, 1/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 AAA 1,570,545
Illinois, Dedicated Tax Revenue, Civic Center:
Series A, 6.5%, 12/15/06 (c) . . . . . . . . . . . . . . . . . . . . . . 3,535,000 AAA 3,714,189
Series A, 6.5%, 12/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . 4,400,000 AAA 4,560,864
6.25%, 12/15/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,974,680
6.25%, 12/15/20 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,975,000 AAA 6,730,457
Illinois Educational Facilities Authority Revenue, Loyola University:
1991 Series A, Zero Coupon, 7/1/04 (c) . . . . . . . . . . . . . . . . . 2,860,000 AAA 1,605,289
Zero Coupon, 7/1/05 (c) (d) . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 2,089,720
Illinois Health Facilities Authority Revenue, Brokaw-Mennonite Healthcare:
6%, 8/15/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,380,000 AAA 1,381,021
6%, 8/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,460,000 AAA 1,452,116
6%, 8/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,550,000 AAA 1,531,912
6%, 8/15/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,640,000 AAA 1,608,266
</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>
Illinois Health Facilities Authority Revenue:
Children's Memorial, 6.25%, 8/15/13 (c) . . . . . . . . . . . . . . . . 2,000,000 AAA 1,962,900
Felician Healthcare Inc., Series A, 6.25%, 1/1/15 (c) . . . . . . . . . 17,000,000 AAA 16,485,750
Memorial Medical Center, 6.75%, 10/1/11 (c) . . . . . . . . . . . . . . 2,135,000 AAA 2,195,890
Methodist Health Service, 1985 Series G, 8%, 8/1/15 (c) . . . . . . . . 10,210,000 AAA 11,306,758
University of Chicago, 8.1%, 8/1/14, Prerefunded 8/1/97 at 102 (c) . . . 11,205,000 AAA 12,353,513
Sherman Hospital, 6.75%, 8/1/11 (c) . . . . . . . . . . . . . . . . . . 2,700,000 AAA 2,770,011
Illinois State Toll Highway Authority, 1992 Series A, 5.75%, 1/1/17 (c) . . 15,400,000 AAA 13,734,336
Joliet, IL, Junior College Assistance Corp., Lease Revenue, North
Campus Extension Center, 6.7%, 9/1/12 (c) . . . . . . . . . . . . . . . 2,500,000 AAA 2,598,125
Kendall, Kane and Will Counties, IL, Community Unit School District #308:
Zero Coupon, 3/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,055,000 AAA 688,778
Zero Coupon, 3/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,540,000 AAA 820,912
Zero Coupon, 3/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,595,000 AAA 789,844
Metropolitan Pier & Exposition Authority, IL, McCormick Place Expansion
Project, Zero Coupon:
12/15/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200,000 AAA 1,858,304
6/15/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,300,000 AAA 5,758,421
Northern Cook County, IL, Solid Waste Agency Contract Revenue,
6.5%, 5/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 AAA 6,119,520
Northwest Suburban Municipal Joint Action Water Agency, IL, Supply
System Revenue, 6.45%, 5/1/07 (c) . . . . . . . . . . . . . . . . . . . 2,575,000 AAA 2,671,563
Rosemont, IL, General Obligation, Corporate Purpose Project 3,
Series C, Zero Coupon, 12/1/94 (c) . . . . . . . . . . . . . . . . . . . 1,510,000 AAA 1,500,185
Rosemont, IL, Tax Increment, Series C:
Zero Coupon, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,655,000 AAA 1,162,545
Zero Coupon, 12/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,455,000 AAA 2,269,644
State University Retirement System, IL, Special Revenue, Zero Coupon,
10/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750,000 AAA 1,626,405
University of Illinois, Board of Trustees, Series 1991:
Zero Coupon, 4/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,890,000 AAA 2,368,699
Zero Coupon, 4/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,830,000 AAA 2,031,355
Will County, IL, Community Unit School District #201-U, Crete-monee:
Zero Coupon, 12/15/01 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,730,000 AAA 1,149,672
Zero Coupon, 12/15/00 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,325,000 AAA 936,974
INDIANA
Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%, 11/15/12 (c) . 1,400,000 AAA 1,409,758
Indiana, Government Center North, Parking Facilities, 1993 Series A,
5.25%, 7/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,195,000 AAA 5,188,870
Indiana Health Facilities Finance Authority, Hospital Revenue:
Ancilla Systems Inc., Series A, 6%, 7/1/18 (c) . . . . . . . . . . . . . 27,635,000 AAA 25,750,017
Community Hospital Project, 6.4%, 5/1/12 (c) . . . . . . . . . . . . . . 5,000,000 AAA 4,963,150
Indiana Municipal Power Agency, Power Supply System, Series B:
5.5%, 1/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,443,450
6%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,455,000 AAA 15,031,378
6%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 1,933,080
5.875%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,300,000 AAA 5,120,807
Indiana Transportation Finance Authority, Highway Revenue, Series A,
5.25%, 6/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,100,000 AAA 4,543,080
Indiana University, Revenue Refunding, Series H, Zero Coupon, 8/1/06 (c) . 8,500,000 AAA 4,102,610
Indiana University, Student Fees Revenue, Series J, 5%, 8/1/18 (c) . . . . 4,200,000 AAA 3,338,580
Madison County, IN, Community Hospital of Anderson, Facility Revenue,
8%, 1/1/14, Prerefunded 1/1/98 at 102 (c) . . . . . . . . . . . . . . . 7,055,000 AAA 7,802,407
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
<TABLE>
AARP INSURED TAX FREE GENERAL BOND FUND
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merrillville, IN, Multiple School Building Corp., First Mortgage,
Zero Coupon, 1/15/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 1,373,480
Porter County, IN, Hospital Authority, Porter Memorial Hospital,
Series 1993, 5.25%, 6/1/14 (c) . . . . . . . . . . . . . . . . . . . . . 8,750,000 AAA 7,339,675
IOWA
Muscatine, IA, Electric Utility, Revenue Refunding, 7.625%, 1/1/04 (c) . . 6,600,000 AAA 6,930,726
Polk County, IA, Mercy Hospital, 6.75%, 11/1/05 (c) . . . . . . . . . . . . 5,000,000 AAA 5,296,900
KANSAS
Kansas City, KS, Utility System Revenue:
Zero Coupon, 9/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,300,000 AAA 2,814,777
Zero Coupon, 9/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,575,000 AAA 2,025,559
Zero Coupon, 9/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,875,000 AAA 932,156
Zero Coupon, 9/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,640,000 AAA 1,488,617
Zero Coupon, 9/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,950,000 AAA 2,075,686
Zero Coupon, 9/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,375,000 AAA 671,811
KENTUCKY
Kentucky Property and Buildings Commission, Project #55, 4.5%, 9/1/02 (c) . 4,300,000 AAA 3,923,234
LOUISIANA
Lafayette, LA, Public Improvement, Sales Tax Revenue, 8%, 3/1/09,
Prerefunded 3/1/98 at 102 (c) . . . . . . . . . . . . . . . . . . . . . 3,695,000 AAA 4,101,635
Louisiana Public Facilities Authority, 4.75%, 5/1/16, Prerefunded 2/15/08
at 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,765,000 AAA 5,098,566
New Orleans, LA, General Obligation, Zero Coupon, 9/1/07 (c) . . . . . . . 10,000,000 AAA 4,492,700
MARYLAND
University of Maryland, Facilities & Tuition Revenue, 4.75%, 10/1/07 (c) . 14,605,000 AAA 12,768,859
MASSACHUSETTS
Massachusetts Bay Transportation Authority:
General Transportation System, 5.25%, 3/1/06 (c) . . . . . . . . . . . . 10,000,000 AAA 9,433,200
General Transportation System, 5.4%, 3/1/07 (c) . . . . . . . . . . . . 5,000,000 AAA 4,731,250
Massachusetts General Obligation:
Series C, 4.95%, 8/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 9,163,900
Series C2, 5%, 8/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . 20,000,000 AAA 18,037,200
Series A, 7%, 3/1/99 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,850,000 AAA 5,200,316
Series D, 7%, 10/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . 7,000,000 AAA 7,541,310
Dedicated Income Tax, Series A, 7.875%, 6/1/97 (c) . . . . . . . . . . . 13,080,000 AAA 14,058,122
Massachusetts Health & Educational Facilities Authority:
Lahey Clinic, Series A, 7.6%, 7/1/08, Prerefunded 7/1/98 at 102 (c) . . 3,000,000 AAA 3,314,490
Lahey Clinic, Series A, 7.625%, 7/1/18, Prerefunded 7/1/98 at 102 (c) . 2,350,000 AAA 2,598,325
Massachusetts Health & Educational Facilities Authority, Tufts University,
Inverse Floater, 6.27%, 8/15/18*** (c) . . . . . . . . . . . . . . . . . 4,000,000 AAA 3,329,000
Massachusetts Housing Finance Agency, Multi-Family Mortgage Purchase
Revenue, 1985 Series A, 9.25%, 12/1/14 (c) . . . . . . . . . . . . . . . 2,500,000 AAA 2,653,150
Massachusetts Municipal Wholesale Electric Company:
Power Supply System Revenue, Series A, 5.1%, 7/1/06 (c) . . . . . . . . 8,795,000 AAA 8,077,680
Power Supply System Revenue, Series A, 5.1%, 7/1/07 (c) . . . . . . . . 2,000,000 AAA 1,801,300
Power Supply System Revenue, Series A, 5.1%, 7/1/08 (c) . . . . . . . . 4,000,000 AAA 3,538,760
MICHIGAN
Brighton, MI, Area School District, Series I, Zero Coupon, 5/1/20,
Prerefunded 5/1/05 at 34.134 (c) . . . . . . . . . . . . . . . . . . . . 27,675,000 AAA 5,019,415
Detroit, MI, General Obligation, Distributable State Aid Refunding:
5.2%, 5/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,787,360
5.25%, 5/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 AAA 1,369,020
</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>
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess
Medical Center, Series A, 6%, 7/1/09 (c) . . . . . . . . . . . . . . . . 8,250,000 AAA 8,555,663
Michigan Hospital Finance Authority, Sisters of Mercy Healthcorp
Obligated Group, Series P:
5.1%, 8/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,780,250
5.25%, 8/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 8,655,000 AAA 7,829,053
Michigan Housing Development Authority, Single Family Mortgage
Revenue, 1993 Series B, 3.55%, 12/1/18 . . . . . . . . . . . . . . . . . 13,100,000 AA 13,060,831
Michigan Municipal Bond Authority, Local Government Loan Program,
School Improvement-Ad Valorem Tax, Zero Coupon, 5/15/04 (c) . . . . . . 5,805,000 AAA 3,307,689
MISSISSIPPI
Mississippi Hospital Equipment Facilities Authority, North Mississippi
Health Services, 5.5%, 5/15/09 (c) . . . . . . . . . . . . . . . . . . . 5,050,000 AAA 4,644,485
MISSOURI
Missouri Health & Educational Facilities Authority, SSM Healthcare,
1992 Series A:
6.35%, 6/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,125,000 AAA 8,348,519
6.4%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,640,000 AAA 8,866,886
6.4%, 6/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 9,195,000 AAA 9,367,406
Sikeston, MO, Electric Revenue Refunding, 5.5%, 6/1/06 (c) . . . . . . . . 6,030,000 AAA 6,155,545
NEVADA
Clark County, NV, General Obligation, School District, Series B,
Zero Coupon, 3/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 8,070,000 AAA 4,301,794
NEW JERSEY
New Jersey Housing and Finance Agency, Home Mortgage Purchase
Revenue, Zero Coupon, 10/1/16 (c) . . . . . . . . . . . . . . . . . . . 5,155,000 AAA 523,542
NEW YORK
Metropolitan Transportation Authority, NY, Transit Facilities Revenue:
Series N, 4.9%, 7/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . 8,500,000 AAA 7,473,285
Series F, 8.375%, 7/1/16, Prerefunded 7/1/96 at 102 (c) . . . . . . . . 7,000,000 AAA 7,592,760
New York City Educational Construction Fund, 1989 Series A,
6.8%, 10/1/99 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,373,450
New York City General Obligation:
Series D, 6%, 8/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 140,000 AAA 140,568
Series D, 6%, 8/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . 370,000 AAA 368,246
Series C, 6.25%, 8/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . 150,000 AAA 157,068
Series C, ETM, 6.25%, 8/1/02** (c) . . . . . . . . . . . . . . . . . . . 5,720,000 AAA 6,030,482
Series C, 6.4%, 8/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . 500,000 AAA 525,260
Series C, 6.4%, 8/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . 430,000 AAA 448,434
Series C, 6.4%, 8/1/05, Prerefunded 8/1/02 at 101.50 (c) . . . . . . . . 16,730,000 AAA 17,962,332
ETM, 6.9%, 8/15/98** (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,150,000 AAA 3,377,840
6.9%, 8/15/98 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,850,000 AAA 1,975,634
Series E, 7%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . 115,000 AAA 122,852
Series H, 7.2%, 8/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . 2,585,000 AAA 2,825,844
8%, 11/1/00 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915,000 AAA 1,000,946
Series A, ETM, 8%, 11/1/00** (c) . . . . . . . . . . . . . . . . . . . . 585,000 AAA 644,799
8.125%, 11/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000 AAA 1,556,604
Series A, 8%, 11/1/01 (c) . . . . . . . . . . . . . . . . . . . . . . . 740,000 AAA 854,811
Series A, 8%, 11/1/01 (c) . . . . . . . . . . . . . . . . . . . . . . . 760,000 AAA 832,633
Series D, 8%, 8/1/05, Prerefunded 8/1/97 at 102 (c) . . . . . . . . . . 830,000 AAA 917,640
Series D, 8%, 8/1/05 . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 AAA 185,851
Series D, 3%, 8/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . 9,000,000 AAA 7,464,420
Series E, ETM, 7%, 12/1/07** (c) . . . . . . . . . . . . . . . . . . . . 1,385,000 AAA 1,490,980
</TABLE>
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
<TABLE>
AARP INSURED TAX FREE GENERAL BOND FUND
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Dormitory Authority Revenue, City University Revenue:
Series D, 7%, 7/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 4,358,720
Series C, 7.5%, 7/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,750,000 AAA 6,475,363
New York State Dormitory Authority Revenue, College & University
Pooled Capital Program, 7.8%, 12/1/05 (c) . . . . . . . . . . . . . . . 11,805,000 AAA 12,925,058
New York State Medical Care Facilities Agency, Mental Health Services,
Series F, 4.8%, 8/15/05 (c) . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 8,932,800
New York State Urban Development Corporation, Correctional Facilities,
Series A, 5%, 1/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,315,000 AAA 3,874,525
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency, Power System
Revenue, Series B, 6%, 1/1/18 (c) . . . . . . . . . . . . . . . . . . . 8,775,000 AAA 8,321,771
North Carolina Municipal Power Agency, Catawba Electric Revenue:
5.25%, 1/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 AAA 2,261,975
6%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,235,000 AAA 9,092,781
NORTH DAKOTA
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center,
Series 1991, Zero Coupon, 5/1/02 (c) . . . . . . . . . . . . . . . . . . 2,850,000 AAA 1,842,953
OHIO
Hamilton County, OH, Electric System Mortgage Revenue Refunding,
Series B, 8%, 10/15/22, Prerefunded 10/15/98 at 102 (c) . . . . . . . . 3,720,000 AAA 4,184,628
Ohio Air Quality Development Authority, Ohio Power Co., 7.4%, 8/1/09 (c) . 5,000,000 AAA 5,428,450
Ohio Building Authority, 4.9%, 4/1/07 (c) . . . . . . . . . . . . . . . . . 3,375,000 AAA 2,970,236
OKLAHOMA
Oklahoma Industrial Authority Revenue, Baptist Medical Center,
Series A, 7%, 8/15/14 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,261,650
Tulsa, OK, Industrial Authority:
Hospital Revenue, St. John's Medical Center, Zero Coupon, 12/1/04 (c) . 5,430,000 AAA 2,973,522
St. John's Medical Center, Zero Coupon, 12/1/02 (c) . . . . . . . . . . 3,930,000 AAA 2,457,547
PENNSYLVANIA
Commonwealth of Pennsylvania, Certificate of Participation,
Lease Revenue, Series A, 5.25%, 7/1/11 (c) . . . . . . . . . . . . . . . 14,000,000 AAA 12,358,360
Pennsylvania Industrial Development Authority:
Economic Development Revenue, 5.8%, 1/1/08 (c) . . . . . . . . . . . . . 4,250,000 AAA 4,176,305
Economic Development Revenue, 5.8%, 7/1/08 (c) . . . . . . . . . . . . . 4,875,000 AAA 4,788,469
Economic Development Revenue, 5.8%, 1/1/09 (c) . . . . . . . . . . . . . 2,500,000 AAA 2,433,575
Philadelphia, PA, Gas Works Revenue, Series 8, 8.7%, 5/1/05, Prerefunded
5/1/95 at 102.50 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,250,000 AAA 3,420,008
Philadelphia, PA, General Obligation, 8.25%, 2/15/09, Prerefunded 2/15/96
at 102 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,215,000 AAA 1,296,490
Philadelphia, PA, Water & Wastewater Revenue:
5.5%, 6/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,787,850
5.625%, 6/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000 AAA 2,011,758
5.625%, 6/15/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 20,855,000 AAA 19,841,238
5.625%, 6/15/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000,000 AAA 19,027,800
Philadelphia, PA, Municipal Authority Revenue, Series B, 6.9%,
11/15/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,212,720
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health, 5.375%, 7/1/11 (c) . . . . . . . . . . . . . . . . 6,750,000 AAA 6,031,665
PUERTO RICO
Commonwealth of Puerto Rico, General Obligation, Public Improvement
Refunding, 8%, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,700,000 AAA 5,671,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RHODE ISLAND
Rhode Island Clean Water Protection Agency, Pollution Control Revenue,
Revolving Fund, Series A, 5.4%, 10/1/15 (c) . . . . . . . . . . . . . . 2,000,000 AAA 1,743,600
Rhode Island Convention Center Authority, 1993 Series B:
5%, 5/15/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,301,200
5.25%, 5/15/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,750,000 AAA 13,331,903
Rhode Island Depositors Economic Protection Corp., Series B:
5.8%, 8/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,200,000 AAA 5,879,584
5.8%, 8/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,525,000 AAA 4,233,907
5.8%, 8/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 AAA 2,321,500
5.8%, 8/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,340,000 AAA 6,763,149
Rhode Island Public Building Authority, Public Project Revenue,
Series A, 8.2%, 2/1/08, Prerefunded 2/1/98 at 102 (c) . . . . . . . . . 2,200,000 AAA 2,450,932
SOUTH CAROLINA
Charleston County, SC, Hospital Authority, 5.5%, 10/1/19 . . . . . . . . . 3,000,000 AAA 2,562,810
Piedmont Municipal Power Agency, SC, Electric Revenue:
5.5%, 1/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,915,000 AAA 1,807,205
Series C, 5.5%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,533,350
Series A, 6.5%, 1/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 3,016,830
Richland County, SC, Hospital Facility Revenue, Baptist Hospital,
Series B, Zero Coupon, 8/1/04 (c) . . . . . . . . . . . . . . . . . . . 2,250,000 AAA 1,266,323
TENNESSEE
Chattanooga-Hamilton County, TN, Erlanger Medical, 5.6%, 10/1/08 (c) . . . 1,145,000 AAA 1,096,784
Knox County, TN, Health & Educational Hospital Facilities:
5.75%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,405,000 AAA 14,608,870
5.75%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,880,000 AAA 16,798,439
6.25%, 1/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500,000 AAA 6,412,185
TEXAS
Austin, TX, Combined Utility System Revenue, 7.875%, 11/15/06,
Prerefunded 5/15/01 at 100 (c) . . . . . . . . . . . . . . . . . . . . . 2,550,000 AAA 2,908,020
Bexar County, TX, Health Facility Development Corp., Revenue Refunding,
Independence Hill Project, 7.5%, 12/1/98 (c) . . . . . . . . . . . . . . 1,000,000 AAA 1,093,780
Collin County, TX, General Obligation, Jail Facility, 5.875%, 3/1/07 (c) . 800,000 AAA 790,592
Dallas, TX, Housing Finance Corp., Single Family Mortgage Revenue,
Zero Coupon, 10/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . . 7,450,000 AAA 750,215
Dallas-Fort Worth, TX, Airport Revenue, Series A:
7.375%, 11/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 AAA 4,979,430
7.375%, 11/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,846,010
7.75%, 11/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 AAA 1,146,040
7.8%, 11/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,320,440
7.8%, 11/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,025,000 AAA 2,330,735
East Texas Housing Finance Corp., Single Family Mortgage Program,
1985 Series A, Zero Coupon, 10/15/16 (c) . . . . . . . . . . . . . . . . 11,545,000 AAA 1,061,794
Harris County, TX, Toll Road Authority, Subordinate Lien, Unlimited Tax:
Series A, Zero Coupon, 8/15/04 (c) . . . . . . . . . . . . . . . . . . . 2,050,000 AAA 1,151,137
Series A, Zero Coupon, 8/15/05 (c) . . . . . . . . . . . . . . . . . . . 4,025,000 AAA 2,105,035
Series A, Zero Coupon, 8/15/06 (c) . . . . . . . . . . . . . . . . . . . 4,010,000 AAA 1,948,700
Series A, 5%, 8/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,131,275
Harris County, TX, General Obligation:
Flood Control District, Zero Coupon, 10/1/00 (c) . . . . . . . . . . . . 1,000,000 AAA 718,650
Zero Coupon, 10/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 9,035,000 AAA 4,356,677
Zero Coupon, 10/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,250,000 AAA 1,452,620
Houston, TX, Water & Sewer System Authority, Series C:
Zero Coupon, 12/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 18,600,000 AAA 9,558,354
</TABLE>
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
<TABLE>
AARP INSURED TAX FREE GENERAL BOND FUND
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zero Coupon, 12/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 14,575,000 AAA 6,957,231
Zero Coupon, 12/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 4,090,100
Zero Coupon, 12/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . 14,750,000 AAA 5,556,768
Lubbock, TX, Health Facilities Development, Methodist Hospital:
Series B, 5.5%, 12/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . 3,945,000 AAA 3,792,407
Series B, 5.6%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . 2,415,000 AAA 2,317,048
Series B, 5.625%, 12/1/08 (c) . . . . . . . . . . . . . . . . . . . . . 4,400,000 AAA 4,183,080
Lubbock, TX, Health Facilities Development, 5.625%, 12/1/09 (c) . . . . . . 4,640,000 AAA 4,366,518
Montgomery County, TX, Library Refunding, Zero Coupon, 9/1/03 (c) . . . . . 3,475,000 AAA 2,079,544
Montgomery County, TX, Library Refunding, Zero Coupon, 9/1/04 (c) . . . . . 3,475,000 AAA 1,946,278
Montgomery County, TX, Library Refunding, Zero Coupon, 9/1/05 (c) . . . . . 3,475,000 AAA 1,812,595
North Central Texas Health Facilities Development Corp., Presbyterian
Healthcare System Hospital Revenue, 8.875%, 12/1/15, Prerefunded
12/1/97 at 102 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,666,850
San Antonio, TX, Electric & Gas Revenue Refunding:
Series A, Zero Coupon, 2/1/05 (c) . . . . . . . . . . . . . . . . . . . 2,500,000 AAA 1,359,675
Series B, Zero Coupon, 2/1/05 (c) . . . . . . . . . . . . . . . . . . . 8,000,000 AAA 4,350,960
Series A, Zero Coupon, 2/1/06 (c) . . . . . . . . . . . . . . . . . . . 17,900,000 AAA 9,057,758
Tarrant County, TX, Health Facilities Development Corp.:
Fort Worth Osteopathic Hospital, 6%, 5/15/11 (c) . . . . . . . . . . . . 4,615,000 AAA 4,445,537
Fort Worth Osteopathic Hospital, 6%, 5/15/21 (c) . . . . . . . . . . . . 6,235,000 AAA 5,827,231
Texas General Obligation, Super Collider, Series C:
Zero Coupon, 4/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,300,000 AAA 2,299,296
Zero Coupon, 4/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,385,000 AAA 2,676,776
Texas Municipal Power Agency, Revenue Refunding:
5.25%, 9/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,235,000 AAA 5,612,872
5.75%, 9/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,000 AAA 803,487
5.75%, 9/1/12, Prerefunded 9/1/02 at 100 (c) . . . . . . . . . . . . . . 4,950,000 AAA 5,066,573
6.1%, 9/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,250,000 AAA 9,348,328
6.1%, 9/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,435,000 AAA 4,438,992
Texas Public Finance Authority, Building Authority:
Zero Coupon, 2/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 13,915,000 AAA 6,987,278
Series B, 6.25%, 2/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . 9,195,000 AAA 9,542,111
Series B, 6.25%, 2/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . 5,190,000 AAA 5,293,022
UTAH
Associated Municipal Power System, UT, Hunter Project, Refunding Revenue:
Zero Coupon, 7/1/00 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,755,000 AAA 1,998,367
Zero Coupon, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,200,000 AAA 3,330,496
Zero Coupon, 7/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,895,000 AAA 3,308,805
Zero Coupon, 7/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,900,000 AAA 3,082,337
Zero Coupon, 7/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,895,000 AAA 2,859,900
Zero Coupon, 7/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,750,000 AAA 1,685,513
Intermountain Power Agency, UT, Power Supply Revenue:
Series A, Zero Coupon, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . 1,655,000 AAA 1,066,416
Series A, Zero Coupon, 7/1/03 (c) . . . . . . . . . . . . . . . . . . . 1,000,000 AAA 604,200
Series A, Zero Coupon, 7/1/04 (c) . . . . . . . . . . . . . . . . . . . 1,730,000 AAA 978,419
Series B, Zero Coupon, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . 8,230,000 AAA 5,303,083
5%, 7/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 AAA 846,970
Series C, 8.375%, 7/1/12, Prerefunded 7/1/97 at 102 (c) . . . . . . . . 4,150,000 AAA 4,593,843
Series C, 8.5%, 7/1/07, Prerefunded 7/1/97 at 102.50 . . . . . . . . . . 2,000,000 AAA 2,223,160
9.625%, 7/1/08, Prerefunded 7/1/95 at 102.50 (c) . . . . . . . . . . . . 200,000 AAA 213,148
Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15** (c) . . . . . . 1,800,000 AAA 2,613,888
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VIRGINIA
Roanoke, VA, Industrial Development Authority, Roanoke Memorial
Hospital, Series B, 6.125%, 7/1/17 (c) . . . . . . . . . . . . . . . . . 7,500,000 AAA 7,192,950
Southeastern Public Service Authority, VA, Series A, 5.25%, 7/1/10 (c) . . 7,380,000 AAA 6,584,953
Virginia Beach, VA, Development Authority:
Virginia Beach General Hospital Project, 5%, 2/15/06 (c) . . . . . . . . 1,750,000 AAA 1,584,223
Virginia Beach General Hospital Project, 5%, 2/15/07 (c) . . . . . . . . 1,800,000 AAA 1,609,344
Virginia Beach General Hospital Project, 5.1%, 2/15/08 (c) . . . . . . . 1,345,000 AAA 1,198,193
Virginia Beach General Hospital Project, 5.125%, 2/15/18 (c) . . . . . . 3,000,000 AAA 2,476,230
Virginia Beach General Hospital Project, 6%, 2/15/11 (c) . . . . . . . . 1,595,000 AAA 1,551,153
Winchester County, VA, Industrial Development Authority, 6%, 1/1/15 (c) . . 5,700,000 AAA 4,995,024
WASHINGTON
King County, WA, Public Hospital District #1, Valley Medical Center,
Series 1992, 5.5%, 9/1/17 (c) . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,011,295
North Shore, WA, General Obligation, School District #417:
5.45%, 12/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,825,000 AAA 2,710,672
5.5%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,860,000 AAA 4,631,920
5.6%, 12/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,650,000 AAA 1,532,157
Snohomish County, WA:
Public Utilities District #1, 5.5%, 1/1/15 (c) . . . . . . . . . . . . . 1,350,000 AAA 1,173,029
Public Utilities District #1, 5.5%, 1/1/14 (c) . . . . . . . . . . . . . 10,000,000 AAA 8,750,300
School District #6, 6.5%, 12/1/07 (c) . . . . . . . . . . . . . . . . . 3,325,000 AAA 3,499,297
Washington Health Care Facilities Authority:
Empire Health Services-Spokane, 5.65%, 11/1/05 (c) . . . . . . . . . . . 2,155,000 AAA 2,120,067
Empire Health Services-Spokane, 5.7%, 11/1/06 (c) . . . . . . . . . . . 3,440,000 AAA 3,351,936
Empire Health Services-Spokane, 5.75%, 11/1/07 (c) . . . . . . . . . . . 3,675,000 AAA 3,556,702
Empire Health Services-Spokane, 5.8%, 11/1/09 (c) . . . . . . . . . . . 2,500,000 AAA 2,395,650
Empire Health Services-Spokane, 5.8%, 11/1/10 (c) . . . . . . . . . . . 2,100,000 AAA 2,002,749
Washington Public Power Supply Revenue, Revenue Refunding:
Nuclear Project #3, Series A, Zero Coupon, 7/1/04 (c) . . . . . . . . . 3,625,000 AAA 2,050,155
Nuclear Project #3, Zero Coupon, 7/1/05 (c) . . . . . . . . . . . . . . 4,125,000 AAA 2,173,091
Nuclear Project #2, Series A, 5.7%, 7/1/08 (c) . . . . . . . . . . . . . 5,000,000 AAA 4,864,800
Nuclear Project #1, Series A, 7%, 7/1/11 (c) . . . . . . . . . . . . . . 3,830,000 AAA 4,054,476
Nuclear Project #2, Series C, 7%, 7/1/01 (c) . . . . . . . . . . . . . . 10,000,000 AAA 10,852,900
Nuclear Project #1, Series B, 7.25%, 7/1/12 (c) . . . . . . . . . . . . 10,895,000 AAA 11,714,086
Nuclear Project #2, Series A, 7.25%, 7/1/03 (c) . . . . . . . . . . . . 2,000,000 AAA 2,178,980
Nuclear Project #3, Series A, 7.25%, 7/1/16, Prerefunded 7/1/99 at 102(c) 3,630,000 AAA 4,012,457
Nuclear Project #2, Series C, 7.375%, 7/1/11 (c) . . . . . . . . . . . . 1,370,000 AAA 1,533,770
Nuclear Project #1, Series A, 7.5%, 7/1/15, Prerefunded 7/1/99 at 102(c) 2,405,000 AAA 2,681,310
Nuclear Project #1, Series A, 7.5%, 7/1/15 (c) . . . . . . . . . . . . . 1,595,000 AAA 1,751,342
WEST VIRGINIA
West Virginia State Parkways, Economic Development & Tourism
Authority, 7.125%, 7/1/19, Prerefunded 7/1/99 at 102 (c) . . . . . . . . 2,185,000 AAA 2,402,910
WISCONSIN
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/1/04 (c) . . . . 3,475,000 AAA 1,960,143
Wisconsin Health & Educational Facilities Authority:
Wheaton Franciscan Hospital, 6.1%, 8/15/08 (c) . . . . . . . . . . . . . 4,580,000 AAA 4,554,169
Felician Healthcare Inc., Series B, 6.25%, 1/1/22 (c) . . . . . . . . . 5,285,000 AAA 5,026,141
Villa St. Francis Inc., Series C, 6.25%, 1/1/22 (c) . . . . . . . . . . 9,230,000 AAA 8,777,915
St. Luke's Medical Center, 7.1%, 8/15/11 (c) . . . . . . . . . . . . . . 2,000,000 AAA 2,093,500
Riverview Hospital Association Project, 9%, 5/1/11 (c) . . . . . . . . . 2,500,000 AAA 2,697,750
Hospital Sisters Services Inc. Obligated Group, 5.375%, 6/1/18 (c) . . . 4,800,000 AAA 4,019,892
SSM Healthcare, 1992 Series A:
6.4%, 6/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335,000 AAA 2,379,505
</TABLE>
The accompanying notes are an integral part of the financial statements.
67
<PAGE>
<TABLE>
AARP INSURED TAX FREE GENERAL BOND FUND
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6.45%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,485,000 AAA 2,527,220
6.45%, 6/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,650,000 AAA 2,667,888
6.5%, 6/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,820,000 AAA 2,839,655
6.5%, 6/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 3,005,850
OTHER
General Electric Capital Public Finance-1, Tax Exempt Grantor Trust,
1990 Series E, 6.622%, 12/15/94 (c) . . . . . . . . . . . . . . . . . . 117,650 AAA 117,650
-------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS (COST $1,730,643,803) . . . . . . . . 1,708,266,760
-------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $1,914,584,275) (a) . . . . . . . . . 98.8 1,892,152,730
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 1.2 22,118,223
----- -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 1,914,270,953
===== =============
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Floating rate demand notes are securities whose interest rates vary with a designated market index or market rate, such as the
coupon-equivalent of the U.S. Treasury bill rate. Variable rate demand notes are securities whose interest rates are reset
periodically at levels that are generally comparable to tax-exempt commercial paper. These securities are payable on demand
within seven calendar days and normally incorporate an irrevocable letter of credit or line of credit from a major bank. Since
these securities are payable on demand, they are valued at 100% of their principal.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are collateralized by U.S. Treasury securities which are held
in escrow by a trustee and used to pay principal and interest on bonds so designated.
*** Inverse floating rate notes are instruments whose yields have an inverse relationship to benchmark interest rates. These
securities are shown at their rate as of September 30, 1994.
(a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income tax purposes of
$1,914,598,197 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 36,133,087
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (58,578,554)
------------
Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(22,445,467)
=============
(b) All of the securities held have been determined to be of appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings Group or Moody's Investors Service, Inc. Unrated
securities (NR) have been determined to be of comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC or MBIA.
(d) At September 30, 1994, $3,000,000 par value of Illinois Educational Facilities Authority, Zero Coupon, 7/1/05, with a
market value of $1,567,290 was pledged to cover initial margin requirements for open futures contracts.
</TABLE>
<TABLE>
At September 30, 1994, open futures contracts sold short were as follows (Note 1):
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury December
Bond . . . . . . . . . . . . . . . . . 1994 430 42,756,950 42,543,125
---------- ----------
Total net unrealized appreciation on open futures contracts sold short . . . . . . . . . . . . 213,825
----------
<FN>
The aggregate face value of futures contracts opened and closed during the year ended September 30, 1994 was $319,102,034
and $307,629,895, respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the year ended September 30,
1994, aggregated $707,214,727 and $718,899,728, respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
From November 1, 1993 through September 30, 1994, the Fund incurred approximately $1,547,279 of net realized capital
losses which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are
comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may
be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's
other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
68
<PAGE>
<TABLE>
AARP BALANCED STOCK AND BOND FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 6.5%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
11,372,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated
9/30/94 at 4.8% to be repurchased at $11,376,549 on 10/3/94, collateralized by a
$10,520,000 U.S. Treasury Note, 8.875%, 11/15/98 (COST $11,372,000) . . . . . . . 11,372,000
----------
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 25.6%
- ---------------------------------------------------------------------------------------------------------------------------
20,000,000 Federal Home Loan Bank, Discount Note, 10/28/94 . . . . . . . . . . . . . . . . . . . 19,922,667
15,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/4/94 . . . . . . . . . . . . . . 14,994,125
10,000,000 Federal Home Loan Mortgage Corp, Discount Note, 10/6/94 . . . . . . . . . . . . . . . 9,992,167
----------
TOTAL SHORT-TERM NOTES (COST $44,908,959) . . . . . . . . . . . . . . . . . . . . . . 44,908,959
----------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 14.3%
- ---------------------------------------------------------------------------------------------------------------------------
2,000,000 U.S. Treasury Bond, 7.25%, 5/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . 1,845,940
2,000,000 U.S. Treasury Note, 4.625%, 2/29/96 . . . . . . . . . . . . . . . . . . . . . . . . . 1,955,940
4,000,000 U.S. Treasury Note, 5.5%, 9/30/97 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,856,880
2,500,000 U.S. Treasury Note, 5.125%, 4/30/98 . . . . . . . . . . . . . . . . . . . . . . . . . 2,346,100
2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 . . . . . . . . . . . . . . . . . . . . . . . . . 2,372,650
6,500,000 U.S. Treasury Note, 6.875%, 7/31/99 . . . . . . . . . . . . . . . . . . . . . . . . . 6,394,375
1,250,000 U.S. Treasury Note, 5.875%, 2/15/04 . . . . . . . . . . . . . . . . . . . . . . . . . 1,106,250
5,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 2/15/09 (8.14**) . 1,587,950
5,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/09 (8.15**) . 1,554,400
4,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/16 (8.26**) . 694,600
10,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/18 (8.25**) . 1,450,600
----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $26,280,746) . . . . . . . . . . . . . . . . . 25,165,685
----------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS* 5.3%
- ---------------------------------------------------------------------------------------------------------------------------
3,300,000 Federal National Mortgage Association, 7.5%, 8/1/24 . . . . . . . . . . . . . . . . . 3,142,194
3,200,000 Government National Mortgage Association Pass-thru, 8%, 8/15/24 . . . . . . . . . . . 3,104,000
3,100,000 Government National Mortgage Association Pass-thru, 8.5%, 8/15/24 . . . . . . . . . . 3,095,133
----------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS (COST $9,354,969) . . . . . . . . . 9,341,327
----------
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S.$ DENOMINATED 1.4%
- ---------------------------------------------------------------------------------------------------------------------------
1,000,000 ABN-AMRO Bank NV, subordinated note, 7.13%, 10/15/2093 . . . . . . . . . . . . . . . 801,010
1,655,000 United Mexican States, Tesobonos, 8/17/95 . . . . . . . . . . . . . . . . . . . . . . 1,547,888
----------
TOTAL FOREIGN BONDS -- U.S.$ DENOMINATED (COST $2,399,448) . . . . . . . . . . . . . 2,348,898
----------
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 5.0%
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES 1.4%
Food & Beverage
2,000,000 Borden Inc., 7.875%, 2/15/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,519,420
1,000,000 Coca-Cola Enterprises, Inc., 8.5%, 2/1/22 . . . . . . . . . . . . . . . . . . . . . . 983,980
----------
2,503,400
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
69
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDIA 0.6%
Cable Television
1,000,000 Tele-Communications, Inc., 9.8%, 2/1/12 . . . . . . . . . . . . . . . . . . . . . . . 1,023,970
---------
DURABLES 2.2%
Aerospace 1.1%
1,000,000 Boeing Co., 6.875%, 10/15/43 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 790,700
1,000,000 McDonnell Douglas Corp., 9.75%, 4/1/12 . . . . . . . . . . . . . . . . . . . . . . . 1,057,970
---------
1,848,670
---------
Automobiles 1.1%
1,000,000 Ford Motor Co., 8.875%, 1/15/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,018,930
1,000,000 General Motors Acceptance Corp., 5.75%, 4/4/96 . . . . . . . . . . . . . . . . . . . 983,130
---------
2,002,060
---------
TECHNOLOGY 0.8%
Military Electronics
1,500,000 Loral Corp., 8.375%, 6/15/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,392,510
---------
TOTAL CORPORATE BONDS (COST $9,665,708) . . . . . . . . . . . . . . . . . . . . . . . 8,770,610
---------
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 0.0%
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL 0.0%
Banks
15,000 Credit Suisse, 4.875%, 11/19/02 . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,903
---------
CONSTRUCTION 0.0%
Homebuilding
30,000 Empresa ICA Sociedad Controladora S.A., 5.0%, 3/15/04 . . . . . . . . . . . . . . . . 32,625
---------
TOTAL CONVERTIBLE BONDS (COST $52,275) . . . . . . . . . . . . . . . . . . . . . . . 52,528
---------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 3.3%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH 0.6%
Health Industry Services
38,300 FHP International Corp. "A", Cum. $1.25 . . . . . . . . . . . . . . . . . . . . . . . 1,048,462
---------
SERVICE INDUSTRIES 0.9%
EDP Services
26,600 General Motors Corp., Series C, Cum. $3.25 (convertible into GM "E") . . . . . . . . 1,529,500
---------
DURABLES 0.8%
Automobiles
16,000 Ford Motor Co., Series A, Cum. $4.20 . . . . . . . . . . . . . . . . . . . . . . . . 1,468,000
---------
MANUFACTURING 0.9%
Containers & Paper 0.7%
13,600 Boise Cascade Corp. "E", Cum $1.79 . . . . . . . . . . . . . . . . . . . . . . . . . 380,800
3,300 Boise Cascade Corp. "G", Cum $1.58 . . . . . . . . . . . . . . . . . . . . . . . . . 87,037
25,300 Bowater, Inc. "B" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,194
---------
1,143,031
---------
Industrial Specialty 0.2%
7,900 Corning Delaware L.P., Cum. $3.00 . . . . . . . . . . . . . . . . . . . . . . . . . . 393,025
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
70
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 0.1%
Oil & Gas Production
4,200 Parker & Parsley Capital Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,300
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,711,763) . . . . . . . . . . . . . . . . 5,798,318
----------
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 44.0%
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 1.9%
Department & Chain Stores
33,900 Edison Brothers Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779,700
15,800 J.C. Penney Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 815,675
37,900 Rite Aid Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786,425
18,400 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883,200
----------
3,265,000
----------
CONSUMER STAPLES 2.8%
Food & Beverage 1.6%
17,600 General Mills, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,016,400
29,500 H.J. Heinz Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,438
9,200 Quaker Oats Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703,800
----------
2,800,638
----------
Package Goods/Cosmetics 1.2%
22,600 Avon Products Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,350
22,400 Tambrands Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834,400
----------
2,184,750
----------
HEALTH 6.3%
Health Industry Services 0.5%
8,000 McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814,000
----------
Pharmaceuticals 5.8%
19,400 American Cyanamid Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,930,300
16,700 American Home Products Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002,000
34,900 Baxter International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981,562
18,500 Bristol-Myers Squibb Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,061,437
32,300 Eli Lilly Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869,363
19,100 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,356,100
13,300 SmithKline Beecham PLC (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410,637
19,800 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,588,950
----------
10,200,349
----------
COMMUNICATIONS 2.5%
Telephone/Communications
53,000 Alltel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,431,000
22,500 Compania Telefonica Nacional de Espana SA (ADR) . . . . . . . . . . . . . . . . . . . 911,250
8,200 Compania de Telefonos de Chile, SA (ADR) . . . . . . . . . . . . . . . . . . . . . . 719,550
40,900 Hong Kong Telecommunications Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . . 823,113
17,100 Tele Danmark A/S (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465,975
----------
4,350,888
----------
FINANCIAL 7.8%
Banks 3.2%
36,100 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,263,500
56,700 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,509,637
</TABLE>
The accompanying notes are an integral part of the financial statements.
71
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
46,900 First Bank System Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711,850
18,600 J.P. Morgan & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,129,950
---------
5,614,937
---------
Insurance 1.0%
25,400 EXEL, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987,425
23,500 Lincoln National Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878,313
---------
1,865,738
---------
Other Financial Companies 1.1%
61,000 Great Western Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174,250
22,600 Student Loan Marketing Association . . . . . . . . . . . . . . . . . . . . . . . . . 737,325
---------
1,911,575
---------
Real Estate 2.5%
30,300 Health Care Property Investment Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . 905,212
33,100 McArthur/Glen Realty Corp. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . 599,938
40,700 Meditrust SBI (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,302,400
24,100 Nationwide Health Properties Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . 927,850
26,000 Omega Healthcare Investors (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . 646,750
---------
4,382,150
---------
SERVICE INDUSTRIES 0.2%
Miscellaneous Commercial Services
13,000 Fleming Companies Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303,875
---------
DURABLES 4.1%
Aerospace 2.9%
11,400 Lockheed Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793,725
36,200 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,239,850
42,800 Thiokol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043,250
33,800 United Technologies Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,116,725
---------
5,193,550
---------
Automobiles 0.9%
30,000 Dana Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840,000
10,800 Eaton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513,000
6,200 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,050
---------
1,525,050
---------
Telecommunications Equipment 0.3%
25,805 Alcatel Alsthom (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477,392
---------
MANUFACTURING 10.6%
Chemicals 2.3%
16,900 Dow Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,322,425
20,500 E.I. du Pont de Nemours & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,189,000
48,200 Lyondell Petrochemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,225
---------
4,011,650
---------
Containers & Paper 2.3%
43,600 Boise Cascade Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,286,200
40,100 Federal Paper Board Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,263,150
11,200 Kimberly Clark de Mexico S.A. "A" (ADR) . . . . . . . . . . . . . . . . . . . . . . . 469,000
16,000 Kimberly-Clark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 940,000
---------
3,958,350
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
72
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Diversified Manufacturing 1.5%
27,000 Dresser Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,750
28,900 TRW Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,095,250
----------
2,642,000
----------
Electrical Products 0.7%
17,000 Thomas & Betts Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,151,750
----------
Machinery/Components/Controls 1.5%
36,500 Parker-Hannifin Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455,438
33,000 Timken Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,241,625
----------
2,697,063
----------
Office Equipment/Supplies 1.2%
20,500 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,188,375
----------
Specialty Chemicals 1.1%
24,800 Betz Laboratories Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174,900
26,100 Witco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750,375
----------
1,925,275
----------
ENERGY 5.5%
Engineering 0.7%
48,600 McDermott International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,251,450
----------
Oil & Gas Production 0.4%
16,400 Louisiana Land & Exploration Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 717,500
----------
Oil Companies 3.9%
14,100 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812,512
24,700 Murphy Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,074,450
7,300 Pennzoil Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342,188
13,100 Repsol SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,188
7,200 Royal Dutch Petroleum Co. (New York shares) . . . . . . . . . . . . . . . . . . . . . 773,100
31,119 Societe Nationale Elf Aquitaine (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 1,120,284
31,800 Total SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 930,150
18,400 USX Marathon Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,600
39,500 YPF SA "D" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997,375
----------
6,777,847
----------
Oilfield Services/Equipment 0.5%
27,300 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 859,950
----------
METALS AND MINERALS 0.7%
Steel & Metals
49,100 Freeport McMoRan Copper & Gold, Inc. "A" . . . . . . . . . . . . . . . . . . . . . . 1,227,500
----------
TRANSPORTATION 0.6%
Marine Transportation 0.3%
20,300 Alexander & Baldwin Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518,919
----------
Railroads 0.3%
9,000 CSX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616,500
----------
UTILITIES 1.0%
Electric Utilities 0.6%
8,000 Empresa Nacional de Electricidad SA (ADR) . . . . . . . . . . . . . . . . . . . . . . 342,000
29,700 Unicom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,825
----------
1,002,825
----------
Natural Gas Distribution 0.4%
20,200 Consolidated Natural Gas Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,275
----------
TOTAL COMMON STOCKS (COST $74,503,686) . . . . . . . . . . . . . . . . . . . . . . . 77,222,121
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
73
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $184,249,554) (a) . . . . . . . . . . 105.4 184,980,446
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (5.4) (9,482,576)
------ -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 175,497,870
====== ===========
<FN>
REIT Real Estate Investment Trust
* Effective maturities will be shorter due to amortization and prepayments.
** Yield (unaudited); bond equivalent yield to maturity; not a coupon rate.
(a) At September 30, 1994, the net unrealized appreciation on investments based on cost for federal income
tax purposes of $184,272,328 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 5,144,227
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (4,436,109)
-----------
Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 708,118
===========
- -----------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities, (excluding short-term investments), for the period February 1, 1994
(commencement of operations) to September 30, 1994, aggregated $159,126,852 and $30,898,352, respectively.
- -----------------------------------------------------------------------------------------------------------------------------------
From February 1, 1994 through September 30, 1994, the Fund incurred approximately $426,090 of net realized capital losses which
the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995.
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are
comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment
portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the
calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
74
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
LIST OF INVESTMENTS as of September 30, 1994
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 2.0%
- ---------------------------------------------------------------------------------------------------------------------------
46,147,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/94
at 4.8% to be repurchased at $46,165,459 on 10/3/94, collateralized
by a $49,711,000 U.S. Treasury Note, 6.375%, 8/15/02 (COST $46,147,000) . . . . . 46,147,000
----------
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 4.3%
- ---------------------------------------------------------------------------------------------------------------------------
24,000,000 Pfizer, Inc., 4.72%, 10/5/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,987,413
10,000,000 J.P. Morgan & Co., Inc., 4.7%, 10/7/94 . . . . . . . . . . . . . . . . . . . . . . . 9,992,167
16,000,000 Pfizer, Inc., 4.72%, 10/7/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,987,413
10,000,000 Barclays US Funding Corp., 4.54%, 10/25/94 . . . . . . . . . . . . . . . . . . . . . 9,969,733
30,000,000 Santander Finance Delaware Inc., 4.81%, 11/8/94 . . . . . . . . . . . . . . . . . . 29,847,683
10,000,000 Pitney Bowes Credit Corp., 4.82%, 11/29/94 . . . . . . . . . . . . . . . . . . . . . 9,921,006
----------
TOTAL COMMERCIAL PAPER (COST $99,705,415) . . . . . . . . . . . . . . . . . . . . . 99,705,415
----------
- ---------------------------------------------------------------------------------------------------------------------------
BANKERS' ACCEPTANCES 0.9%
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL
Banks
10,000,000 Chemical Bank, 4.77%, 10/31/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,960,250
10,100,000 Chemical Bank, 5.07%, 12/20/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,986,207
----------
TOTAL BANKERS' ACCEPTANCES (COST $19,946,457) . . . . . . . . . . . . . . . . . . . 19,946,457
----------
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 0.2%
- ---------------------------------------------------------------------------------------------------------------------------
5,000,000 U.S. Treasury Bill, 11/17/94 (COST $4,970,070) . . . . . . . . . . . . . . . . . . . 4,971,850
----------
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 2.6%
- ---------------------------------------------------------------------------------------------------------------------------
10,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/4/94 . . . . . . . . . . . . . . 9,996,083
25,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/11/94 . . . . . . . . . . . . . 24,967,431
15,000,000 Federal Home Loan Mortgage Corp., Discount Note, 11/2/94 . . . . . . . . . . . . . . 14,936,800
10,000,000 Trust Company Bank of Georgia, 3.65%, 11/15/94 . . . . . . . . . . . . . . . . . . . 9,986,100
----------
TOTAL SHORT-TERM NOTES (COST $59,899,708) . . . . . . . . . . . . . . . . . . . . . 59,886,414
----------
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 0.2%
- ---------------------------------------------------------------------------------------------------------------------------
MANUFACTURING
Electrical Products
4,500,000 Siemens Capital Corp., with warrants, 8%, 6/24/02 (COST $5,885,818) . . . . . . . . 5,715,000
----------
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 2.7%
- ---------------------------------------------------------------------------------------------------------------------------
HEALTH 0.1%
Health Industry Services
2,000,000 Hillhaven Corp., 7.75%, 11/1/02 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,760,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statments.
75
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATIONS 0.1%
Telephone/Communications
1,000,000 Compania de Telefonos de Chile, SA, 4.5%, 1/15/03 . . . . . . . . . . . . . . . . . 1,170,000
----------
FINANCIAL 1.0%
Banks 0.9%
9,000,000 Banco Nacional de Mexico, 7%, 12/15/99 . . . . . . . . . . . . . . . . . . . . . . . 10,080,000
8,995,000 Credit Suisse, 4.875%, 11/19/02 . . . . . . . . . . . . . . . . . . . . . . . . . . 11,935,241
----------
22,015,241
----------
Insurance 0.1%
1,800,000 Cincinnati Financial Corp., 5.5%, 5/1/02 . . . . . . . . . . . . . . . . . . . . . . 2,169,000
500,000 First Central Financial Corp., 9%, 8/1/00 . . . . . . . . . . . . . . . . . . . . . 490,000
----------
2,659,000
----------
MEDIA 0.1%
Broadcasting & Entertainment
8,000,000 Time Warner Inc., Zero Coupon Liquid Yield Option Note, 6/22/13 . . . . . . . . . . 2,900,000
----------
TECHNOLOGY 0.3%
Electronic Data Processing 0.2%
8,000,000 Silicon Graphics Inc., 11/5/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,760,000
----------
Precision Instruments 0.1%
1,000,000 Thermo Instruments Systems Inc., 6.625%, 8/15/01 . . . . . . . . . . . . . . . . . . 1,770,000
----------
ENERGY 0.2%
Oil & Gas Production
4,000,000 Amoco Canada Petroleum Co., 7.375%, 9/1/13 . . . . . . . . . . . . . . . . . . . . . 4,750,000
----------
CONSTRUCTION 0.5%
Homebuilding
10,670,000 Empresa ICA Sociedad Controladora S.A., 5%, 3/15/04 . . . . . . . . . . . . . . . . 11,603,625
----------
TRANSPORTATION 0.4%
Airlines
13,500,000 Delta Air Lines, Inc., 3.23%, 6/15/03 . . . . . . . . . . . . . . . . . . . . . . . 8,910,000
----------
TOTAL CONVERTIBLE BONDS (COST $61,378,370) . . . . . . . . . . . . . . . . . . . . . 62,297,866
----------
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 5.9%
- ---------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------------
HEALTH 1.1%
Health Industry Services
952,700 FHP International Corp. "A", Cum. $1.25 . . . . . . . . . . . . . . . . . . . . . . 26,080,163
----------
FINANCIAL 0.1%
Insurance
62,500 Equitable Companies, Inc., Series C, Cum. $3.00 . . . . . . . . . . . . . . . . . . 3,046,875
----------
SERVICE INDUSTRIES 1.0%
EDP Services
373,900 General Motors Corp., Series C, Cum. $3.25 . . . . . . . . . . . . . . . . . . . . . 21,499,250
----------
DURABLES 1.6%
Automobiles
17,000 Chrysler Corp., Cum. $4.625 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,133,500
383,000 Ford Motor Co., Series A, Cum. $4.20 . . . . . . . . . . . . . . . . . . . . . . . . 35,140,250
----------
37,273,750
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
76
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MANUFACTURING 1.0%
Containers & Paper 0.5%
348,400 Boise Cascade Corp. "E", Cum. $1.79 . . . . . . . . . . . . . . . . . . . . . . . . 9,755,200
61,900 Boise Cascade Corp. "G", Cum. $1.58 . . . . . . . . . . . . . . . . . . . . . . . . 1,632,613
-----------
11,387,813
-----------
Industrial Specialty 0.5%
211,600 Corning Delaware L.P., Cum. $3.00 . . . . . . . . . . . . . . . . . . . . . . . . . 10,527,100
-----------
TECHNOLOGY 0.1%
Electronic Data Processing
50,000 Ceridian Corp., Cum. $2.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,006,250
-----------
ENERGY 0.5%
Oil & Gas Production
215,300 Parker & Parsley Capital Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,087,950
-----------
METALS AND MINERALS 0.5%
Precious Metals
500,000 Freeport McMoRan Copper & Gold, Inc., Cum. $1.25 . . . . . . . . . . . . . . . . . . 12,250,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $126,242,685) . . . . . . . . . . . . . . . 136,159,151
-----------
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 81.1%
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 3.3%
Department & Chain Stores
462,600 Edison Brothers Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,639,800
408,400 J.C. Penney Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,083,650
1,012,700 Rite Aid Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,013,525
473,100 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,708,800
-----------
75,445,775
-----------
CONSUMER STAPLES 5.6%
Consumer Specialties 0.2%
255,100 A.T. Cross Co. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,241,038
-----------
Food & Beverage 3.1%
458,100 General Mills, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,455,275
760,200 H.J. Heinz Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,842,325
243,600 Quaker Oats Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,635,400
-----------
72,933,000
-----------
Package Goods/Cosmetics 2.3%
523,300 Avon Products Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,267,175
571,100 Tambrands Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,273,475
-----------
52,540,650
-----------
HEALTH 12.5%
Health Industry Services 0.7%
145,500 McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,804,625
13,400 McKesson Corp. (When-issued) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,163
-----------
15,205,788
-----------
Pharmaceuticals 11.8%
503,200 American Cyanamid Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,068,400
438,600 American Home Products Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,316,000
851,900 Baxter International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,959,688
469,400 Bristol-Myers Squibb Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,931,825
654,200 Carter-Wallace Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,913,475
846,400 Eli Lilly Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,985,400
507,200 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,011,200
334,200 SmithKline Beecham PLC (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,318,425
</TABLE>
The accompanying notes are an integral part of the financial statements.
77
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
525,300 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,155,325
-----------
273,659,738
-----------
COMMUNICATIONS 4.3%
Telephone/Communications
770,300 Alltel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,798,100
613,800 Compania Telefonica Nacional de Espana SA (ADR) . . . . . . . . . . . . . . . . . . 24,858,900
200,700 Compania de Telefonos de Chile, SA (ADR) . . . . . . . . . . . . . . . . . . . . . . 17,611,425
1,036,800 Hong Kong Telecommunications Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . 20,865,600
898,915 S.I.P. SpA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,535,401
504,900 Tele Danmark A/S (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,758,525
-----------
100,427,951
-----------
FINANCIAL 13.3%
Banks 6.7%
286,000 AmSouth Bancorp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,009,000
72,000 Argentaria Corporacion Bancaria de Espana . . . . . . . . . . . . . . . . . . . . . 2,867,119
969,700 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,939,500
605,200 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,113,450
545,500 Corporacion Bancaria de Espana (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 10,910,000
1,006,500 First Bank System Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,737,250
432,800 J.P. Morgan & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,292,600
201,000 Summit Bancorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,208,438
27,360 Swiss Bank Corp. (PC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,818,205
760 Swiss Bank Corp. Warrants* (expire 6/30/95) . . . . . . . . . . . . . . . . . . . . 11,213
295,300 Wilmington Trust Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,677,800
-----------
155,584,575
-----------
Insurance 2.2%
692,250 EXEL, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,911,219
623,900 Lincoln National Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,318,263
-----------
50,229,482
-----------
Other Financial Companies 1.6%
934,700 Great Western Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,992,975
38,500 Security Capital Industrial Trust . . . . . . . . . . . . . . . . . . . . . . . . . 587,125
579,700 Student Loan Marketing Association . . . . . . . . . . . . . . . . . . . . . . . . . 18,912,713
-----------
37,492,813
-----------
Real Estate 2.8%
39,500 Avalon Properties, Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 834,438
313,500 Camden Property Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,367,250
88,500 Charles E. Smith Residential Realty, Inc. (REIT) . . . . . . . . . . . . . . . . . . 2,267,813
28,000 Equity Residential Properties Trust (REIT) . . . . . . . . . . . . . . . . . . . . . 889,000
225,000 General Growth Properties, Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . . 4,556,250
246,000 Health Care Property Investment Inc. (REIT) . . . . . . . . . . . . . . . . . . . . 7,349,250
31,100 Mark Centers Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,413
161,600 McArthur/Glen Realty Corp. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . 2,929,000
457,000 Meditrust SBI (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,624,000
399,500 Nationwide Health Properties Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . 15,380,750
20,000 Post Properties Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602,500
451,200 Southwestern Properties Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . 5,358,000
54,400 Vornado Realty Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,863,200
-----------
64,421,864
-----------
SERVICE INDUSTRIES 0.4%
Miscellaneous Commercial Services
374,400 Fleming Companies Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,751,600
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
78
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DURABLES 6.5%
Aerospace 4.5%
293,600 AAR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,816,800
292,500 Lockheed Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,365,313
695,700 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,827,725
65,000 Thiokol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,584,375
862,600 United Technologies Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,020,325
-----------
103,614,538
-----------
Automobiles 1.7%
769,800 Dana Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,554,400
252,700 Eaton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,003,250
228,600 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,343,650
-----------
39,901,300
-----------
Telecommunications Equipment 0.3%
426,040 Alcatel Alsthom (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,881,740
-----------
MANUFACTURING 20.2%
Chemicals 5.8%
477,500 BOC Group Inc. PLC (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,207,291
473,300 Dow Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,035,725
541,600 E.I. du Pont de Nemours & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,412,800
1,160,600 Lyondell Petrochemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,123,675
707,600 Union Carbide Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,058,400
-----------
133,837,891
-----------
Containers & Paper 3.1%
1,051,500 Federal Paper Board Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,122,250
581,700 Kimberly-Clark de Mexico S.A. "A" . . . . . . . . . . . . . . . . . . . . . . . . . 12,172,325
33,800 Kimberly-Clark de Mexico S.A. "A" (ADR) . . . . . . . . . . . . . . . . . . . . . . 1,415,375
410,400 Kimberly-Clark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,111,000
-----------
70,820,950
-----------
Diversified Manufacturing 2.8%
690,700 Dresser Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,986,675
694,600 TRW Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,358,500
-----------
64,345,175
-----------
Electrical Products 1.1%
377,100 Thomas & Betts Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,548,525
-----------
Machinery/Components/Controls 2.1%
949,800 Parker-Hannifin Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,873,275
273,500 Timken Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,290,438
-----------
48,163,713
-----------
Office Equipment/Supplies 2.3%
509,900 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,431,825
-----------
Specialty Chemicals 3.0%
204,800 ARCO Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,137,600
630,800 Betz Laboratories Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,884,150
306,400 Petrolite Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,268,600
692,600 Witco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,912,250
-----------
69,202,600
-----------
ENERGY 10.1%
Engineering 1.4%
1,287,800 McDermott International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,160,850
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
79
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Oil & Gas Production 1.6%
224,500 Louisiana Land & Exploration Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,821,875
437,500 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,296,875
257,000 Societe Nationale Elf Aquitaine . . . . . . . . . . . . . . . . . . . . . . . . . . 18,446,278
-------------
37,565,028
-------------
Oil Companies 5.3%
329,700 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,998,963
234,200 Murphy Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,187,700
209,500 Pennzoil Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,820,313
353,000 Repsol SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,810,625
168,100 Royal Dutch Petroleum Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,049,738
40,800 Texaco Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,448,000
125,795 Total SA "B" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,394,265
593,152 Total SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,349,696
364,700 USX Marathon Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,473,425
807,400 YPF SA "D" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,386,850
-------------
121,919,575
-------------
Oilfield Services/Equipment 1.8%
1,326,500 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,784,750
-------------
METALS AND MINERALS 1.3%
Precious Metals 0.4%
405,000 De Beers Consolidated Mines Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . . 9,568,125
-------------
Steel & Metals 0.9%
579,010 Freeport McMoRan Copper & Gold, Inc. "A" . . . . . . . . . . . . . . . . . . . . . . 14,475,250
120,100 Reynolds Metals Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,470,388
-------------
20,945,638
-------------
TRANSPORTATION 1.1%
Marine Transportation 0.4%
316,700 Alexander & Baldwin Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,095,644
-------------
Railroads 0.7%
110,300 CSX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,555,550
141,100 Norfolk Southern Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,783,475
-------------
16,339,025
-------------
UTILITIES 2.5%
Electric Utilities 1.6%
1,468,800 China Light & Power Co., Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 7,470,170
229,220 Empresa Nacional de Electricidad SA (ADR) . . . . . . . . . . . . . . . . . . . . . 9,799,155
876,100 Unicom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,493,225
-------------
36,762,550
-------------
Natural Gas Distribution 0.9%
523,500 Consolidated Natural Gas Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,351,051
-------------
TOTAL COMMON STOCKS (COST $1,636,876,852) . . . . . . . . . . . . . . . . . . . . . 1,875,174,767
-------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $2,061,052,375) (a) . . . . . . . . . 99.9 2,310,003,920
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 0.1 2,133,996
----- -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 2,312,137,916
===== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
80
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
REIT Real Estate Investment Trust
* Nonincome producing security.
(a) At September 30, 1994, the net unrealized appreciation on investments based on cost for federal income tax purposes of
$2,059,938,288 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost $ 288,939,154
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (38,873,522)
-----------
Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,065,632
============
<FN>
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments) for the year ended September 30, 1994,
aggregated $1,092,876,512 and $578,135,733, respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised
of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater
or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and
liabilities are disclosed in the Statement of Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
81
<PAGE>
AARP Capital Growth Fund
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS as of September 30, 1994
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT 4.3%
29,166,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette, dated 9/30/94 at
4.8%, to be repurchased at $29,177,666 on 10/3/94, collateralized by a
$29,858,000 U.S. Treasury Note, 6%, 12/31/97 (COST $29,166,000) . . . . . . . . . 29,166,000
----------
- ---------------------------------------------------------------------------------------------------------------------------
BANKERS' ACCEPTANCES 0.8%
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL
Banks
5,300,000 Chemical Bank, 4.74%, 10/7/94 (COST $5,295,813) . . . . . . . . . . . . . . . . . . 5,295,813
----------
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 0.7%
- ---------------------------------------------------------------------------------------------------------------------------
5,000,000 Federal National Mortgage Association, Discount Note, 10/13/94 (COST $4,992,133) . . 4,992,133
----------
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 0.5%
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL
Banks
3,000,000 Banco Nacional de Mexico, 7%, 12/15/99 (COST $3,678,750) . . . . . . . . . . . . . . 3,360,000
----------
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 2.2%
- ---------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------------
DURABLES
Automobiles
121,000 Chrysler Corp., $4.625 (COST $15,351,345) . . . . . . . . . . . . . . . . . . . . . 15,185,500
----------
- ---------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 0.3%
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL
Banks
20,000 First Nationwide Bank, non-cumulative 11.5% (COST $2,020,000) . . . . . . . . . . . 2,095,000
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 92.4%
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 20.5%
Apparel & Shoes 1.3%
126,100 Jones Apparel Group, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,089,450
87,200 Luxottica Group SpA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,953,900
126,700 Phillips-Van Heusen Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613,188
----------
8,656,538
----------
Department & Chain Stores 4.1%
634,000 Charming Shoppes Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,151,250
445,100 Filene's Basement Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,727,712
86,300 Fred Meyer Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,837,113
100,000 J.C. Penney Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,162,500
100,000 Limited Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,962,500
304,600 Price/Costco Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,892,638
193,000 Wal-Mart Stores Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,511,375
----------
28,245,088
----------
Home Furnishings 0.8%
400,000 Shaw Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,750,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
82
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Hotels & Casinos 6.7%
224,300 Caesar's World Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,729,012
137,000 Carnival Corp., Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,010,875
305,300 Circus Circus Enterprises Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . 6,792,925
13,000 Club Mediterranee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,127,063
377,500 Mirage Resorts Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,116,250
155,000 President Riverboat Casinos* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,443,438
138,000 Promus Companies Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,640,250
241,300 Royal Caribbean Cruises Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,273,800
110,000 Station Casinos Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485,000
----------
45,618,613
----------
Recreational Products 3.4%
280,000 Acclaim Entertainment Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,760,000
147,500 Bally Gaming International Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . 1,917,500
292,700 Electronic Arts Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,414,950
521,200 International Game Technology Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 10,749,750
----------
22,842,200
----------
Specialty Retail 4.2%
185,800 Consolidated Stores Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,042,475
529,000 Fingerhut Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,167,000
245,000 Home Shopping Network Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,633,750
97,100 Spiegel Inc. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,759,938
250,000 Toys "R" Us Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,906,250
----------
28,509,413
----------
CONSUMER STAPLES 3.2%
Consumer Electronic & Photographic Products 0.6%
32,000 Goldstar Co. (GDR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704,000
8,404 Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,605,146
26,000 Samsung Electronics Co., Ltd. (GDS) . . . . . . . . . . . . . . . . . . . . . . . . 1,768,000
1,077 Samsung Electronics Co., Ltd. (GDS) (New) . . . . . . . . . . . . . . . . . . . . . 73,236
348 Samsung Electronics Co., Ltd. (New) . . . . . . . . . . . . . . . . . . . . . . . . 66,467
----------
4,216,849
----------
Consumer Specialties 0.5%
114,900 Paragon Trade Brands, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,987,400
----------
Food & Beverage 1.6%
98,200 Dr. Pepper/Seven-Up Companies Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 2,283,150
150,000 Pan American Beverages Inc. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . 5,381,250
100,000 PepsiCo Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,312,500
----------
10,976,900
----------
Package Goods/Cosmetics 0.5%
257,400 American Safety Razor Co.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,474,900
----------
HEALTH 5.5%
Health Industry Services 0.7%
129,000 Beverly Enterprises Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,983,375
88,300 Healthcare Compare Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,544,144
----------
4,527,519
----------
Hospital Management 1.3%
198,200 American Medical Holdings Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . 4,434,725
100,000 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,350,000
----------
8,784,725
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
83
<PAGE>
AARP CAPITAL GROWTH FUND
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Medical Supply & Specialty 0.5%
44,900 Elan Corp. PLC (ADS)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,762,325
100,000 Ventritex Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,950,000
----------
3,712,325
----------
Pharmaceuticals 3.0%
365,000 Astra AB "B" (Free) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,588,133
68,000 Carter-Wallace Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926,500
100,000 Perrigo Co.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,000
80,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,680,000
50,000 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,012,500
----------
20,557,133
----------
COMMUNICATIONS 12.5%
Cellular Telephone 4.3%
159,100 AirTouch Communications, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,554,237
154,600 Associated Communications Corp. "A"* . . . . . . . . . . . . . . . . . . . . . . . . 3,980,950
249,300 Associated Communications Corp. "B"* . . . . . . . . . . . . . . . . . . . . . . . . 6,419,475
11,700 Grupo Iusacell S.A. de CV "D" (ADR)* . . . . . . . . . . . . . . . . . . . . . . . . 333,450
57,900 Grupo Iusacell S.A. de CV "L" (ADR)* . . . . . . . . . . . . . . . . . . . . . . . . 1,722,525
88,800 LIN Broadcasting Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,354,300
----------
29,364,937
----------
Telephone/Communications 8.2%
328,500 American Telephone & Telegraph Co. . . . . . . . . . . . . . . . . . . . . . . . . . 17,739,000
586,000 Century Telephone Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,920,750
150,000 IDB Communications Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,000
871 Nippon Telegraph & Telephone Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 7,744,564
263,300 Telephone & Data Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,111,800
----------
55,866,114
----------
FINANCIAL 6.8%
Banks 2.0%
100,000 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000
56,250 First Commerce Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,504,687
7,000 First Empire State Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060,500
100,000 G P Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,375,000
43,000 Grupo Financiero Bancomer "C" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 1,049,544
150,200 MBNA Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,473,375
25,500 Mercantile Bancorporation Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 940,313
----------
13,903,419
----------
Insurance 3.8%
51,500 20th Century Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656,625
99,900 American RE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,021,975
140,000 EXEL, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,442,500
77,800 General Re Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,237,075
44,800 Liberty Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,192,800
130,800 Mid Ocean Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,310,875
300,000 Western National Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050,000
----------
25,911,850
----------
Other Financial Companies 1.0%
58,000 Federal National Mortgage Association . . . . . . . . . . . . . . . . . . . . . . . 4,567,500
26,400 Nichiei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,835,221
----------
6,402,721
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
84
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDIA 20.3%
Broadcasting & Entertainment 7.7%
123,200 BET Holdings Inc. "A"* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,986,600
54,700 Jacor Communications, Inc. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . 793,150
58,800 Savoy Pictures Entertainment Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 676,200
978,000 Time Warner Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,352,250
25,600 Viacom Inc. "A"* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,046,400
337,968 Viacom Inc. "B"* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,434,228
320,000 Viacom Inc. Rights* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,000
----------
52,708,828
----------
Cable Television 12.0%
1,588,150 Comcast Corp. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,318,547
1,504,400 Rogers Communications Inc. "B"* . . . . . . . . . . . . . . . . . . . . . . . . . . 22,851,818
1,551,790 Tele-Communications Inc. "A" (New)* . . . . . . . . . . . . . . . . . . . . . . . . 34,430,330
----------
81,600,695
----------
Print Media 0.6%
90,400 Scholastic Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,407,000
----------
SERVICE INDUSTRIES 0.6%
Investment
100,000 Franklin Resources Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,737,500
----------
DURABLES 3.9%
Automobiles 2.3%
110,000 Autoliv AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,308,784
150,000 Collins & Aikman Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,462,500
400,000 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,100,000
----------
15,871,284
----------
Telecommunications Equipment 1.3%
100,000 DSC Communications Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,850,000
68,000 Newbridge Networks Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,176,000
31,500 Nokia AB Oy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,659,850
----------
8,685,850
----------
Tires 0.3%
100,000 Cooper Tire & Rubber Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,337,500
----------
MANUFACTURING 1.3%
Electrical Products 1.1%
250,000 Philips NV (New York shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,593,750
----------
Machinery/Components/Controls 0.2%
70,000 Daewoo Heavy Industries Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,542,506
1,400 Daewoo Heavy Industries Ltd. (New)* . . . . . . . . . . . . . . . . . . . . . . . . 29,097
----------
1,571,603
----------
TECHNOLOGY 8.6%
Computer Software 3.5%
203,300 Informix Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,641,575
324,600 Microsoft Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,218,175
----------
23,859,750
----------
Edp Peripherals 0.5%
200,000 Adaptec Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,787,500
----------
Office/Plant Automation 1.3%
200,000 Cisco Systems, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,475,000
250,000 Novell Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,687,500
----------
9,162,500
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
85
<PAGE>
AARP CAPITAL GROWTH FUND
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Semiconductors 3.3%
100,000 Advanced Micro Devices Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,975,000
95,000 Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,842,500
948,600 Intel Corp. Warrants (expire 3/14/98)* . . . . . . . . . . . . . . . . . . . . . . . 13,339,687
-----------
22,157,187
-----------
ENERGY 4.2%
Engineering 0.3%
50,000 Grupo Tribasa SA de CV (ADR)* . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,837,500
Oil & Gas Production 2.0%
70,000 Anadarko Petroleum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,132,500
202,500 Perez Companc S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150,127
291,000 Triton Energy Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,457,500
-----------
13,740,127
-----------
Oil Companies 1.6%
100,000 Chevron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,162,500
150,000 Unocal Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,237,500
100,000 YPF SA "D" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,525,000
-----------
10,925,000
-----------
Oilfield Services/Equipment 0.3%
350,000 Global Marine Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,487,500
52,100 Smith International Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807,550
-----------
2,295,050
-----------
METALS AND MINERALS 1.6%
Steel & Metals
110,700 Allegheny Ludlum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,380,050
100,000 LTV Corp* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,050,000
30,100 Oregon Steel Mills Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534,275
372,000 Usinas Siderurgicas de Minas Gerais S/A (pfd.) (ADR) . . . . . . . . . . . . . . . . 6,184,500
-----------
11,148,825
-----------
CONSTRUCTION 2.0%
Building Materials 0.4%
10,300 Mannesmann AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,585,698
-----------
Building Products 0.3%
100,000 USG Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,062,500
-----------
Forest Products 0.6%
50,000 Louisiana-Pacific Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,656,250
65,000 Weyerhaeuser Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900,625
-----------
4,556,875
-----------
Homebuilding 0.7%
240,000 Hovnanian Enterprises Inc. "A"* . . . . . . . . . . . . . . . . . . . . . . . . . . 1,830,000
164,700 Kaufman & Broad Home Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,244,037
50,000 Toll Brothers Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,750
-----------
4,642,787
-----------
UTILITIES 1.4%
Electric Utilities
145,500 Destec Energy Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,655,062
60,000 Illinova Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,155,000
50,000 Korea Electric Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,316,264
190,200 Public Service Co. of New Mexico* . . . . . . . . . . . . . . . . . . . . . . . . . 2,329,950
87,600 Unicom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,949,100
-----------
9,405,376
-----------
TOTAL COMMON STOCKS (COST $613,255,615) . . . . . . . . . . . . . . . . . . . . . . 630,989,329
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
86
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $673,759,656) (a) . . . . . . . . . . 101.2 691,083,775
OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (1.2) (8,283,862)
----- -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 682,799,913
===== ===========
<FN>
* Nonincome producing security.
(a) At September 30, 1994, the net unrealized appreciation on investments based on cost for federal income tax purposes of
$673,847,690 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost . . $ 63,297,066
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value . . (46,060,981)
------------
Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,236,085
============
<FN>
- -----------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities, (excluding short-term investments), for the year ended September 30, 1994,
aggregated $614,231,940 and $497,020,904, 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
lesser 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.
</TABLE>
The accompanying notes are an integral part of the financial statements.
87
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP High AARP High AARP GNMA
Quality Quality Tax Free and
September 30, 1994 Money Fund Money Fund U.S. Treasury Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments, at value (for identified cost, see
accompanying lists of investment portfolios) . . . $ 330,682,541 $ 130,138,320 $ 5,370,095,635
Cash . . . . . . . . . . . . . . . . . . . . . . . . 296,594 35,493 1,952
Other receivables:
Investments sold . . . . . . . . . . . . . . . . . -- -- 726,432,371
Dividends and interest . . . . . . . . . . . . . . 2,161,176 638,159 30,534,190
Fund shares sold . . . . . . . . . . . . . . . . . 2,150,641 97,851 1,986,378
Due from Fund Manager (Note 2) . . . . . . . . . . -- 8,083 --
Deferred organization expenses (Note 1) . . . . . . . -- -- --
Other assets . . . . . . . . . . . . . . . . . . . . 3,625 938 52,856
--------------- --------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . 335,294,577 130,918,844 6,129,103,382
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to custodian bank . . . . . . . . . . . . . . -- -- --
Investments purchased . . . . . . . . . . . . . . -- 1,001,660 523,481,250
Fund shares redeemed . . . . . . . . . . . . . . . 1,417,151 340,394 3,696,718
Dividends . . . . . . . . . . . . . . . . . . . . 113,406 51,806 13,010,755
Daily variation margin on open futures
contracts (Note 1) . . . . . . . . . . . . . . . -- -- --
Management fee (Note 2) . . . . . . . . . . . . . 108,799 57,653 1,928,188
Transfer and dividend disbursing agent (Note 2) . 122,974 30,941 736,317
Other accrued expenses . . . . . . . . . . . . . . 94,188 26,745 764,964
--------------- --------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . 1,856,518 1,509,199 543,618,192
- ------------------------------------------------------------------------------------------------------------------------
Net assets at value . . . . . . . . . . . . . . . . . $ 333,438,059 $ 129,409,645 $ 5,585,485,190
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Accumulated undistributed net investment
income (Note 3) . . . . . . . . . . . . . . . . . $ -- $ -- $ --
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . (255,702) -- (109,914,729)
Futures contracts . . . . . . . . . . . . . . . . -- -- --
Accumulated net realized capital gain (loss) (Note 3) -- (1,321,860) (304,560,473)
Accumulated distributions in excess of net realized
capital gain (Note 3) . . . . . . . . . . . . . . -- -- --
Shares of beneficial interest, at par . . . . . . . . 3,336,938 129,412 3,791,212
Additional paid-in capital (Note 3) . . . . . . . . . 330,356,823 130,602,093 5,996,169,180
- ------------------------------------------------------------------------------------------------------------------------
Net assets at value . . . . . . . . . . . . . . . . . $ 333,438,059 $ 129,409,645 $ 5,585,485,190
- ------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding, $.01 par
value, unlimited number of shares authorized.
(Note) AARP High Quality Tax Free Money Fund
has a $.001 par value. . . . . . . . . . . . . . . 333,693,761 129,411,544 379,121,168
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, offering and redemption price per
share (net assets at value, per fund, divided by the
respective shares of beneficial interest outstanding) $1.00 $1.00 $14.73
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
88
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AARP Insured AARP Balanced
AARP High Tax Free Stock and AARP Growth AARP Capital
Quality Bond Fund General Bond Fund Bond Fund and Income Fund Growth Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 620,116,055 $ 1,892,152,730 $ 184,980,446 $ 2,310,003,920 $ 691,083,775
2,175 98,221 190 -- --
30,262,898 25,250,751 37,308 980,680 --
4,967,448 26,592,613 724,345 7,671,831 642,613
174,465 698,908 401,723 2,233,734 132,014
-- -- -- -- --
-- -- 48,922 -- --
2,125 9,769 -- 5,828 4,123
------------- --------------- ------------- --------------- -------------
655,525,166 1,944,802,992 186,192,934 2,320,895,993 691,862,525
- ------------------------------------------------------------------------------------------------------------------------
-- -- -- 47,915 10,390
85,775,781 25,203,277 10,329,393 5,692,383 6,909,843
521,896 1,056,812 137,783 1,309,816 1,477,685
733,437 2,978,950 -- -- --
17,656 107,500 -- -- --
230,297 777,218 69,301 921,086 354,071
159,046 198,570 40,272 259,840 106,631
101,146 209,712 118,315 527,037 203,992
------------- --------------- ------------- --------------- -------------
87,539,259 30,532,039 10,695,064 8,758,077 9,062,612
- ------------------------------------------------------------------------------------------------------------------------
$567,985,907 $ 1,914,270,953 $ 175,497,870 $ 2,312,137,916 $682,799,913
- ------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $ 142,595 $ 4,044,032 $ 122,688
(22,074,619) (22,431,545) 730,892 248,951,545 17,324,119
235,464 213,825 -- -- --
-- -- (453,177) 54,862,328 13,099,140
(16,553,184) (6,619,518) -- -- --
377,342 1,130,667 119,836 677,403 215,140
606,000,904 1,941,977,524 174,957,724 2,003,602,608 652,038,826
- ------------------------------------------------------------------------------------------------------------------------
$567,985,907 $ 1,914,270,953 $ 175,497,870 $ 2,312,137,916 $ 682,799,913
- ------------------------------------------------------------------------------------------------------------------------
37,734,181 113,066,680 11,983,629 67,740,274 21,513,985
- ------------------------------------------------------------------------------------------------------------------------
$15.05 $16.93 $14.64 $34.13 $31.74
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
89
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP High AARP High AARP GNMA
Quality Quality Tax Free and
Year Ended September 30, 1994 Money Fund Money Fund U.S. Treasury Fund
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME:
Interest . . . . . . . . . . . . . . . . . . . . . $ 11,917,686 $ 3,530,989 $ 419,014,488
Dividends . . . . . . . . . . . . . . . . . . . . -- -- --
------------ ----------- --------------
11,917,686 3,530,989 419,014,488
Less foreign taxes withheld . . . . . . . . . . . -- -- --
------------ ----------- --------------
11,917,686 3,530,989 419,014,488
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fee (Note 2) . . . . . . . . . . . . . 1,244,322 568,107 26,198,841
Services to shareholders:
Transfer and dividend disbursing expense (Note 2) 1,488,175 403,163 9,570,696
Other expenses . . . . . . . . . . . . . . . . . 154,315 38,501 1,599,164
Trustees' fees and expenses (Note 2) . . . . . . . 20,362 30,653 30,128
Shareholder communications . . . . . . . . . . . . 235,012 49,800 2,589,435
Legal . . . . . . . . . . . . . . . . . . . . . . 28,965 2,979 34,810
Auditing . . . . . . . . . . . . . . . . . . . . . 26,278 26,108 65,132
Custodian fees . . . . . . . . . . . . . . . . . . 68,152 52,392 842,375
Registration expenses . . . . . . . . . . . . . . 60,624 26,910 55,269
Amortization of organization expenses (Note 1) . . -- -- --
Other . . . . . . . . . . . . . . . . . . . . . . 14,675 10,024 193,059
------------ ----------- --------------
Total expenses before reimbursement from Fund
Manager . . . . . . . . . . . . . . . . . . . . . 3,340,880 1,208,637 41,178,909
Reimbursement of expenses from Fund Manager
(Note 2) . . . . . . . . . . . . . . . . . . . . . -- (8,083) --
------------ ----------- --------------
Expenses, net . . . . . . . . . . . . . . . . . . . . 3,340,880 1,200,554 41,178,909
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . 8,576,806 2,330,435 377,835,579
- ------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . -- (10,344) (301,854,645)
Futures contracts (Note 1) . . . . . . . . . . . -- -- --
Option contracts (Note 1) . . . . . . . . . . . -- -- (2,842,351)
Foreign currency related transactions (Note 1) . -- -- --
Net unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . (551,482) -- (194,039,955)
Futures contracts . . . . . . . . . . . . . . . -- -- --
------------ ----------- --------------
Net gain (loss) on investments . . . . . . . . . . . (551,482) (10,344) (498,736,951)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . . . $ 8,025,324 $ 2,320,091 $(120,901,372)
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
</TABLE>
The accompanying notes are an integral part of the financial statements.
90
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AARP Insured AARP Balanced
AARP High Tax Free Stock and AARP Growth AARP Capital
Quality Bond Fund General Bond Fund Bond Fund (a) and Income Fund Growth Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$38,080,183 $ 112,262,836 $ 2,193,509 $ 9,598,880 $ 2,245,740
-- -- 1,502,021 65,512,046 4,606,290
----------- ------------- ----------- ------------ ------------
38,080,183 112,262,836 3,695,530 75,110,926 6,852,030
-- -- (32,387) (1,196,056) (129,091)
----------- ------------- ----------- ------------ ------------
38,080,183 112,262,836 3,663,143 73,914,870 6,722,939
- ------------------------------------------------------------------------------------------------------------------------
2,952,999 9,944,429 365,435 9,533,476 4,184,437
2,008,127 2,511,304 355,400 2,985,636 1,339,182
210,994 375,965 31,094 642,393 279,618
30,128 30,653 18,050 28,587 28,587
339,654 582,518 28,842 966,885 417,903
3,471 24,460 1,164 21,125 7,454
46,397 55,721 9,921 45,900 42,769
115,124 288,287 64,852 337,143 174,000
36,899 69,675 99,938 343,862 101,845
-- -- 7,323 -- --
15,738 103,937 1,230 64,973 27,045
----------- ------------- ----------- ------------ ------------
5,759,531 13,986,949 983,249 14,969,980 6,602,840
-- -- -- -- --
----------- ------------- ----------- ------------ ------------
5,759,531 13,986,949 983,249 14,969,980 6,602,840
- ------------------------------------------------------------------------------------------------------------------------
32,320,652 98,275,887 2,679,894 58,944,890 120,099
- ------------------------------------------------------------------------------------------------------------------------
(12,214,126) (782,787) (481,337) 54,940,316 17,135,778
1,131,998 5,547,043 -- -- --
-- -- -- -- --
-- -- 56,480 (92,431) 2,595
(56,963,191) (198,675,783) 730,892 38,962,776 (53,012,292)
163,838 119,639 -- -- --
----------- ------------- ----------- ------------ ------------
(67,881,481) (193,791,888) 306,035 93,810,661 (35,873,919)
- ------------------------------------------------------------------------------------------------------------------------
$ (35,560,829) $ (95,516,001) $ 2,985,929 $152,755,551 $ (35,753,820)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
91
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP High AARP High AARP GNMA
Quality Quality Tax Free and
Money Fund Money Fund U.S. Treasury Fund
- ------------------------------------------------------------------------------------------------------------------------
YEARS ENDED YEARS ENDED YEARS ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1994 1993 1994 1993 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Net Assets
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 8,576,806 $ 6,035,616 $ 2,330,435 $ 2,088,141 $ 377,835,579 $ 430,864,251
Net realized gain (loss) from:
Investments . . . . . . . -- -- (10,344) -- (301,854,645) 59,602,264
Future contracts . . . . . -- -- -- -- -- --
Option contracts . . . . . -- -- -- -- (2,842,351) --
Foreign currency related
transactions . . . . . . -- -- -- -- -- --
Net unrealized appreciation
(depreciation) on:
Investments . . . . . . . (551,482) (319,753) -- -- (194,039,955) (144,230,011)
Future contracts . . . . . -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------- --------------
Net increase (decrease) in net assets
resulting from operations . 8,025,324 5,715,863 2,320,091 2,088,141 (120,901,372) 346,236,504
------------ ------------ ------------ ------------ ------------- --------------
Distributions to shareholders:
Net investment income . . . (8,576,806) (6,035,616) (2,330,435) (2,088,141) (377,835,579) (430,864,251)
Net realized gains . . . . . -- -- -- -- -- --
In excess of net realized gains -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------- --------------
(8,576,806) (6,035,616) (2,330,435) (2,088,141) (377,835,579) (430,864,251)
------------ ------------ ------------ ------------ ------------- --------------
Fund share transactions:
Proceeds from sale of shares 457,195,131 274,945,434 72,891,766 88,294,482 767,903,410 2,063,407,242
Net asset value of shares issued to
shareholders in reinvestment of
distributions from net investment
income and net realized gains 7,471,832 5,060,331 1,833,452 1,582,369 243,322,806 257,800,461
Cost of shares redeemed . . (384,553,352) (348,502,951) (78,946,046) (83,650,326) (1,639,307,179) (756,627,380)
------------ ------------ ------------ ------------ ------------- --------------
Net increase (decrease) in net assets
from Fund share transactions 80,113,611 (68,497,186) (4,220,828) 6,226,525 (628,080,963) 1,564,580,323
------------ ------------ ------------ ------------ ------------- --------------
Increase (decrease) in net assets 79,562,129 (68,816,939) (4,231,172) 6,226,525 (1,126,817,914) 1,479,952,576
Net assets at beginning of period 253,875,930 322,692,869 133,640,817 127,414,292 6,712,303,104 5,232,350,528
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) $333,438,059 $253,875,930 $129,409,645 $133,640,817 $5,585,485,190 $6,712,303,104
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
FUND SHARES:
Shares outstanding at beginning
of period . . . . . . . . . 253,580,150 322,077,336 133,632,372 127,405,847 420,695,404 323,129,713
------------ ------------ ------------ ------------ ------------- --------------
Shares sold . . . . . . . . 457,195,131 274,945,434 72,891,766 88,294,482 49,495,268 128,658,180
Shares issued to shareholders in
reinvestment of distributions
from net investment income
and net realized gains . . 7,471,832 5,060,331 1,833,452 1,582,369 15,901,711 16,084,629
Shares redeemed . . . . . . (384,553,352) (348,502,951) (78,946,046) (83,650,326) (106,971,215) (47,177,118)
------------ ------------ ------------ ------------ ------------- --------------
Net increase (decrease) in
Fund shares . . . . . . . . 80,113,611 (68,497,186) (4,220,828) 6,226,525 (41,574,236) 97,565,691
------------ ------------ ------------ ------------ ------------- --------------
Shares outstanding at end of period 333,693,761 253,580,150 129,411,544 133,632,372 379,121,168 420,695,404
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes accumulated
undistributed net investment
income $ -- $ -- $ -- $ -- $ -- $ --
(b) Commencement of Operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
92
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AARP Insured AARP Balanced
AARP High Tax Free Stock and
Quality Bond Fund General Bond Fund Bond Fund
- -------------------------------------------------------------------------------
FOR THE PERIOD
YEARS ENDED YEARS ENDED FEBRUARY 1,
SEPT. 30, SEPT. 30, 1994 (B) TO
1994 1993 1994 1993 SEPT. 30, 1994
- ------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 32,320,652 $ 26,965,293 $ 98,275,887 $ 86,370,483 $ 2,679,894
(12,214,126) 10,651,382 (782,787) 43,487,055 (481,337)
1,131,998 (1,663,384) 5,547,043 (6,800,868) --
-- 7,203 -- -- --
-- -- -- -- 56,480
(56,963,191) 20,235,403 (198,675,783) 116,438,608 730,892
163,838 71,626 119,639 (543,673) --
- ------------ ------------ -------------- -------------- ------------
(35,560,829) 56,267,523 (95,516,001) 238,951,605 2,985,929
- ------------ ------------ -------------- -------------- ------------
(32,320,652) (26,965,293) (98,275,887) (86,370,483) (2,565,619)
-- (4,651,794) (38,761,058) (37,168,095) --
(13,990,833) -- (6,584,253) -- --
- ------------ ------------ -------------- -------------- ------------
(46,311,485) (31,617,087) (143,621,198) (123,538,578) (2,565,619)
- ------------ ------------ -------------- -------------- ------------
168,940,806 242,905,095 384,083,220 624,141,174 190,243,552
34,534,021 23,182,316 97,111,633 83,057,025 970,439
(157,452,199) (70,960,326) (414,495,879) (223,287,123) (16,137,931)
- ------------ ------------ -------------- -------------- ------------
46,022,628 195,127,085 66,698,974 483,911,076 175,076,060
- ------------ ------------ -------------- -------------- ------------
(35,849,686) 219,777,521 (172,438,225) 599,324,103 175,496,370
603,835,593 384,058,072 2,086,709,178 1,487,385,075 1,500
- -------------------------------------------------------------------------
$567,985,907 $603,835,593 $1,914,270,953 $2,086,709,178 $175,497,870
- -------------------------------------------------------------------------
35,123,046 23,357,425 109,849,454 83,203,792 100
- ------------ ------------ -------------- -------------- ------------
10,342,361 14,684,297 21,237,027 34,272,260 13,025,672
2,141,000 1,393,219 5,382,600 4,612,964 67,628
(9,872,226) (4,311,895) (23,402,401) (12,239,562) (1,109,771)
- ------------ ------------ -------------- -------------- ------------
2,611,135 11,765,621 3,217,226 26,645,662 11,983,529
- ------------ ------------ -------------- -------------- ------------
37,734,181 35,123,046 113,066,680 109,849,454 11,983,629
- ------------ ------------ -------------- -------------- ------------
- -------------------------------------------------------------------------
$ -- $ -- $ -- $ -- $ 142,595
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
AARP Growth AARP Capital
and Income Fund Growth Fund
- -----------------------------------------------------------
YEARS ENDED YEARS ENDED
SEPT. 30, SEPT. 30,
1994 1993 1994 1993
- -------------- -------------- ------------ -------------
<C> <C> <C> <C>
$ 58,944,890 $ 34,089,726 $ 120,099 $ 1,106,973
54,940,316 12,040,829 17,135,778 50,408,582
-- -- -- --
-- -- -- (124,419)
(92,431) 36,536 2,595 (71,574)
38,962,776 149,831,506 (53,012,292) 60,475,465
-- -- -- --
- -------------- -------------- ------------ -------------
152,755,551 195,998,597 (35,753,820) 111,795,027
- -------------- -------------- ------------ -------------
(66,829,027) (29,531,904) (916,825) (2,058,600)
(11,016,834) (8,828,720) (53,175,158) (17,789,275)
-- -- -- --
- -------------- -------------- ------------ -------------
(77,845,861) (38,360,624) (54,091,983) (19,847,875)
- -------------- -------------- ------------ -------------
915,359,577 754,800,190 277,949,808 212,871,489
57,428,013 33,894,170 51,627,257 18,931,304
(295,649,512) (134,524,207) (164,072,900) (141,104,911)
- -------------- -------------- ------------ -------------
677,138,078 654,170,153 165,504,165 90,697,882
- -------------- -------------- ------------ -------------
752,047,768 811,808,126 75,658,362 182,645,034
1,560,090,148 748,282,022 607,141,551 424,496,517
- -----------------------------------------------------------
$2,312,137,916 $1,560,090,148 $682,799,913 $607,141,551
- -----------------------------------------------------------
47,404,023 26,100,037 16,773,892 14,008,476
- -------------- -------------- ------------ -------------
27,412,953 24,549,104 8,230,221 6,449,803
1,732,575 1,135,138 1,522,034 593,086
(8,809,277) (4,380,256) (5,012,162) (4,277,473)
- -------------- -------------- ------------ -------------
20,336,251 21,303,986 4,740,093 2,765,416
- -------------- -------------- ------------ -------------
67,740,274 47,404,023 21,513,985 16,773,892
- -----------------------------------------------------------
$ 4,044,032 $ 12,292,606 $ 122,688 $ 800,377
</TABLE>
The accompanying notes are an integral part of the financial statements.
93
<PAGE>
FINANCIAL HIGHLIGHTS
AARP HIGH QUALITY MONEY FUND
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Years Ended September 30,
-----------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------
<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 (a) . . . . . . . . . . . . . . .028 .021 .040 .060 .073
Distributions from net investment income . . . . . . . (.028) (.021) (.040)(b) (.060) (.073)
-----------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . $1.000 $1.000 $1.000 $1.000 $1.000
===============================================
TOTAL RETURN (%) (C) . . . . . . . . . . . . . . . . . . 2.84 2.13 4.12 6.22 7.58
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 333 254 323 357 376
Ratio of operating expenses to average net assets (%) (a) 1.125 1.312 1.151 1.053 1.058
Ratio of net investment income to average net assets (%) 2.889 2.123 3.613 6.050 7.319
<FN>
(a) Reflects a per share reimbursement of expenses
during the period by the Fund Manager of: $ -- $ -- $ .000 $ .001 $ .001
(b) Includes approximately $.005 per share of net realized
short-term capital gains.
(c) Total returns in some periods were higher due to maintenance of the Fund's expenses.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
AARP HIGH QUALITY TAX FREE MONEY FUND (B)
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Under prior
objectives (b)
--------------
Years Ended September 30,
-----------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . $1.000 $1.000 $1.000 $ .996 $ .998
-----------------------------------------------
Income from investment operations:
Net investment income (a) . . . . . . . . . . . . . . .017 .016 .026 .055 .061
Net realized and unrealized gain (loss) on investments -- -- -- .004 (.002)
-----------------------------------------------
Total from investment operations . . . . . . . . . . . . .017 .016 .026 .059 .059
-----------------------------------------------
Less distributions from net investment income . . . . . . (.017) (.016) (.026) (.055) (.061)
-----------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . $1.000 $1.000 $1.000 $1.000 $ .996
===============================================
TOTAL RETURN (%) (C) . . . . . . . . . . . . . . . . . . 1.76 1.62 2.58 6.10 6.02
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 129 134 127 119 98
Ratio of operating expenses to average net assets (%) (a) .90 .93 .95 1.06 1.12
Ratio of net investment income to average net assets (%) 1.75 1.60 2.54 5.43 6.06
Portfolio turnover rate (%) . . . . . . . . . . . . . . . -- -- -- -- 39.88
<FN>
(a) Reflects a per share reimbursement of expenses
during the period by the Fund Manager of: $ .000 $ .002 $ .002 $ .001 $ --
(b) On August 1, 1991 the Fund implemented a 15.17 to 1.00 stock split and
adopted its present name and investment objectives. Prior to that date, the
Fund was known as the AARP Insured Tax Free Short Term Fund. Financial
Highlights, for the years ended September 30, 1990 and 1991, have been
restated to reflect the stock split and should not be considered
representative of the present Fund.
(c) Total returns in some periods were higher due to maintenance of the Fund's expenses.
</TABLE>
94
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Years Ended September 30,
------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . $15.96 $16.19 $15.72 $14.95 $14.98
------------------------------------------------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . . . .93 1.15 1.22 1.26 1.31
Net realized and unrealized gain (loss) on investments (1.23) (.23) .47 .77 (.03)
------------------------------------------------
Total from investment operations . . . . . . . . . . . . (.30) .92 1.69 2.03 1.28
------------------------------------------------
Less distributions from net investment income . . . . . (.93) (1.15) (1.22) (1.26) (1.31)
------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . $14.73 $15.96 $16.19 $15.72 $14.95
================================================
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . (1.90) 5.89 11.19 14.12 8.86
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 5,585 6,712 5,232 3,311 2,583
Ratio of operating expenses to average net assets (%) . . .66 .70 .72 .74 .79
Ratio of net investment income to average net assets (%) 6.09 7.15 7.69 8.23 8.71
Portfolio turnover rate (%) . . . . . . . . . . . . . . . 114.54 105.49 74.33 86.64 60.54
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AARP HIGH QUALITY BOND FUND
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Years Ended September 30,
------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . $17.19 $16.44 $15.71 $14.63 $15.04
------------------------------------------------
Income from investment operations:
Net investment income (a) . . . . . . . . . . . . . . .85 .93 1.03 1.10 1.17
Net realized and unrealized gain (loss) on investments (1.76) .93 .73 1.08 (.41)
------------------------------------------------
Total from investment operations . . . . . . . . . . . . (.91) 1.86 1.76 2.18 .76
------------------------------------------------
Less distributions:
Net investment income . . . . . . . . . . . . . . . . (.85) (.93) (1.03) (1.10) (1.17)
Net realized gains on investments . . . . . . . . . . -- (.18) -- -- --
In excess of net realized gains on investments . . . . (.38) -- -- -- --
------------------------------------------------
Total distributions . . . . . . . . . . . . . . . . . . . (1.23) (1.11) (1.03) (1.10) (1.17)
------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . $15.05 $17.19 $16.44 $15.71 $14.63
================================================
TOTAL RETURN (%) (b) . . . . . . . . . . . . . . . . . . (5.55) 11.88 11.56 15.44 5.21
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 568 604 384 201 151
Ratio of operating expenses to average net assets (%) (a) .95 1.01 1.13 1.17 1.14
Ratio of net investment income to average net assets (%) 5.31 5.64 6.40 7.26 7.86
Portfolio turnover rate (%) . . . . . . . . . . . . . . . 63.75 100.98 63.00 90.43 47.39
<FN>
(a) Reflects a per share reimbursement of expenses during
the period by the Fund Manager of: $ -- $ -- $ -- $ -- $ .009
(b) Total returns in some periods were higher due to maintenance of the Fund's expenses.
</TABLE>
95
<PAGE>
FINANCIAL HIGHLIGHTS
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Years Ended September 30,
------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . $19.00 $17.88 $17.30 $16.12 $16.61
------------------------------------------------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . . . .86 .90 .93 1.00 1.04
Net realized and unrealized gain (loss) on
investments . . . . . . . . . . . . . . . . . . . . . (1.67) 1.55 .75 1.18 (.24)
------------------------------------------------
Total from investment operations . . . . . . . . . . . (.81) 2.45 1.68 2.18 .80
------------------------------------------------
Less distributions:
Net investment income . . . . . . . . . . . . . . . . (.86) (.90) (.93) (1.00) (1.04)
Net realized gains on investments . . . . . . . . . . (.34) (.43) (.17) -- (.25)
In excess of net realized gains on investments . . . . (.06) -- -- -- --
------------------------------------------------
Total distributions . . . . . . . . . . . . . . . . . . . (1.26) (1.33) (1.10) (1.00) (1.29)
------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . $16.93 $19.00 $17.88 $17.30 $16.12
================================================
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . (4.48) 14.31 10.01 13.85 4.89
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 1,914 2,087 1,487 1,068 771
Ratio of operating expenses to average net assets (%) . . .68 .72 .74 .77 .80
Ratio of net investment income to average net assets (%) 4.80 4.90 5.31 5.92 6.29
Portfolio turnover rate (%) . . . . . . . . . . . . . . . 38.39 47.96 62.45 32.18 48.24
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
For the Period
February 1, 1994 (c)
to September 30, 1994
---------------------
<S> <C>
Net asset value, beginning of period . . . . . . . . . . . . . . . . $15.00
------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . .25
Net realized and unrealized loss on investments . . . . . . . . . (.37)(d)
------
Total from investment operations . . . . . . . . . . . . . . . . . . (.12)
------
Less distributions from net investment income . . . . . . . . . . . . (.24)
------
Net asset value, end of period . . . . . . . . . . . . . . . . . . . $14.64
======
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . . . . (.78)(a)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . . . . . . . 175
Ratio of operating expenses to average net assets (%) . . . . . . . . 1.31(b)
Ratio of net investment income to average net assets (%) . . . . . . 3.58(b)
Portfolio turnover rate (%) . . . . . . . . . . . . . . . . . . . . . 49.32(b)
<FN>
(a) Not Annualized
(b) Annualized
(c) Commencement of operations
(d) 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.
</TABLE>
96
<PAGE>
AARP Growth and Income Fund
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Years Ended September 30,
------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . $32.91 $28.67 $26.97 $22.30 $26.11
------------------------------------------------
Income from investment operations:
Net investment income . . . . . . . . . . . . . . . . .94 .83 .97 1.11 1.11
Net realized and unrealized gain (loss) on investments 1.62 4.58 2.11 4.78 (3.69)
------------------------------------------------
Total from investment operations . . . . . . . . . . . . 2.56 5.41 3.08 5.89 (2.58)
------------------------------------------------
Less distributions from:
Net investment income . . . . . . . . . . . . . . . . (1.13) (.87) (.90) (1.17) (1.15)
Net realized gains on investments . . . . . . . . . . (.21) (.30) (.48) (.05) (.08)
------------------------------------------------
Total distributions . . . . . . . . . . . . . . . . . . . (1.34) (1.17) (1.38) (1.22) (1.23)
------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . $34.13 $32.91 $28.67 $26.97 $22.30
================================================
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . 7.99 19.38 11.59 27.19 (10.19)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 2,312 1,560 748 392 248
Ratio of operating expenses to average net assets (%) . . .76 .84 .91 .96 1.03
Ratio of net investment income to average net assets (%) 3.00 3.08 3.84 4.61 4.76
Portfolio turnover rate (%) . . . . . . . . . . . . . . . 31.82 17.44 36.40 53.68 58.47
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AARP Capital Growth Fund
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Years Ended September 30,
------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . $36.20 $30.30 $30.23 $23.32 $34.17
------------------------------------------------
Income from investment operations:
Net investment income (a) . . . . . . . . . . . . . . .00 .06 .15 .24 .54(b
Net realized and unrealized gain (loss) on investments (1.51) 7.19 1.09 9.05 (9.27)
------------------------------------------------
Total from investment operations . . . . . . . . . . . . (1.51) 7.25 1.24 9.29 (8.73)
------------------------------------------------
Less distributions from:
Net investment income . . . . . . . . . . . . . . . . (.05) (.14) (.23) (.59) (.19)
Net realized gains on investments . . . . . . . . . . (2.90) (1.21) (.94) (1.79) (1.93)
------------------------------------------------
Total distributions . . . . . . . . . . . . . . . . . . . (2.95) (1.35) (1.17) (2.38) (2.12)
------------------------------------------------
Net asset value, end of period . . . . . . . . . . . . . $31.74 $36.20 $30.30 $30.23 $23.32
================================================
TOTAL RETURN (%) (c) . . . . . . . . . . . . . . . . . . (4.70) 24.53 3.94 42.81 (26.94)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 683 607 424 242 160
Ratio of operating expenses to average net assets (%) (a) .97 1.05 1.13 1.17 1.11
Ratio of net investment income to average net assets (%) .02 .22 .61 .90 2.00
Portfolio turnover rate (%) . . . . . . . . . . . . . . . 79.65 100.63 89.20 99.62 83.28
<FN>
(a) Reflects a per share reimbursement of expenses during
the period by the Fund Manager of: $ -- $ -- $ -- $ -- $ .009
(b) Net investment income per share includes non recurring
dividend income amounting to $.18 per share.
(c) Total returns in some periods were higher due to maintenance of the Fund's expenses.
</TABLE>
97
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES.
The AARP Cash Investment Funds, consisting of the AARP High Quality Money
Fund, the AARP Income Trust, consisting of the AARP GNMA and U.S. Treasury Fund
and the AARP High Quality Bond Fund, the AARP Tax Free Income Trust, consisting
of the AARP High Quality Tax Free Money Fund, (formerly AARP Insured Tax Free
Short Term Fund), and the AARP Insured Tax Free General Bond Fund, and the AARP
Growth Trust, consisting of the AARP Balanced Stock and Bond Fund, which
commenced operations on February 1, 1994, AARP Growth and Income Fund, and the
AARP Capital Growth Fund are each Massachusetts business trusts and are
registered under the Investment Company Act of 1940, as amended, as open-end
management investment companies. All funds are diversified. The AARP Cash
Investment Funds, has one series, the AARP Growth Trust has three series and
each of the other Trusts have two series. The Declaration of Trust of each
Trust permits its Trustees to create an unlimited number of series and to issue
an unlimited number of full and fractional shares of each separate series.
The policies described below are followed consistently by the funds in
preparation of their financial statements and are in conformity with generally
accepted accounting principles.
A. SECURITY VALUATION. The AARP High Quality Money Fund uses the penny
rounding method of security valuation as permitted under Rule 2a-7 of the
Investment Company Act of 1940. Under this method, securities for which market
quotations are readily available and which have remaining maturities of
sixty-one days or more from the date of valuation are valued at the mean
between the over-the-counter bid and asked prices by an independent registered
broker/dealer. On the sixtieth day prior to maturity and there- after until
maturity, securities originally purchased with more than sixty days remaining
to maturity are valued at amortized cost calculated daily, based upon the
market valuation of the securities on the sixty-first day prior to maturity.
The AARP High Quality Tax Free Money Fund uses the amortized cost method of
security valuation as permitted under Rule 2a-7 of the Investment Company Act
of 1940. Under this method, the value of a security is determined by adjusting
its original cost to face value through the amor- tization of any acquisition
discount or premium at a constant rate until maturity, which approximates
market. Security valuation with respect to each of the remaining funds is
performed in the following manner:
Common and preferred stocks traded on national securities exchanges are
valued at the most recent sale price on such exchange where the security is
principally traded. If no sale occurred, the security is valued at the mean
between the most recent bid and asked quotations on such exchanges. If there is
no such bid and asked quotations the most recent bid quotation is used.
Unlisted securities quoted on the National Association of Securities Dealers
Automatic Quotation ("NASDAQ") System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are no
such sales, the value is the high or "inside" bid quotation. Unlisted
securities which are not quoted on the NASDAQ System but are traded in another
over-the-counter market are valued at the most recent sale price on such
market. If no sale occurred, the security is valued at the mean between the
most recent bid and asked quotations. If there are no such bid and asked
quotations the most recent bid quotation is used.
Portfolio debt securities with remaining maturities greater than sixty days
are valued by pricing agents approved by the Trustees, which prices reflect
broker/dealer-supplied valuations and electronic data processing techniques. If
the pricing agents are unable to provide such quotations, the most recent bid
quotation supplied by a bona fide market maker shall be used.
Short-term investments with remaining maturities of 60 days or less are
valued at amortized cost. Variable rate demand notes are carried at cost which
together with accrued interest approximates market.
The value of all other securities is determined in good faith under the
direction of the Trustees.
B. REPURCHASE AGREEMENTS. The AARP High Quality Money Fund, AARP Growth
Funds and AARP GNMA and U.S. Treasury Fund regularly invest in repurchase
agreements. Each of the AARP funds may enter into repurchase agreements with
selected banks and broker/dealers whereby each fund, through its custodian,
receives delivery of the securities collateralizing
98
<PAGE>
repurchase agreements, the amount of which at the time of purchase and each
subsequent business day is required to be maintained at such a level that the
market value, depending on the maturity of the underlying collateral, is equal
to at least 101% of the resale price.
C. COVERED CALL OPTIONS. The AARP growth funds and the AARP income funds may
write (sell) exchange listed and over-the-counter covered call option contracts
on their securities. When a fund writes 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 a capital gain to the extent of the net premium received.
If the option is terminated through a closing purchase transaction, the fund
will realize a capital gain (or loss if the cost of the closing purchase
transaction exceeds the net premium received) and the liability will be elimi-
nated. If the option is exercised, a decision over which a fund has no control,
the fund must sell the underlying security to the option holder at the exercise
price.
The proceeds of the sale are increased by the net premium originally
received and the fund will realize a capital gain or loss on the transaction.
By writing a covered call option, the fund foregoes, in exchange for the
premium less any commission paid, 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 writes a covered call option, the premium received by the fund
is included in the fund's "Statement of Assets and Liabilities" as a deferred
credit (liability). The liability of a traded option will be marked-to-market
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 if no bid or
asked price is available. Over-the-Counter written options are valued using
dealer supplied valuations.
D. OPTIONS ON FUTURES CONTRACTS. Each of the funds in the AARP Income Trust,
the AARP Insured Tax Free General Bond Fund and the AARP Balanced Stock and
Bond Fund may purchase and write (sell) call and put options on futures
contracts which are traded on exchanges for bona fide hedging purposes. Options
on futures contracts are valued in accordance with the security and options
valuation policies described above.
E. FUTURES CONTRACTS. Each of the funds in the AARP Income Trust, the AARP
Insured Tax Free General Bond Fund and the AARP Balanced Stock and Bond Fund
may enter into futures contracts. Such contracts may either be based on indices
of particular groups of securities (index futures contracts) or be for the
purchase or sale of a debt obligation (debt futures contracts). Upon entering
into a futures contract, the fund is required by the exchange to deposit cash
or pledge U.S. Government securities with a broker in an amount (initial
margin) equal to a certain percentage of the purchase price indicated in the
futures contract. Subsequent payments, which are dependent on the daily
fluctuations in the value of the underlying index or security, are made or
received by the fund each day (daily variation margin). The aggregate of these
payments or receipts through the expiration of the futures contracts is
recorded for book purposes as unrealized gains or losses by the fund. If the
fund enters into a closing transaction, it will realize, for book purposes, a
gain or loss equal to the difference between the value of the futures contract
at the time it was opened or purchased and its value at the time it was closed.
Open futures contracts are valued at the most recent settlement price. Certain
risks may arise upon entering into futures contracts from the contingency of
imperfect market conditions.
F. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of the funds in the
AARP Growth Trust, in connection with portfolio purchases and sales of
securities denominated in a foreign currency, may enter into forward foreign
currency exchange contracts ("contracts"). Additionally, from time to time,
each fund may enter into contracts to hedge certain foreign currency
denominated assets. Contracts are recorded at market value. Certain risks may
arise upon entering these contracts from the potential inability of
counterparties to meet the terms of their contracts. Realized gains or losses
arising from such transactions are included in net realized gain (loss) from
foreign currency related transactions.
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NOTES TO FINANCIAL STATEMENTS
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.
The funds use 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 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. All of the net investment income of
each fund is declared as a dividend to shareholders. The dividends from AARP
High Quality Money Fund and each of the funds in the AARP Income Trust and the
AARP Tax Free Income Trust are declared daily and distributed monthly. The
dividends from AARP Balanced Stock and Bond Fund and AARP Growth and Income
Fund are declared and paid quarterly. The dividends from AARP Capital Growth
Fund are declared and paid annually. During any particular year, net realized
gains from securities transactions for each fund which are in excess of any
available capital loss carryforwards, would be taxable to the fund if not
distributed and, therefore, will be distributed to shareholders in the
following fiscal year. The AARP High Quality Money Fund takes into account
realized gains and losses on the sales of securities held less than one year in
its daily distributions. An additional distribution may be made by each fund to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal income tax
rules and regulations which may differ from generally accepted accounting
principles. These differences relate primarily to investments in options,
futures, forward contracts, foreign denominated investments and mortgage backed
securities. As a result, net investment income and net realized gain (loss) on
investment transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
K. EXPENSES. Each fund is charged for those expenses that are directly
attributable to it, such as management, custodian, audit, and certain
shareholder service fees. Expenses that are not directly attributable to a
fund, such as reports to shareholders, portions of Trustees' and legal fees,
are allocated among all the funds.
L. ORGANIZATION COST. Costs incurred by the AARP Balanced Stock and Bond Fund
in connection with its organization and initial registration of shares have
been deferred and are being
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amortized on a straight-line basis over a five-year period.
M. PORTFOLIO INSURANCE. The cost of premiums paid by the AARP Insured Tax
Free General Bond Fund for insurance, which covers individual securities, is
non-cancellable and runs the life of such securities, is added to the cost
basis of such securities. This insurance provides for the timely payment of
principal and interest on these securities when due and protects the fund
against loss from default by the Municipal issuer. It does not protect the
investor from losses due to changes in market values.
N. SECURITIES PURCHASED ON A FORWARD DELIVERY OR WHEN-ISSUED BASIS. The AARP
High Quality Money Fund, each of the funds in the AARP Income Trust and AARP
Tax Free Income Trust, and AARP Balanced Stock and Bond Fund may purchase
securities on a forward delivery or when-issued basis. Municipal, corporate and
government securities are frequently offered on a forward delivery or
when-issued basis. At the time the fund makes the commitment to purchase a
security on a forward delivery or when-issued basis, the price of the
underlying security is fixed. The fund will record the transaction at the time
of the commitment and reflect the value of the security in determining its net
asset value. The settlement date of the transaction can occur within one month
or more after the date the commitment was made. During the period between
purchase and settlement date, no payment is made on behalf of the fund and no
interest accrues to the fund.
NOTE 2. MANAGEMENT FEE AND OTHER RELATED TRANSACTIONS.
On January 13, 1994, the Shareholders approved, effective February 1, 1994,
a new investment management and advisory agreement (the "Management Agreement")
between each Trust and Scudder (the "Fund Manager"). Under the new Management
Agreement, the management fee consists of two elements: a Base Fee and an
Individual Fund Fee. The Base Fee is calculated as a percentage of the combined
net assets of all of the AARP Funds ("Program Assets"). Each AARP Fund pays, as
its portion of the Base Fee, an amount equal to the ra- tio of its daily net
assets to the daily net assets of all of the AARP Funds. The Annual Base Fee is
calculated as follows: .35%, of the first $2.0 billion of such assets, .33% of
the next $2.0 billion of such assets, .30% of the next $2.0 billion of such
assets, .28% of the next $2.0 billion of such assets, .26% of the next $3.0
billion of such assets, .25% of the next $3.0 billion of such assets, .24% of
such assets in excess of $14.0 billion.
In addition to the Base Fee Rate, each Fund agrees to pay the Fund Manager a
flat Individual Fund Fee based on the average daily net assets of that Fund.
The Individual Fund Fee Rate recognizes the different characteristics of each
Fund, the varying levels of complexity of investment research and securities
trading required to manage each Fund. The Individual Fund Fee Rate is
calculated at the following percentages of the average daily net assets of each
fund: .10% for AARP High Quality Money Fund and AARP High Quality Tax Free
Money Fund; .12% for AARP GNMA and U.S. Treasury Fund; .19% for AARP High
Quality Bond Fund, AARP Insured Tax Free General Bond Fund, AARP Balanced Stock
and Bond Fund and AARP Growth and Income Fund; .32% for AARP Capital Growth
Fund. The amount for each fund is shown in the Statement of Operations as
Management Fee.
As manager of the assets of each Fund, the Fund Manager directs the
investments of each Fund in accordance with its investment objectives, policies
and restrictions. In addition to portfolio management services, the Fund
Manager under the Management Agreement will provide certain administrative
services in accordance with such Agreement. The Fund Manager has also entered
into a Member Ser- vices Agreement with AARP Financial Services Corp. ("AFSC"),
a subsidiary of AARP, and pays portions of its investment management and
advisory fee to AFSC.
Under the previous Management Agreement (the "Agreement") which was in
effect prior to February 1, 1994, the approximate annual fee rate was .49% for
AARP High Quality Bond Fund, AARP High Quality Tax Free Money Fund, AARP
Insured Tax Free General Bond Fund and AARP Growth and Income Fund; .62% for
AARP Capital Growth Fund; and .48% of the first $250 million of average daily
net assets declining to .38% of such assets over $2.0 billion for AARP High
Quality Money Fund; and .45% of the first $2.0 billion of average daily net
assets declining to .43% of such assets over $3.0 billion for AARP GNMA and
U.S. Treasury Fund.
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NOTES TO FINANCIAL STATEMENTS
Both the Management Agreement and the Agreement provide that the Fund
Manager will reimburse the funds for annual expenses in excess of the lowest
state limitations imposed, exclusive of taxes, brokerage commissions, interest
and extraordinary expenses.
The Fund Manager agreed to maintain the annualized expenses of the AARP High
Quality Tax Free Money Fund at not more than 0.90% of average daily net assets
until February 1, 1995. Effective February 1, 1994, the Fund Manager agreed to
maintain the annualized expenses of the AARP Balanced Stock and Bond Fund at
not more than 1.50% of average net assets until September 30, 1994. The amount
of expenses reimbursed by the Fund Manager, if any, for each fund has been
shown in the Statement of Operations as Reimbursement of expenses from Fund
Manager.
Each Trust has a shareholder servicing agreement with Scudder Service
Corporation ("SSC"), a wholly-owned subsidiary of Scudder. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount for each fund has been shown
in the Statement of Operations as Transfer and Dividend Disbursing Expense.
Each fund pays each Trustee not affiliated with Scudder or AARP $2,000
annually, $270 for each Trustees' meeting, $200 for each audit committee
meeting attended, and $100 for other committee meetings, plus expenses, subject
to certain maximums per Trustee for meetings held jointly with other funds. The
amount for each fund has been shown in the Statement of Operations as Trustees'
fees and expenses.
NOTE 3. RECLASSIFICATION OF CAPITAL ACCOUNTS.
As required, effective October 1, 1993, the Funds have adopted the
provisions of Statement of Position 93-2 "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies (SOP)." In implementing the SOP, the AARP
GNMA and U.S. Treasury Fund has reclassified $14,728,770 to accumulated
distributions in excess of net investment income and $93,528,045 from
accumulated net realized capital gain (loss) for a net decrease of $78,799,275
to additional paid in capital. The AARP High Quality Bond Fund has reclassified
$719,941 to accumulated distributions in excess of net investment income and
$221,919 to accumulated net realized capital gain (loss) for a net increase of
$498,022 to additional paid in capital. The AARP Insured Tax Free General Bond
Fund has reclassified $35,409 to accumulated distributions in excess of net
investment income and $383,778 from accumulated net realized capital gain
(loss) for a net increase of $419,187 to additional paid in capital. The AARP
Growth and Income Fund has reclassified $212,415 from accumulated net
investment income (loss) and $318,201 to accumulated net realized capital gain
(loss) for a net decrease of $105,786 to additional paid in capital. The AARP
Capital Growth Fund has reclassified $152,914 to accumulated net investment
income (loss) and $152,952 from accumulated net realized capital gain (loss)
for a net increase of $38 to additional paid in capital. These
reclassifications, which have no impact on the net asset value of the Funds,
are primarily attributable to certain differences in the computation of
distributable income and capital gains under federal income tax rules and
regulations versus generally accepted accounting principles. The statement of
changes in net assets and financial highlights have not been restated to
reflect this change in presentation.
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Report of Independent Accountants
160 Federal Street Telephone 617 439 4390
Boston MA
Price Waterhouse LLP
November 8, 1994
To the Board of Trustees and Shareholders of
AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust and
AARP Growth Trust
In our opinion, the accompanying statements of assets and liabilities,
including the shares, principal amount, and value of the securities in
the lists 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 positions of AARP Cash Investment
Funds which is comprised of AARP High Quality Money Fund (formerly AARP
Money Fund), AARP Income Trust which is comprised of AARP GNMA and U.S.
Treasury Fund and AARP High Quality Bond Fund, AARP Tax Free Income
Trust which is comprised of AARP High Quality Tax Free Money Fund
(formerly AARP Insured Tax Free Short Term Fund) and AARP Insured Tax
Free General Bond Fund and AARP Growth Trust which is comprised of AARP
Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP
Capital Growth Fund at September 30, 1994 and the results of their
operations, the changes in their net assets, and their financial
highlights for each of the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
the financial highlights (thereafter 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 accounting standards which require that we plan and
perform the audits to obtain a 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 owned at September 30, 1994 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
/s/Price Waterhouse LLP
<PAGE>
Officers and Trustees
Adelaide Attard
Trustee of AARP Income Trust and AARP Growth Trust; Consultant,
Gerontology; Commissioner, County of Nassau, NY Department of Senior
Citizen Affairs (1971-1991); Board Member, American Association of
International Aging (1983-1992); Member, NYS Community Services for the
Elderly Advisory Council _ Appointed by Governor (1987-1990); Chairperson,
Federal Council on Aging (1981-1986); U.S. Senior Advisor to 1982 United
Nations World Assembly on Aging.
Cyril F. Brickfield
Trustee of AARP Income Trust, AARP Tax Free Income Trust, AARP Growth
Trust; Honorary Trustee, AARP Cash Investment Funds; Honorary President and
Special Counsel, American Association of Retired Persons; Board Member,
American Association of International Aging, National Alzheimer's
Association, and American Federation of Aging Research (AFAR).
Robert N. Butler, M.D.
Trustee of AARP Income Trust and AARP Growth Trust; Brookdale Professor of
Geriatrics and Adult Development; Chairman, Henry L. Schwartz Department of
Geriatrics and Adult Development, Mount Sinai Medical Center; Former
Director, National Institute on Aging, National Institute of Health (1976-
1982).
Linda C. Coughlin
President and Trustee of AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust and AARP Growth Trust; Director of Scudder
Investor Services, Inc.; Managing Director and Member, Board of Directors
of Scudder, Stevens & Clark, Inc.
Horace B. Deets
Vice Chairman and Trustee of AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust and AARP Growth Trust; Executive Director,
American Association of Retired Persons; Member, Board of Councilors,
Andrus Gerontology Center; Member of the Board, HelpAge International.
Mary Johnston Evans
Trustee of AARP Cash Investment Funds, AARP Tax Free Income Trust and AARP
Growth Trust; Director, Scudder New Europe Fund, Inc.; Director, Baxter
International, Inc., Delta Air Lines, Inc., Household International, Inc.,
The Sun Company and Dun & Bradstreet Corporation.
Edgar R. Fiedler
Trustee of AARP Cash Investment Funds, AARP Income Trust and AARP Tax Free
Income Trust; Vice President and Economic Counsellor, The Conference Board,
Inc.; Director or Trustee, The Brazil Fund, Inc., Scudder Fund, Inc.,
Scudder Institutional Fund, Inc.; Director of The Stanley Works, Zurich-
American Insurance Company, HT Insight Funds, and Emerging Mexico Fund.
Cuyler W. Findlay
Chairman and Trustee of AARP Cash Investment Funds, AARP Income Trust, AARP
Tax Free Income Trust, and AARP Growth Trust; Senior Vice President and
Director, Scudder Investor Services.; Managing Director, Scudder, Stevens &
Clark, Inc.; Trustee or Director of Scudder GNMA Fund, Scudder Cash
Investment Trust, Scudder Fund, Inc., and Scudder Institutional Fund, Inc.
Eugene P. Forrester
Trustee of AARP Income Trust and AARP Tax Free Income Trust; Consultant,
International Trade; Lt. General (Retired), U.S. Army; Command General,
U.S. Army Western Command, Honolulu (1981-1983); Consultant, Digital
Equipment Corp., DHI, Philip Morris, PICS Previews, and Whittle
Communications.
Wayne F. Haefer
Trustee of AARP Income Trust, AARP Tax Free Income Trust, and AARP Growth
Trust; Director, Membership Division of AARP; Secretary, Employee's Pension
and Welfare Trusts of AARP and Retired Persons Services, Inc.; Formerly
Director, Administration and Data Management Division of AARP.
William B. Macomber
Trustee of AARP Tax Free Income Trust and AARP Growth Trust; Formerly
Teacher, History and Government, Nantucket High School, Nantucket, MA;
Director, Becton, Dickinson & Co.; Trustee, Carnegie Endowment for
International Peace; Formerly President, The Metropolitan Museum of Art
(1978-1987) and U.S. Ambassador to Turkey and to Jordan.
George L. Maddox, Jr.
Trustee of AARP Income Trust and AARP Tax Free Income Trust; Director and
Professor, Long Term Care Resources Program, Duke University Medical
Center; Senior Fellow, Center for the Study of Aging and Human Development,
Duke University; Professor of Sociology, Departments of Sociology and
Psychiatry, Duke University.
Robert J. Myers
Trustee of AARP Cash Investment Funds, AARP Income Trust and AARP Growth
Trust; Actuarial Consultant; Formerly Executive Director, National
Commission on Social Security Reform (1982-1983); Director, NASL Series
Trust, Inc.; Formerly Director, Board of Pensions, Evangelical Lutheran
Church in America; Former Chairman, Commission on Railroad Retirement
Reform; Member, Commission on the Social Security Notch Issue (appointed by
Senate Majority Leader), 1993.
Joseph S. Perkins
Trustee of AARP Cash Investment Funds, AARP Growth Trust, AARP Income Trust
and AARP Tax Free Income Trust; Director, American Association of Retired
Persons; Corporate Retirement Manager, Polaroid Corporation.
James H. Schulz
Trustee of AARP Tax Free Income Trust and AARP Growth Trust; Professor of
Economics and Kirstein Professor of Aging Policy, Policy Center of Aging,
Florence Heller School, Brandeis University.
Mildred M. Seltzer
Trustee of AARP Cash Investment Funds and AARP Income Trust; Professor
Emerita, Department of Sociology and Anthropology, Miami University,
Oxford, Ohio; Senior Fellow, The Scripps Gerontology Center, Miami
University.
Gordon Shillinglaw
Trustee of AARP Cash Investment Funds, AARP Tax Free Income Trust, AARP
Growth Trust; Professor Emeritus of Accounting, Columbia University
Graduate School of Business; Director and Treasurer, FERIS Foundation of
America; Director or Trustee, Scudder Equity Trust, Scudder Development
Fund, Scudder International Fund, Inc. and Scudder Mutual Funds, Inc.
Edward Creed*
Vice President
Thomas W. Joseph*
Vice President
David S. Lee*
Vice President and Assistant Treasurer
Douglas M. Loudon*
Vice President
Thomas F. McDonough*
Vice President and Assistant Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Kathryn L. Quirk*
Vice President and Secretary
Howard Schneider*
Vice President
Cornelia M. Small*
Vice President
*Scudder, Stevens & Clark, Inc.
Telephone Numbers and Addresses
Shareholder Service Line
1-800-253-2277
Our knowledgeable AARP Mutual Fund Representatives are available to answer
questions about the Program or your account Monday through Friday, between
8:00 a.m. and 6:00 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
P.O. Box 2540
Boston, MA 02208-2540
AARP Investment Program
(for overnight and certified mail)
1099 Hingham Street
Rockland, MA 02370
Easy-Access Line
1-800-631-4636
Shareholders may call for a recorded message to find out fund performance
information and, with a touch-tone telephone, current account information,
24 hours a day, 7 days a week. Also, with a touch-tone phone you can
exchange or sell (redeem) your AARP Mutual Fund shares.
Transactions by Fax
1-800-821-6234
If you have access to a fax machine, you can fax transaction requests. Any
exchange or redemption request received after business hours will be
processed the next business day. All faxes are kept confidential.
Telecommunications Device for the Deaf and Speech Impaired (TDD)
1-800-634-9454
AARP members with hearing or speech impairments and access to TDD equipment
can communicate with the AARP Investment Program Monday through Friday
between 8:00 a.m. and 6:00 p.m., eastern time. Transactions can be made
between 8:00 a.m. and 4:00 p.m., eastern time.
TAX INFORMATION
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, 1994, 100% constituted exempt-
interest dividends for regular federal income tax purposes.
Pursuant to Section 852 of the Internal Revenue Code, the AARP GNMA
and U.S. Treasury Fund, the AARP High Quality Bond Fund, the AARP Insured
Tax Free General Bond, the AARP Growth and Income Fund and the AARP Capital
Growth Fund designate $39,226,084, $975,953, $219,529, $48,608,627, and
$16,466,874, respectively, as capital gain dividends for their fiscal years
ended September 30, 1994.
In January 1995 you will receive federal tax information on all
distributions paid to your account in calendar year 1994.
