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 BOND FUND FOR INCOME
AARP Tax Free Income Trust:
AARP HIGH QUALITY TAX FREE MONEY FUND
AARP INSURED TAX FREE GENERAL BOND FUND
AARP Growth Trust:
AARP BALANCED STOCK AND BOND FUND
AARP GROWTH AND INCOME FUND
AARP U.S. STOCK INDEX FUND
AARP GLOBAL GROWTH FUND
AARP CAPITAL GROWTH FUND
AARP INTERNATIONAL STOCK FUND
AARP SMALL COMPANY STOCK FUND
AARP Managed Investment Portfolios Trust:
AARP DIVERSIFIED INCOME PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
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STATEMENT OF ADDITIONAL INFORMATION
February 1, 1997
as revised May 23, 1997
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This Statement of Additional Information is not a prospectus and should
be read in conjunction with the combined Prospectus for all fifteen of the above
Funds, dated February 1, 1997, as amended from time to time, copies of which may
be obtained without charge by writing to the AARP INVESTMENT PROGRAM FROM
SCUDDER, P.O. Box 2540, Boston, Massachusetts 02208-2540 or by calling
1-800-253-2277.
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TABLE OF CONTENTS
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AARP INVESTMENT PROGRAM FROM SCUDDER................................................................................1
Summary of Advantages and Benefits.........................................................................1
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.......................................................................3
AARP Money Fund............................................................................................3
AARP Income Funds..........................................................................................4
AARP Tax Free Income Funds.................................................................................7
AARP Growth Funds.........................................................................................12
AARP Managed Investment Portfolios........................................................................16
Special Investment Policies of the AARP Funds.............................................................17
General Investment Policies of the AARP Funds.............................................................32
Investment Restrictions...................................................................................32
PURCHASES..........................................................................................................37
General Information.......................................................................................37
Checks....................................................................................................37
Share Price...............................................................................................37
Share Certificates........................................................................................38
Direct Deposit Program....................................................................................38
Wire Transfers............................................................................................38
Holidays..................................................................................................38
Other Information.........................................................................................38
REDEMPTIONS........................................................................................................39
General Information.......................................................................................39
Redemption by Telephone...................................................................................39
Redemption by Mail or Fax.................................................................................40
Redemption by Checkwriting................................................................................41
Redemption-in-Kind........................................................................................41
Other Information.........................................................................................41
EXCHANGES..........................................................................................................41
TRANSACT BY PHONE..................................................................................................42
Purchasing Shares by Transact by Phone....................................................................43
Redeeming Shares by Transact by Phone.....................................................................43
FEATURES AND SERVICES OFFERED BY THE FUNDS.........................................................................43
Automatic Dividend Reinvestment...........................................................................43
Distributions Direct......................................................................................43
Reports to Shareholders...................................................................................43
Consolidated Statements...................................................................................44
RETIREMENT PLANS...................................................................................................44
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA").............................................44
AARP Keogh Plan...........................................................................................45
OTHER PLANS........................................................................................................46
Automatic Investment......................................................................................46
Automatic Withdrawal Plan.................................................................................46
Direct Payment of Regular Fixed Bills.....................................................................46
DIVIDENDS AND YIELD................................................................................................47
Performance Information: Computation of Yields and Total Return...........................................48
Taking a Global Approach..................................................................................54
TRUST ORGANIZATION.................................................................................................55
MANAGEMENT OF THE FUNDS............................................................................................56
Personal Investments by Employees of Scudder..............................................................62
TRUSTEES AND OFFICERS..............................................................................................62
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REMUNERATION.......................................................................................................65
DISTRIBUTOR........................................................................................................67
TAXES..............................................................................................................67
BROKERAGE AND PORTFOLIO TURNOVER...................................................................................72
Brokerage Commissions.....................................................................................72
Portfolio Turnover........................................................................................73
NET ASSET VALUE....................................................................................................73
AARP Money Funds..........................................................................................73
AARP Non-Money Market Funds...............................................................................74
ADDITIONAL INFORMATION.............................................................................................75
Experts...................................................................................................75
Shareholder Indemnification...............................................................................75
Ratings of Corporate Bonds................................................................................76
Ratings of Commercial Paper...............................................................................76
Ratings of Municipal Bonds................................................................................76
Other Information.........................................................................................77
Tax-Exempt Income vs. Taxable Income......................................................................79
FINANCIAL STATEMENTS...............................................................................................80
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AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Investment Program from Scudder (the "Program") was developed
by the American Association of Retired Persons ("AARP") to provide an array of
conservatively managed investment options for its members. Today's financial
markets present an enormous, ever-changing selection of investments suited for
investors with varying needs. AARP, a non-profit organization dedicated to
improving the quality of life, independence and dignity of older people, has
undertaken to help its members by designing an investment program which attempts
to satisfy the investment and retirement planning needs of most of its members,
whether they are experienced investors or savers who have never invested at all.
As with any program with the "AARP" name, the Program includes special benefits
as described in the combined prospectus for five trusts -- AARP Cash Investment
Funds, AARP Income Trust, AARP Tax Free Income Trust, AARP Growth Trust, and
AARP Managed Investment Portfolios Trust (the "Trusts"), dated February 1, 1997
(the "Prospectus"). AARP endorses this program which was developed with the
assistance of Scudder, Stevens & Clark, Inc. ("the Fund Manager" or "Scudder"),
a firm with over 75 years of investment counseling and management experience.
Scudder, Stevens & Clark, Inc. was selected after an extensive search among
qualified candidates, and provides the Program with continuous and conservative
professional investment management. (See "MANAGEMENT OF THE FUNDS.")
Each of the Trusts is an open-end, management investment company
authorized to issue its shares of beneficial interest in separate series ("the
Funds"). A total of 15 Funds are currently offered by the five Trusts. The
differing investment objectives of the 15 Funds in the Program provide AARP
members with a variety of sensible investment alternatives, and by matching
their own objectives with those of the different AARP Funds, AARP members may
design an investment program to meet their personal needs. Not all your money is
the same. There is short-term money, for example money needed for your regular
budgeting and for emergencies, and there is money which can be invested for the
longer term. It is generally thought that three months of income/expenses should
be set aside in a savings account or money market fund to cover short-term
needs. The Program is designed to offer alternatives to keeping all of your
money in short-term fixed price investments like money market funds, insured
short-term savings accounts and insured six-month certificates of deposit. The
AARP Money Funds provide a taxable and a tax free alternative for short-term
monies and the AARP Income Funds, the AARP Insured Tax Free General Bond Fund
and the AARP Growth Funds provide a range of choices for longer term investment
dollars and the AARP Managed Investment Portfolios provide diversification of
investment by investing in a select mix of AARP Funds.
Summary of Advantages and Benefits
o Experienced Professional Management: Scudder, Stevens & Clark, Inc.,
investment counsel since 1919 and mutual fund managers since 1928, provides
investment advice to the Funds.
o AARP's Commitment: the Program was designed with AARP's active
participation to provide strong, ongoing representation of the members'
interests and to help ensure a high level of service.
o Wide Selection of Investment Objectives: you can emphasize money market
returns and liquidity, income, tax-free income, growth, or any combination.
o Diversification: you may benefit from investing in one or more large
portfolios of carefully selected securities.
o $2000 Minimum Starting Investment for 12 of the Funds ($500 Minimum
Starting Investment for AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund and AARP GNMA and U.S. Treasury Fund): you may make additional
investments in any amount at any time.
o No Sales Commissions: the AARP Funds are pure no-load(TM), so you pay no
sales charges to purchase, transfer or redeem shares, nor do you pay Rule
12b-1 (i.e., distribution) fees.
o Investment Flexibility and Exchange: you may exchange among the 15 AARP
Funds in the Program at any time, without charge.
o Dividends: the AARP Money Funds, the AARP Income Funds, the AARP Insured
Tax Free Income Fund and the AARP Diversified Income Portfolio all pay
dividends monthly, the AARP Balanced Stock and Bond Fund, the AARP Growth
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and Income Fund and the AARP U.S. Stock Index Fund are expected to pay
dividends quarterly and the AARP Global Growth Fund, the AARP Capital
Growth Fund, the AARP International Stock Fund, the AARP Small Company
Stock Fund and the AARP Diversified Growth Portfolio pay dividends, if any,
annually.
o Automatic Dividend Reinvestment: you may receive dividends by check or
arrange to have them automatically reinvested.
o Readily Available Account, Price, Yield and Total Return Information: the
yield for the AARP Money Funds is quoted weekly and the net asset value of
each other Fund is quoted daily in the financial pages of leading
newspapers. You may also dial our automated Easy-Access Line, toll-free,
1-800-631-4636 for recorded account information, share price, yield and
total return information, 7 days a week.
o Convenience and Efficiency: simplified investment procedures save you time
and help your money work harder for you.
o Liquidity: on any business day (subject to a 7 day waiting period for
investment checks to clear), you may request redemption of your shares at
the next determined net asset value, and, in the case of the AARP Money
Funds, you may elect free Checkwriting and write checks for $100 or more on
your account to make payments to any person or business.
o Direct Deposit Program: you may have your Social Security or other checks
from the U.S. Government or any other regular income checks, such as
pension, dividend, interest, and even payroll checks automatically
deposited directly to your account.
o Automatic Withdrawal Plan: with a minimum qualifying balance of $10,000 in
one AARP Fund, you may arrange to receive monthly, quarterly or periodic
checks from your account for any designated amount of $50 or more.
o Direct Payment of Regular Fixed Bills: with a minimum qualifying balance of
$10,000 in one AARP Fund, you may arrange to have your regular fixed bills
that are of fixed amounts, such as rent, mortgage, or other payments of $50
or more sent directly from your account at the end of the month.
o Personal Service and Information: professionally trained service
representatives help you whenever you have questions through our toll-free
number, 1-800-253-2277.
o Consolidated Statements: in addition to receiving a confirmation statement
of each transaction in your account, you receive, without extra charge, a
convenient monthly consolidated statement. (Retirement Plan statements are
mailed quarterly.) This statement contains the market value of all your
holdings and a complete listing of your transactions for the statement
period.
o Shareholder Handbook: the Shareholder Handbook was created to help answer
many of the questions you may have about investing in the Program.
o IRA Shareholder Handbook: The IRA Shareholder Handbook was created to help
answer many of the questions you may have about investing in the no-fee
AARP IRA.
o A Glossary of Investment Terms: the Glossary defines commonly used
financial and investment terms.
o Newsletter: every month, shareholders receive our newsletter, Financial
Focus (retirement plan shareholders receive a special edition of Financial
Focus on a quarterly basis) which is designed to help keep you up to date
on economic and investment developments, and any new financial services and
features of the Program.
This Statement of Additional Information supplements the Prospectus,
and provides more detailed information about the Trusts and the Funds.
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
AARP Money Fund
(See "AARP High Quality Money Fund," "INVESTMENT OBJECTIVES AND
POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.)
The AARP Funds offer a choice of a taxable and a tax free money fund
for small savers, big savers and people looking for a way to invest. People who
earn a relatively low interest rate in an insured bank savings account, who have
to make withdrawals or deposits in person or whose money isn't easily accessible
may find that the AARP Money Funds can help.
AARP High Quality Money Fund. The 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. Amendments have been proposed
to the federal rules regulating quality, maturity and diversification
requirements of money market funds, like the Fund. If the amendments are adopted
the Fund intends to comply with such new requirements.
Securities eligible for investment by the Fund include "first tier
securities" and "second tier securities." "First tier securities" are those
securities which are generally rated (or issued by an issuer with comparable
securities rated) in the highest category by at least two rating services (or by
one rating service, if no other rating service has issued a rating with respect
to that security). Securities generally rated (or issued by an issuer with
comparable securities rated) in the top two categories by at least two rating
agencies (or one, if only one rating agency has rated the security) which do not
qualify as first tier securities are known as "second tier securities." To
ensure diversity of the Fund's investments, as a matter of non-fundamental
policy the Fund will not invest more than 5% of its total assets in the
securities of a single issuer, other than the U.S. Government. The Fund may,
however, invest more than 5% of its total assets in the first tier securities of
a single issuer for a period of up to three business days after purchase,
although the Fund may not make more than one such investment at any time. The
Fund may not invest more than 5% of its total assets in securities which were
second tier securities when acquired by the Fund. Further, the Fund may not
invest more than the greater of (1) 1% of its total assets, or (2) one million
dollars, in the securities of a single issuer which were second tier securities
when acquired by the Fund.
The Fund purchases high quality short-term securities consisting of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of supranational organizations such as the
International Bank for Reconstruction and Development (the World Bank);
obligations of domestic banks and their foreign branches, including bankers'
acceptances, certificates of deposit, deposit notes and time deposits;
obligations of savings and loan institutions; instruments whose credit has been
enhanced by: banks (letters of credit), insurance companies (surety bonds), or
other corporate entities (corporate guarantees); corporate obligations,
including commercial paper, notes, bonds, loans and loan participations;
securities with variable or floating interest rates; asset-backed securities,
including certificates, participations and notes; municipal securities including
notes, bonds and participation interests, either taxable or tax-free, as
described in more detail for the AARP High Quality Tax Free Money Fund;
securities with put features; and repurchase agreements. The Fund may hold cash,
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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 Income Funds
(See "AARP GNMA and U.S. Treasury Fund," "AARP High Quality Bond Fund,"
"AARP Bond Fund for Income," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER
INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.) Each of the Funds
seeks to earn a high level of income consistent with its investment policies.
AARP 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 three 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
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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. When interest rates rise, mortgage
prepayment rates tend to decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares.
Some investors may view the Fund as an alternative to a bank
certificate of deposit (CD). While an investment in the Fund is not federally
insured, and there is no guarantee of price stability, an investment in the
Fund--unlike a CD--is not locked away for any period, may be redeemed at any
time without incurring early withdrawal penalties, and may provide a higher
yield.
AARP 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.
Under normal circumstances the Fund will invest substantially all, and
no less than 65%, of its assets invested in U.S. government, corporate and other
fixed-income securities. 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), foreign government bonds denominated in
foreign currencies, trust preferred securities, mortgage-backed and other
asset-backed securities, and money market instruments such as commercial paper,
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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.)
Portfolio Quality. The policies of AARP High Quality Bond Fund are
designed to provide a portfolio that combines primarily high quality securities
with investments that attempt to reduce its market price risk. 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 investment-grade or higher by
Moody's (Aaa, Aa, A, and Baa) or S&P (AAA, AA, A, and BBB) or, if not rated,
will be judged to be of comparable quality by the Fund Manager. At least 65% of
the Fund's assets must be in securities rated in the two highest rating
categories by Moody's or S&P. The Fund may invest up to 20% of its assets in
bonds rated Baa by Moody's or rated BBB by S&P. Securities rated Baa by Moody's
or BBB by S&P are neither highly protected nor poorly secured. These securities
normally pay higher yields and are regarded as having adequate capacity to repay
principal and pay interest but involve potentially greater price variability
than higher-quality securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. The Fund does
not purchase securities rated below investment-grade, commonly known as "junk"
bonds. (See "ADDITIONAL INFORMATION--Ratings of Corporate Bonds.")
Variations of Maturity. In an attempt to capitalize on the differences
in total return from securities of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Fund
Manager's expectations of changes therein.
Foreign Securities. The AARP High Quality Bond Fund may invest, without
limit, in U.S. dollar-denominated foreign debt securities (including U.S.
dollar-denominated debt securities issued by the Dominion of Canada and its
provinces and other debt securities which meet the Fund's criteria applicable to
its domestic investments), and in certificates of deposit issued by foreign
branches of United States banks, to any extent deemed appropriate by the Fund
Manager. The Fund may invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar, but no more
than 5% of the Fund's total assets will be represented by a given foreign
currency.
AARP Bond Fund for Income. The Fund seeks to provide a high level of
current income consistent with investments primarily in investment-grade debt
securities, and to keep the price of its shares more stable than that of a
long-term bond.
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* Morningstar proprietary rankings reflect historical risk-adjusted performance
and are calculated as of 3/31/97. 1919, 1076 and 601 Equity Funds, 1172, 630 and
258 Taxable Bond Funds and 1237, 601 and 267 Municipal Bond Funds were rated for
the 3-, 5-, and 10-year periods, respectively. The ratings are subject to change
each month. Morningstar ratings are calculated from the Funds' 3-, 5-, and
10-year average annualized total returns in excess of 90-day T-Bill returns,
with appropriate adjustments and a risk factor that reflects fund performance
below 90-day T-Bill returns. The Funds' 3-,5-, and 10-year ratings are 5, 5, and
4 stars, respectively. Those funds receiving 5 Stars are in the top 10% of their
investment category, while the top 22.5% of funds that Morningstar evaluates
receive 4 Stars. Past performance is not a guarantee of future results.
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In pursuit of its investment objectives, under normal market
conditions, the Fund invests at least 65% of its assets in investment-grade debt
securities. Investment-grade securities are rated Aaa, Aa, A, or Baa by Moody's
or AAA, AA, A, or BBB by S&P, or, if unrated, are of equivalent quality as
determined by the Fund Manager. The Fund may invest up to 35% of its assets in
securities rated Ba or B by Moody's or BB or B by S&P, but no more than 10% of
the Fund's assets may be invested in securities rated B by Moody's or S&P. These
two grades of securities are considered to be below investment grade. Below
investment-grade securities are considered predominantly speculative with
respect to their capacity to pay interest and repay principal. They generally
involve a greater risk of default and have more price volatility than securities
in higher rating categories.
The Fund may invest in U.S. Treasury and Agency securities, corporate
bonds and notes, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies or
investment-grade foreign institutions, and money market instruments such as
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks. The Fund may invest up to 20% of
total assets in foreign debt securities denominated in currencies other than the
U.S. dollar, but no more than 5% of the fund's total assets will be represented
by a given foreign currency. The Fund may also purchase "when-issued" securities
and invest in repurchase agreements.
For temporary defensive purposes, the Fund may invest without limit in
money market and short-term instruments or invest all or a substantial portion
of its assets in high quality domestic debt securities when the Fund Manager
deems such a position advisable in light of economic or market conditions.
Risks. The Fund can invest a limited portion of assets in below
investment-grade securities, sometimes referred to as "junk" bonds. Investing in
high yielding, lower-quality bonds involves various types of risks including the
risk that issuers of bonds held in the portfolio will not make timely payment of
either interest or principal or may default entirely. This risk of default can
increase with changes in the financial condition of a company or with changes in
the U.S. economy, such as a recession. Compared to investing in higher quality
issues, high yield bond investors may be rewarded for the additional risk of
high yield bonds through higher interest payments and the opportunity for
greater capital appreciation.
AARP Tax Free Income Funds
(See "AARP High Quality Tax Free Money Fund," "AARP Insured Tax Free
General Bond Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT
POLICIES AND RISK FACTORS" in the Prospectus.)
AARP High Quality Tax Free Money Fund. The AARP High Quality Tax Free
Money Fund is a separate series of AARP Tax Free Income Trust. From investments
in high quality municipal securities, the Fund is designed to provide current
income free from federal income taxes. The Fund also seeks to maintain stability
and safety of principal, while offering liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share. There may be circumstances under
which this goal cannot be achieved. Such securities may mature no more than 397
calendar days or less from the date the purchase is expected to be settled by
the Fund, with a weighted average maturity of 90 days or less.
The Fund will invest in municipal securities which are rated at the
time of purchase within the two highest quality ratings of rating agencies such
as: Fitch -- AAA and AA, F1 and F2, or Moody's -- Aaa and Aa, or within Moody's
short-term municipal obligations top ratings of MIG 1 and MIG 2 and P1, or S&P
- -- AAA/AA and SP1+/SP1, A1+ and A1 -- all in such proportions as management will
determine. Securities must be so rated by at least two agencies or by at least
one, if only one has rated the security. Generally, the Fund will invest in
securities rated in the highest quality rating by at least two of these rating
agencies. In some cases, short-term municipal obligations are rated using the
same categories as are used for corporate obligations. In addition, unrated
municipal securities will be considered as being within the foregoing quality
ratings if other equal or junior municipal securities of the same issuer are
rated and their ratings are within the foregoing ratings of Fitch, Moody's or
S&P. The Fund may also invest in municipal securities which are unrated if, in
the opinion of the Fund Manager, such securities possess creditworthiness
comparable to those rated securities in which the Fund may invest. For a
description of ratings, please see "Additional Information." Shares of this Fund
are not insured or guaranteed by the U.S. Government.
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Subsequent to its purchase by the AARP High Quality Tax Free Money
Fund, an issue of municipal securities may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. The Fund will
dispose of any such security unless the Board of Trustees of the Fund determines
that such disposal would not be in the best interests of the Fund.
As a fundamental policy, under normal circumstances, at least 80% of
the net assets of AARP High Quality Tax Free Money Fund will be invested in
tax-exempt securities. Although the Fund normally intends to ensure that all
income to shareholders will be exempt from federal income tax, there can be no
assurance that this goal will be achieved or that income to shareholders which
is federally tax exempt will be exempt from state and local taxes.
From time to time on a temporary basis or for defensive purposes, the
Fund may, subject to its investment restrictions, hold cash and invest in
taxable investments consisting of: (1) other obligations issued by or on behalf
of municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances; and (5)
repurchase agreements (agreements under which the seller agrees at the time of
sale to repurchase the security at an agreed time and price) with respect to any
of the obligations which the Fund is permitted to purchase. The Fund will not
invest in instruments issued by banks or savings and loan associations unless at
the time of investment such issuers have total assets in excess of $1 billion
(as of the date of their most recently published financial statements).
Commercial paper investments will be limited to commercial paper rated A1+ and
A1 by S&P, Prime-1 by Moody's or F-1 by Fitch. The Fund may hold cash or invest
temporarily in taxable investments due, for example, to market conditions or
pending investment of proceeds of subscriptions for shares of the Fund or
proceeds from the sale of portfolio securities or in anticipation of
redemptions. However, the Fund expects to invest such proceeds in municipal
securities as soon as practicable. Interest income from temporary investments
may be taxable to shareholders as ordinary income.
Maintenance of Constant Net Asset Value Per Share. The Trustees of AARP
High Quality Money Fund and AARP High Quality Tax Free Money Fund have
determined that it is in the best interests of the Funds and their shareholders
to maintain the net asset value of the Funds' shares at a constant $1.00 per
share. In order to facilitate the maintenance of a constant $1.00 net asset
value per share, the AARP High Quality Money Fund and the AARP High Quality Tax
Free Money Fund operate in accordance with a rule of the Securities and Exchange
Commission (the "SEC"). In accordance with that rule, the assets of the Funds
consist entirely of cash, cash items, and high quality U.S. dollar-denominated
investments which have minimal credit risks and which have a remaining maturity
date of not more than 397 days from date of purchase (except that the AARP High
Quality Money Fund may invest in U.S. Government securities having maturities of
up to 762 days). The average dollar-weighted maturity of each Fund is varied
according to money market conditions, but may not exceed 90 days. The maturity
of a portfolio security shall be the period remaining until the date stated in
the security for payment of principal or such earlier date as it is called for
redemption, except that a shorter period shall be used for Variable and Floating
Rate Instruments in accordance with and subject to the conditions contained in
the Rule.
The Trustees have established procedures reasonably designed to
stabilize the price per share of the Funds at $1.00, as computed for the
purposes of sales, repurchases and redemptions, taking into account current
market conditions and each Fund's investment objectives. Such procedures, which
the Trustees review annually, include specific requirements designed to assure
that issuers of the Funds' securities continue to meet high standards of
creditworthiness. The procedures also establish certain requirements concerning
the quality and maturity of the Fund's investments. Finally, the procedures
require the determination, at such intervals as the Trustees deem appropriate
and reasonable, of the extent, if any, to which a Fund's net asset value
calculated by using available market quotations deviates from $1.00 per share.
Market quotations and market equivalents used in making such determinations may
be obtained from an independent pricing service approved by the Trustees. Such
determinations will be reviewed periodically by the Trustees.
If at any time it is determined that a deviation exists which may
result in material dilution or other unfair results to investors or existing
shareholders of a Fund, certain corrective actions may be taken, including
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding part or all of
dividends or payment of distributions from capital or capital gains; redeeming
shares in kind; or establishing a net asset value per share by using available
market quotations or equivalents. In addition, in order to stabilize the net
asset value per share at $1.00 the Trustees have the authority (1) to reduce the
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number of outstanding shares of a Fund on a pro rata basis, and (2) to offset
each shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
future dividends. The Funds may hold cash for the purpose of stabilizing their
net asset value per share. Holdings of cash, on which no return is earned, would
tend to lower the yield on the shares of the Funds.
The net income of the Funds is declared as dividends to shareholders
daily and distributed monthly in shares of the Funds unless payment is requested
in cash.
AARP 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
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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
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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.
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Since such discounts and premiums will be recognized in the Fund's accounts over
the life of the respective security issues and included in the regular monthly
income distributions to shareholders, they will not give rise to taxable capital
gains or losses. However, a capital gain or taxable ordinary income may be
realized upon the sale or maturity and payment of certain obligations purchased
at a market discount.
AARP Growth Funds
(See "AARP Balanced Stock and Bond Fund," "AARP Growth and Income
Fund," "AARP U.S. Stock Index Fund," "AARP Global Growth Fund," "AARP Capital
Growth Fund," "AARP International Stock Fund," "AARP Small Company Stock Fund,"
"INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK
FACTORS" in the Prospectus.)
AARP Balanced Stock and Bond Fund. The AARP Balanced Stock and Bond
Fund's investment objective is to seek to provide long-term growth of capital
and income while attempting to keep the value of its shares more stable than
other balanced mutual funds. The Fund pursues these objectives by investing in a
combination of stocks, bonds, and cash reserves.
The Fund is intended to provide--through a single investment--access to
a wide variety of income-oriented stocks and investment-grade bond investments.
Common stocks and other equity investments provide long-term growth potential to
help offset the effect of inflation on an investor's purchasing power. Bonds and
other fixed-income investments provide current income and may, over time, help
reduce fluctuations in the Fund's share price.
In seeking a balance of growth and income, as well as long-term
preservation of capital, the Fund invests in a diversified portfolio of equity
and fixed-income securities. At least 30% of the Fund's assets will be in
fixed-income securities, with the remainder of its net assets in common stocks
and securities convertible into common stocks. For temporary defensive purposes,
the Fund may invest without limit in cash and in other money market and
short-term instruments when the Fund Manager deems such a position advisable in
light of economic or market conditions.
The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Fund
Manager weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Fund Manager analyzes, on a global basis,
the level and direction of interest rates, capital flows, inflation
expectations, anticipated growth of corporate profits, monetary and fiscal
policies around the world, and other related factors.
The Fund does not take extreme investment positions as part of an
effort to "time the market." Shifts between stocks and fixed-income investments
are expected to occur in generally small increments within the guidelines
adopted in the prospectus and this Statement of Additional Information. The Fund
is designed as a conservative long-term investment.
While the Fund emphasizes U.S. equity and debt securities, it may
invest without limit in foreign securities, including depositary receipts. The
Fund's foreign holdings will meet the criteria applicable to its domestic
investments. Foreign securities are intended to increase diversification, thus
reducing risk, while providing the opportunity for higher returns.
In addition, the Fund may invest in securities on a when-issued or
forward delivery basis and may write (sell) covered call options on the equity
securities it holds to enhance investment return and may purchase and sell
options on stock indices for hedging purposes. Subject to applicable regulatory
guidelines and solely to protect against adverse effects of changes in interest
rates, the Fund may make limited use of financial futures contracts.
Equity investments. The Fund can invest up to 70% of its net assets in
equity securities. The Fund's equity investments consist of common stocks,
preferred stocks and securities convertible into common stocks, of companies
that, in the Fund Manager's judgment, will offer the opportunity for capital
growth and growth of earnings while providing dividends. The Fund pursues these
objectives by investing primarily in common stocks and securities convertible
into common stocks. Over time, a stock which produces continued earnings growth
tends to produce higher dividends and stock values.
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The Fund invests in a variety of industries and companies. Changes in
the Fund's portfolio securities are made on the basis of investment
considerations and not for trading purposes.
Fixed-income investments. To enhance income and stability, the Fund
will have at least 30% of its net assets invested in fixed-income securities.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and preferred and convertible preferred securities. It may also purchase
U.S. Government securities and obligations of federal agencies and
instrumentalities that are not backed by the full faith and credit of the U.S.
Government, such as obligations of the Federal Home Loan Banks, Farm Credit
Banks, and the Federal Home Loan Mortgage Corporation. The Fund may also invest
in obligations of international agencies, foreign debt securities (both U.S. and
non-U.S. dollar denominated), trust preferred securities, mortgage-backed and
other asset-backed securities, municipal obligations, zero coupon securities,
and restricted securities issued in private placements.
For liquidity and defensive purposes, the Fund may invest in money
market securities such as commercial paper, bankers' acceptances, and
certificates of deposit issued by domestic and foreign branches of U.S. banks.
The Fund may also enter into repurchase agreements with respect to U.S.
Government securities.
All of the Fund's debt securities will be investment grade, that is,
rated Baa or above by Moody's or BBB by S&P. Moreover, at least 75% of these
securities will be high grade, that is, rated within the three highest quality
ratings of Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or, if unrated,
judged to be of equivalent quality as determined by the Fund Manager at the time
of purchase. Securities must also meet credit standards applied by the Fund
Manager. Moreover, the Fund does not purchase debt securities rated below Baa by
Moody's or BBB by S&P. Should the rating of a portfolio security be downgraded
the Fund Manager will determine whether it is in the best interest of the Fund
to retain or dispose of the security.
AARP Growth and Income Fund. From investments primarily in common
stocks and securities convertible into common stocks, the Fund seeks to provide
long-term capital growth and income, and to keep the value of its shares more
stable than other growth and income mutual funds.
The Fund invests primarily in common stocks and securities convertible
into common stocks. It also may invest in rights to purchase common stocks of
companies offering the prospect for capital growth and growth of earnings while
paying current dividends. The Fund may also invest in preferred stocks
consistent with the Fund's objective. Over time, continued growth of earnings
tends to produce higher dividends and to enhance capital value. In addition,
since 1945, the overall performance of common stocks has exceeded the rate of
inflation. For temporary defensive purposes, the Fund may also purchase
high-quality money market securities (such as U.S. Treasury bills, commercial
paper, certificates of deposit and bankers' acceptances) and repurchase
agreements when the Fund Manager deems such a position advisable in light of
economic or market conditions.
AARP U.S. Stock Index Fund. Taking an indexing approach to investing in
common stocks, the Fund seeks to provide long-term capital growth and income,
and to keep the value of its shares more stable than a S&P 500 Index fund. The
Fund seeks these dual objectives by emphasizing higher dividend stocks while
maintaining investment characteristics otherwise similar to the S&P 500 Index.
The Fund attempts to remain fully invested in common stocks of S&P 500
companies. Under normal circumstances, the Fund will invest at least 95% of its
assets in common stocks, futures contracts and options, primarily on the S&P 500
Index. The Fund, using a proprietary computer model, selects common stocks of
S&P 500 companies that are expected to, on average, pay higher dividends than
S&P 500 companies in the aggregate. In managing the Fund this way, the Fund
Manager expects performance will be somewhat less volatile than that of the S&P
500 over time, and the total return will generally track the S&P 500 within 1%
on an annualized basis. A tracking error of 0% would indicate perfect
correlation to the Index. After the Fund's start-up phase, the portfolio will
typically consist of the common stocks of between 400 to 470 of the S&P 500
companies. The Fund expects to come close to the capitalization weights of the
S&P 500. Nonetheless, to enhance the yield and liquidity characteristics of the
Fund and reduce transaction costs, the Fund will not exactly replicate the
portfolio weights of the S&P 500 and will not hold all 500 stocks within that
Index. The investment approach is "passive" in that after the dividend screening
described above, there is no additional financial analysis regarding the
securities held in the Fund. Under normal circumstances, the Fund may invest up
to 5% of its assets in certain short-term fixed income securities including high
quality money market securities such as U.S. Treasury bills, repurchase
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agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks and bankers' acceptances, although cash or cash
equivalents are normally expected to represent less than 1% of the Fund's
assets. The Fund may invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading costs. The Fund may also
invest in Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs typically trade
like a share of common stock and provide investment results that generally
correspond to the price and yield performance of the component common stocks of
the S&P 500 Index. There can be no assurance that this can be accomplished as it
may not be possible for the trust to replicate and maintain exactly the
composition and relative weightings of the S&P 500 Index securities. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks other than those associated with an investment in a broadly based
portfolio of common stocks in that the selection of the stocks included in the
trust may affect trading in SPDRs, as compared with trading in a broadly based
portfolio of common stocks. The Fund will not invest in cash reserves, futures
contracts or options as part of a temporary defensive strategy, such as lowering
the Fund's investment in common stocks to protect against potential stock market
declines. Thus the Fund will not take specific steps to minimize losses that
reflect a decline in the S&P 500. In the event that the Fund does not track
within an annualized 1% total return of the S&P 500 for an extended period, the
Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's
Corporation.
AARP Global Growth Fund. From investments primarily in equity
securities of corporations worldwide, the Fund seeks to offer long-term capital
growth in a globally diversified portfolio, and to keep the value of its shares
more stable than other global equity funds. The Fund invests on a worldwide
basis in equity securities of companies which are incorporated in the U.S. or in
foreign countries. It may also invest in the debt securities of U.S. and foreign
issuers. Income is an incidental consideration.
The management of the Fund believes that there is substantial
opportunity for long-term capital growth from a professionally managed portfolio
of securities selected from the U.S. and foreign equity markets. Global
investing takes advantage of the investment opportunities created by the growing
integration of economies around the world. The world has become highly
integrated in economic, industrial and financial terms. Companies increasingly
operate globally as they purchase raw materials, produce and sell their
products, and raise capital. As a result, international trends such as movements
in currency and trading relationships are becoming more important to many
industries than purely domestic influences. To understand a company's business,
it is frequently more important to understand how it is linked to the world
economy than whether or not it is, for example, a U.S., French or Swiss company.
Just as a company takes a global perspective in deciding where to operate, so
too may an investor benefit from looking globally in deciding which industries
are growing, which producers are efficient and which companies' shares are
undervalued. The Fund affords the investor access to opportunities wherever they
arise, without being constrained by the location of a company's headquarters or
the trading market for its shares.
The Fund invests in companies that the Fund Manager believes will
benefit from global economic trends, promising technologies or products and
specific country opportunities resulting from changing geopolitical, currency,
or economic relationships. The Fund will normally invest at least 65% of its
total assets in securities of at least three different countries. Typically, it
is expected that the Fund will invest in a wide variety of regions and
countries, including both foreign and U.S. issues. The Fund may be invested 100%
in non-U.S. issues, and for temporary defensive purposes may be invested 100% in
U.S. issues, although under normal circumstances it is expected that both
foreign and U.S. investments will be represented in the Fund's portfolio. It is
expected that investments will include companies of varying size as measured by
assets, sales, or capitalization.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
AARP Capital Growth Fund. From investments primarily in common stocks
and securities convertible into common stocks, the Fund seeks to provide
long-term capital growth, and to keep the value of its shares more stable than
other capital growth mutual funds. Through a broadly diversified portfolio
consisting primarily of high quality, medium- to large-sized companies with
strong competitive positions in their industries the Fund seeks to offer less
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share price volatility than many growth funds. It may also invest in rights to
purchase common stocks, the growth prospects of which are greater than most
stocks but which may also have above-average market risk. The Fund may also
invest in preferred stocks consistent with the Fund's objective. The securities
in which the Fund may invest are described under "AARP Capital Growth Fund" in
the Prospectus.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry. However, the Fund reserves the right
to invest up to 25% of its total assets (taken at market value) in any one
industry.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
AARP International Stock Fund. The Fund seeks to offer long-term
capital growth from a diversified portfolio of foreign equity securities, and to
keep the value of its shares more stable than other international equity funds.
The Fund generally invests in equity securities of established
dividend-paying companies listed on foreign exchanges within developed foreign
markets. The Fund does not invest in emerging markets, but instead focuses its
investments on the 21 developed foreign countries included in the Morgan Stanley
Capital International World ex USA Index. The Fund will normally invest at least
65% of its total assets in securities of at least three different countries.
When the Fund Manager believes that it is appropriate, the Fund may
invest up to 20% of its total assets in investment-grade foreign debt
securities. Such debt securities include debt securities of foreign governments,
supranational organizations and private issuers, including bonds denominated in
the European Currency Unit (ECU). Debt investments will be selected on yield,
credit quality, and the outlooks for currency and interest rates trends in
different parts of the globe, taking into account the ability to hedge a degree
of currency or local bond price risk. The Fund may purchase "investment-grade"
bonds, which are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB
by S&P or, if unrated, judged by the Fund Manager to be of equivalent quality.
Securities rated Baa by Moody's or BBB by S&P are neither highly protected nor
poorly secured. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as Canadian or U.S. government obligations or currencies, corporate debt
instruments, and securities of companies incorporated in and having their
principal activities in Canada or the U.S. when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund may make limited use of financial futures contracts and
related options and may also invest in foreign currency exchange contracts. The
Fund may write (sell) covered call options to enhance investment return, and may
purchase and sell options on stock indices for hedging purposes.
AARP Small Company Stock Fund. From investments primarily in the stocks
of small U.S. companies, the Fund seeks to provide long-term capital growth, and
to keep the value of its shares more stable than other small company stock
funds.
In pursuing its objective of long-term capital growth, the Fund
normally remains substantially invested in the common stocks of small U.S.
companies. Using a quantitative investment approach developed by the Fund
Manager, the Fund focuses on equity securities of companies with market
capitalization below $1 billion that, as a group, have a dividend yield higher
than the average of those in the Russell 2000 Index(R) and that the Fund Manager
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believes are undervalued relative to the stocks in Russell 2000 Index(R). The
Russell 2000 Index(R) is a widely used measure of small stock performance. The
Fund will sell securities of companies that have grown in market capitalization
above this level as necessary to keep the Fund focused on small companies.
The Fund takes a diversified approach to investing in small
capitalization stocks which overall have dividend yields above the average yield
of the Russell 2000 Index(R). After the Fund's start-up phase, it will not be
unusual for it to hold stocks of more than one hundred small companies,
representing a variety of U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (either convertible
or nonconvertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes as a temporary investment to accommodate cash
flows.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
AARP Managed Investment Portfolios
AARP Diversified Income Portfolio. AARP Diversified Income Portfolio
seeks to provide current income with modest long-term appreciation potential by
investing primarily in underlying AARP bond mutual funds.
AARP Diversified Growth Portfolio. The Portfolio seeks long-term growth
of capital by investing primarily in underlying AARP stock mutual funds.
Each Portfolio may invest in any of the AARP Mutual Funds, except for
those designed to provide tax-free income.
Under normal market conditions, each of the AARP Investment Portfolios
will invest within the investment ranges as described below:
o The Diversified Income Portfolio will normally invest 60-80% of total
assets in AARP bond mutual funds; and 20-40% of total assets in AARP stock
mutual funds; and 0-20% of total assets in cash or cash equivalents.
o The Diversified Growth Portfolio will normally invest 60-80% of total
assets in AARP stock mutual funds; and 20-40% of total assets in AARP bond
mutual funds and 0-20% of total assets in cash or cash equivalents.
If, as a result of appreciation or depreciation, the percentage of each
Portfolio's assets invested in the above categories exceeds or is less than the
applicable range, the Fund Manager will consider, in its discretion, whether to
reallocate the assets of each Portfolio to comply with the stated ranges.
Each Portfolio will purchase or sell shares of underlying AARP mutual
funds to: (a) accommodate purchases and sales of each Portfolio's shares, (b)
change the percentages of each Portfolio's assets invested in each of the
underlying AARP mutual funds in response to changing market conditions, and (c)
maintain or modify the allocation of each Portfolio's assets in accordance with
the investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including AARP money market funds, repurchase agreements,
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
For information about the investment objectives of each of the
underlying AARP mutual funds, please refer to the description of each underlying
AARP mutual fund contained in the sections preceding this section.
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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
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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.
Trust Preferred Securities. AARP Balanced Stock and Bond Fund, AARP
High Quality Bond Fund and AARP Bond Fund for Income may invest in Trust
Preferred Securities, which are hybrid instruments issued by a special purpose
trust (the "Special Trust"), the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Funds of Trust Preferred
Securities are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Funds, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
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(regardless of whether the Funds receive any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Funds, to sell their holdings.
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.
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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.
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These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-By
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the
Internal Revenue Service will agree with such position in any particular case.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the treatment of tender fees and swap payments, in
relation to various regulated investment company tax provisions is unclear.
However, the Fund Manager intends to manage the Funds' portfolios in a manner
designed to minimize any adverse impact from these investments.
Repurchase Agreements. Each of the AARP Funds may enter into repurchase
agreements with any member bank of the Federal Reserve System and any
broker-dealers which are recognized as a reporting government securities dealer,
whose creditworthiness has been determined by the Fund Manager to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by any of the nationally-recognized rating services including Moody's
and S&P, two of the most widely recognized rating services for the types of
securities in which a Fund invests. A repurchase agreement, which provides a
means for a Fund to earn income on monies for periods as short as overnight, is
an arrangement under which the purchaser (i.e., the Fund) acquires a security
("Obligation") and the seller agrees, at the time of sale, to repurchase the
Obligation at a specified time and price. The repurchase price may be higher
than the purchase price, the difference being income to the Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the Fund at the time of repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the Obligation itself. For purposes of
the Investment Company Act of 1940, as amended, ("1940 Act") a repurchase
agreement is deemed to be a loan to the seller of the Obligation and is
therefore covered by each Fund's investment restriction applicable to loans.
Each repurchase agreement entered into by a Fund requires that if the market
value of the Obligation becomes less than the repurchase price (including
interest), a Fund will direct the seller of the Obligation, on a daily basis to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. In the
event that a Fund is unsuccessful in seeking to enforce the contractual
obligation to deliver additional securities, and the seller defaults on its
obligation to repurchase, the Fund bears the risk of any drop in market value of
the Obligation(s). In the event that bankruptcy or insolvency proceedings were
commenced with respect to a bank or broker-dealer before its repurchase of the
Obligation, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
Obligation. In the case of repurchase agreements, it is not clear whether a
court would consider a repurchase agreement as being owned by the particular
Fund or as being collateral for a loan by the Fund. If a court were to
characterize the transaction as a loan and the Fund had not perfected a security
interest in the Obligation, the Fund could be required to return the Obligation
to the bank's estate and be treated as an unsecured creditor. As an unsecured
creditor, the Fund would be at the risk of losing some or all of the principal
and income involved in that transaction. The Fund Manager seeks to minimize the
risk of loss through repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligations.
Securities subject to a repurchase agreement are held in a segregated
account, and the amount of such securities is adjusted so as to provide a market
value at least equal to the repurchase price on a daily basis.
Real Estate Investment Trusts. The AARP Growth and Income Fund may
invest in REITs. REITs are sometimes informally characterized as equity REITs,
mortgage REITs and hybrid REITs. Investment in REITs may subject the Fund to
risks associated with the direct ownership of real estate, such as decreases in
real estate values, overbuilding, increased competition and other risks related
to local or general economic conditions, increases in operating costs and
property taxes, changes in zoning laws, casualty or condemnation losses,
possible environmental liabilities, regulatory limitations on rent and
fluctuations in rental income. Equity REITs generally experience these risks
directly through fee or leasehold interests, whereas mortgage REITs generally
experience these risks indirectly through mortgage interests, unless the
mortgage REIT forecloses on the underlying real estate. Changes in interest
rates may also affect the value of the Fund's investment in REITs. For instance,
during periods of declining interest rates, certain mortgage REITs may hold
mortgages that the mortgagors elect to prepay, which prepayment may diminish the
yield on securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
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to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended and to maintain exemption from the 1940 Act. By investing in
REITs indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs. In addition, REITs depend generally on their ability to
generate cash flow to make distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. The
AARP High Quality Bond Fund, the AARP Bond Fund for Income, the AARP Balanced
Stock and Bond Fund and the AARP Growth and Income Fund may invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. The AARP GNMA and U.S. Treasury Fund
invests in mortgage-backed securities guaranteed primarily by the Government
National Mortgage Association. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations as further described below. The AARP High Quality Bond
Fund, the AARP Bond Fund for Income, and the AARP Balanced Stock and Bond Fund
may also invest in debt securities which are secured with collateral consisting
of mortgage-backed securities (see "Collateralized Mortgage Obligations"), and
in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities.
When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of a mortgage-related security and increasing the
price volatility of that security, affecting the price volatility of the Fund's
shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage-backed securities or to the value of Fund shares.
Also, GNMA securities often are purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
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Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Fund Manager determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMO"s). The AARP High Quality Bond Fund,
the AARP Bond Fund for Income, and the AARP Balanced Stock and Bond Fund may
invest in CMOs which are hybrids between mortgage-backed bonds and mortgage
pass-through securities. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with the AARP High Quality Bond Fund's, the AARP Bond Fund
for Income's, and the AARP Balanced Stock and Bond Fund's investment objectives
and policies, the Funds may invest in these and other types of asset-backed
securities that may be developed in the future. In general, the collateral
supporting these securities is of shorter maturity than mortgage loans and is
less likely to experience substantial prepayments with interest rate
fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust ("Trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
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and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Fund will not pay any additional or separate fees for
credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security.
The Funds may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act of 1933 (the "1933 Act") may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Funds to dispose of any then existing holdings of such
securities.
Zero Coupon Securities. The AARP Balanced Stock and Bond Fund and the
AARP Global Growth Fund may invest in zero coupon securities which pay no cash
income and are sold at substantial discounts from their value at maturity. When
held to maturity, their entire income, which consists of accretion of discount,
comes from the difference between the issue price and their value at maturity.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero coupon securities which are
convertible into common stock offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks, as they usually are issued with maturities of 15 years
or less and are issued with options and/or redemption features exercisable by
the holder of the obligation entitling the holder to redeem the obligation and
receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
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separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Funds, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Funds understand that the staff of the SEC no longer considers
such privately stripped obligations to be U.S. Government securities, as defined
in the Investment Company Act of 1940; therefore, the Funds intend to adhere to
this staff position and will not treat such privately stripped obligations to be
U.S. Government securities for the purpose of determining if the Funds are
"diversified" under the 1940 Act.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "TAXES" herein).
High Yield/High Risk Securities. AARP Bond Fund for Income may invest a
limited amount of assets in debt securities which are rated below
investment-grade, rated lower than Baa by Moody's or lower than BBB by S&P
(hereinafter referred to as "lower rated securities") or which are unrated, but
deemed equivalent to those rated below investment-grade by the Fund Manager. The
lower the ratings of such debt securities, the greater their risks. These debt
instruments generally offer a higher current yield than that available from
higher grade issues, but typically involve greater risk. The yields on high
yield/high risk bonds will fluctuate over time. In general, prices of all bonds
rise when interest rates fall and fall when interest rates rise. While less
sensitive to changing interest rates than investment-grade debt, lower-rated
securities are especially subject to adverse changes in general economic
conditions and to changes in the financial condition of their issuers. During
periods of economic downturn or rising interest rates, issuers of these
instruments may experience financial stress that could adversely affect their
ability to make payments of principal and interest and increase the possibility
of default.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of these
securities especially in a market characterized by only a small amount of
trading and with relatively few participants. These factors can also limit the
Fund's ability to obtain accurate market quotations for these securities, making
it more difficult to determine the Fund's NAV.
In cases where market quotations are not available, lower rated
securities are valued using guidelines established by the Fund's Board of
Trustees. Perceived credit quality in this market can change suddenly and
unexpectedly, and may not fully reflect the actual risk posed by a particular
lower rated or unrated security.
Loans of Portfolio Securities. Each Fund may lend its portfolio
securities provided: (1) the loan is secured continuously by collateral
consisting of U.S. Government securities or cash or cash equivalents adjusted
daily to have a market value at least equal to the current market value of the
securities loaned; (2) the Fund may at any time call the loan and regain the
securities loaned; (3) the Fund will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities loaned
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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, the AARP Balanced Stock and Bond Fund, the AARP Global Growth
Fund, the AARP International Stock Fund, the AARP U.S. Stock Index Fund and the
AARP Small Company Stock Fund may 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
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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 Fund Manager determined that such a
correlation existed.
Index Futures Contracts and Debt Futures Contracts currently are
actively traded on the Chicago Board of Trade and the International Monetary
Market at the Chicago Mercantile Exchange.
Options on Futures Contracts. To attempt to gain additional protection
against the effects of interest rate fluctuations, each of the AARP Income
Funds, the AARP Insured Tax Free General Bond Fund, the AARP Balanced Stock and
Bond Fund, the AARP Global Growth Fund, the AARP International Stock Fund, and
the AARP Small Company Stock Fund may purchase and write (sell) put and call
options on futures contracts that are traded on a U.S. exchange or board of
trade and enter into related closing transactions. There can be no assurance
that such closing transactions will be available at all times. In return for the
premium paid, such an option gives the purchaser the right to assume a position
in a futures contract at any time during the option period for a specified
exercise price. The AARP U.S. Stock Index Fund invests its assets in futures
contracts in order to invest uncommitted cash balances, to maintain liquidity or
to minimize trading costs.
A Fund may purchase put options on futures contracts in lieu of, and
for the same purpose as, sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying futures
contract.
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The purchase of call options on futures contracts is intended to serve
the same purpose as the actual purchase of the futures contracts. A Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
A Fund may write (sell) a call option on a futures contract in order to
hedge against a decline in the prices of the index or debt securities underlying
the futures contracts. If the price of the futures contract at expiration is
below the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing (selling) of a put option on a futures contract is similar
to the purchase of the futures contracts, except that, if market price declines,
a Fund would pay more than the market price for the underlying securities or
index units. The net cost to that Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Limitations on Futures Contracts and Options on Futures Contracts. A
Fund will not engage in transactions in futures contracts or related options for
speculation but only as a hedge against changes resulting from market conditions
in the values of debt securities held in its portfolio or which it intends to
purchase and where the transactions are appropriate to the reduction of the
Fund's risks. The Trustees have adopted policies (which are not fundamental and
may be modified by the Trustees without a shareholder vote) that, immediately
after the purchase for a Fund of a futures contract or a related option, the
value of the aggregate initial margin deposits with respect to all futures
contracts (both for receipt and delivery), and premiums paid on related options,
entered into on behalf of the Fund will not exceed 5% of the fair market value
of the Fund's total assets. Additionally, the value of the aggregate premiums
paid for all put and call options held by a Fund will not exceed 20% of its net
assets. Futures contracts and put options written (sold) by a Fund will be
offset by assets of the Fund held in a segregated account in an amount
sufficient to satisfy obligations under such contracts and options.
AARP Income Trust and AARP Tax Free Income Trust have received from the
CFTC an interpretative letter confirming its opinion that it is not a "commodity
pool" as defined under the Commodity Exchange Act. To ensure that its futures
transactions meet this definition, each Fund will enter into them for the
purposes and with the hedging intent specified in CFTC regulations. It will
further determine that the price fluctuations in the futures contracts used for
hedging are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase, though there can be no assurance this
result will be achieved. The Funds' futures transactions will be entered into
for traditional hedging purposes-- that is, futures contracts will be sold (or
related put options purchased) to protect against a decline in the price of
securities that a Fund owns, or futures contracts (or related call options) will
be purchased to protect the Fund against an increase in the price of securities
it intends to purchase. As evidence of this hedging intent, each Fund expects
that approximately 75% of its long futures positions (purchases of futures
contracts or call options on futures contracts) will be "completed"; that is,
upon sale (or other termination) of these long contracts, the Fund will have
purchased, or will be in the process of, purchasing, equivalent amounts of
related securities in the cash market. However, under unusual market conditions,
a long futures position may be terminated without the corresponding purchase of
securities.
Covered Call Options. Each of the AARP Growth Funds with the exception
of the AARP U.S. Stock Index Fund and each of the AARP Income Funds may write
(sell) covered call options on their portfolio securities in an attempt to
enhance investment performance. The AARP U.S. Stock Index Fund invests its
assets in covered call options in order to invest uncommitted cash balances, to
maintain liquidity or to minimize trading costs. The writing of covered call
options by each Fund is subject to limitations imposed by certain state
securities authorities. 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
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over which the Fund has no control, the Fund must sell the underlying security
to the option holder at the exercise price. By writing a covered option, the
Fund forgoes, in exchange for the premium less the commission ("net premium"),
the opportunity to profit during the option period from an increase in the
market value of the underlying security above the exercise price.
When a Fund sells an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked-to-market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a closing purchase transaction (i.e., the Fund
terminates its obligation as the writer of the option by purchasing a call
option on the same security with the same exercise price and expiration date as
the option previously written), the Fund will realize a gain (or loss if the
cost of a closing purchase transaction exceeds the net premium received when the
option was sold) and the deferred credit related to such option will be
eliminated. If an option is exercised, the Fund will realize a long-term or
short-term gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received.
The writing of covered options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
options are written will be segregated on the books of the Fund's custodian.
Purchasing Options on Stock Indices. To protect the value of their
portfolios against declining stock prices, each of the AARP Growth Funds with
the exception of the AARP U.S. Stock Index Fund may purchase put options on
stock indices. The AARP U.S. Stock Index Fund invests its assets in options on
stock indices in order to invest uncommitted cash balances, to maintain
liquidity or to minimize trading costs. To protect against an increase in the
value of securities that it wants to purchase, a Fund may purchase call options
on stock indices. A stock index (such as the Standard & Poor's 500) assigns
relative values to the common stocks included in the index and the index
fluctuates with the changes in the market values of the common stocks so
included. Options on stock indices are similar to options on stock except that,
rather than giving the purchaser the right to take delivery of stock at a
specified price, an option on a stock index gives the purchaser the right to
receive cash. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars,
times a specified multiple (the "multiplier"). The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Gain or loss with respect to options on stock indices depends on price movements
in the stock market generally rather than price movements in individual stocks.
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
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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. Each Fund in the AARP Growth Trust, AARP High
Quality Bond Fund and AARP Bond Fund for Income may invest in convertible
securities. Convertible securities include convertible bonds, notes and
debentures, convertible preferred stocks, and other securities that give the
holder the right to exchange the security for a specific number of shares of
common stock. Convertible securities entail less credit risk than the issuer's
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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 and may invest up to
20% of its assets in foreign bonds denominated in foreign currencies although no
more than 5% of the Fund's total assets will be represented by a given foreign
currency. The AARP Bond Fund for Income may invest without limit in U.S. dollar
denominated investment-grade foreign securities and may invest up to 20% of its
assets in foreign bonds denominated in foreign currencies. The AARP Money Funds
may currently invest in U.S. dollar-denominated certificates of deposit and
bankers' acceptances of foreign branches of large U.S. banks.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in United States securities and
which may favorably or unfavorably affect the Funds' performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
United States and, at times, volatility of price can be greater than in the
United States. Fixed commissions on some foreign securities exchanges and bid to
asked spreads in foreign bond markets are generally higher than commissions on
bid to asked spreads on U.S. markets, although the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S. It may be more difficult for the
Funds' agents to keep currently informed about corporate actions which may
affect the prices of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Payment for securities without
delivery may be required in certain foreign markets. In addition, with respect
to certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Investments in foreign securities may also entail certain risks such as possible
currency blockages or transfer restrictions, and the difficulty of enforcing
rights in other countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, to the
extent investments in foreign securities involve currencies of foreign
countries, the Funds may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversion between currencies.
Investments in companies domiciled in developing countries may be
subject to potentially greater risks than investments in developed countries.
The possibility of revolution and the dependence on foreign economic assistance
may be greater in these countries than in developed countries. The management of
each Fund seeks to mitigate the risks associated with these considerations
through diversification and active professional management.
Forward Foreign Currency Exchange Contracts. Each of the AARP Growth
Funds and the AARP High Quality Bond Fund and the AARP Bond Fund for Income may
enter into forward foreign currency exchange contracts in connection with its
investments in foreign securities. A forward foreign currency exchange contract
("forward contract") involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. 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
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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 cannot guarantee a gain or eliminate the risk of loss.
The net asset value of a non-money market Fund's shares will increase or
decrease with changes in the market prices of the Fund's investments and there
is no assurance that a Fund's objective(s) will be achieved.
Except where otherwise indicated, the objectives and policies stated
above may be changed by the Trustees without a vote of the shareholders.
Investment Restrictions
The following restrictions may not be changed with respect to a Fund
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (1) 67% of the shares
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;
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(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 Trusts,
provided that collateral arrangements with respect to
currency-related contracts, futures contracts, option or other
permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction; and
(7) with respect to 75% of each Fund's total assets, purchase more
than 10% of the voting securities of any one issuer or invest
more than 5% of the value of the total assets of the Fund in
the securities of any one issuer (except for investments in
obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, cash and cash equivalents and
securities of other investment companies), provided that the
amount of the total assets of each of the AARP High Quality
Money Fund and the AARP High Quality Tax Free Money Fund, that
may be invested in the securities of any one issuer will,
instead, be limited in accordance with federal law, regulation
and regulatory interpretation applicable to money market
funds, as amended from time to time.
(B) None of the AARP High Quality Money Fund, the AARP GNMA and U.S.
Treasury Fund, the AARP High Quality Bond Fund, the AARP Bond Fund for
Income, the AARP Growth and Income Fund, the AARP Global Growth Fund,
the AARP Capital Growth Fund, the AARP Balanced Stock and Bond Fund,
the AARP U.S. Stock Index Fund, the AARP International Stock Fund, the
AARP Managed Investment Portfolios and the AARP Small Company Stock
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; or
(2) 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.
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None of the Funds may:
(a) 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. Notwithstanding the foregoing, the AARP
Managed Investment Portfolios may each invest in shares of
other AARP Funds to the extent described in the current
prospectus; or
None of the AARP High Quality Money Fund, the AARP GNMA and U.S. Treasury Fund,
the AARP High Quality Bond Fund, the AARP High Quality Tax Free Money Fund, the
AARP Insured Tax Free General Bond Fund, the AARP Balanced Stock and Bond Fund,
the AARP Growth and Income Fund, the AARP Global Growth Fund and the AARP
Capital Growth Fund may:
(b) invest in other companies for the purpose of exercising
control or management.
(c) 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 GNMA and U.S. Treasury Fund, the AARP High Quality Bond
Fund, the AARP Insured Tax Free General Bond Fund and the AARP
Global Growth Fund in connection with entering into futures
contracts and related options;
(d) 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;
(e) 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;
(f) 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;
(g) 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;
(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 interests
therein; and
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(i) purchase or sell commodities, commodities contracts (except,
in the case of the AARP GNMA and U.S. Treasury Fund, the AARP
High Quality Bond Fund, the AARP Insured Tax Free General Bond
Fund and the AARP Global Growth Fund, contracts for the future
delivery of debt obligations and contracts based on debt
indices) or oil, gas or other mineral exploration or
development programs or leases (although it may invest in
issuers which own or invest in such interests).
AARP High Quality Money Fund may not:
(j) purchase or sell any put or call options or any combination
thereof; or
(k) purchase warrants, unless attached to other securities in
which the Fund is permitted to invest.
Neither the AARP High Quality Money Fund nor the AARP High Quality Tax Free
Money Fund may:
(l) pledge, mortgage or hypothecate its assets, except that, to
secure borrowings permitted by subparagraph (A)(1) above, it
may pledge securities having a value at the time of pledge not
exceeding 15% of the cost of the Fund's total assets.
Neither the AARP GNMA and U.S. Treasury Fund nor the AARP High Quality Bond Fund
may:
(m) purchase warrants of any issuer, except that AARP High Quality
Bond Fund can purchase warrants on a limited basis. As a
result of such purchases by the Fund, no more than 2% of the
value of the total assets of the Fund may be invested in
warrants which are not listed on the New York Stock Exchange
or the American Stock Exchange, and no more than 5% of the
value of the total assets of the Fund may be invested in
warrants whether or not so listed, such warrants in each case
to be valued at the lesser of cost or market, but assigning no
value to warrants acquired by the Fund in units with or
attached to debt securities;
(n) purchase or sell any put or call options or any combination
thereof, except that the Fund may write and sell national
exchange-listed covered call option contracts on national
exchange-listed securities and, to the extent permitted by
applicable state regulatory limits, on other debt securities
owned by the Fund up to, but not in excess of, 25% of the
value of the Fund's net assets at the time such option
contracts are written. The Fund may also purchase call options
for the purpose of terminating its outstanding obligations
with respect to securities upon which covered call option
contracts have been written (i.e., "closing purchase
transaction"). In connection with ---- the writing of covered
call options, the Fund may pledge assets to an extent not
greater than 25% of the value of its net assets at the time
such options are written. The Fund also may purchase and write
options on futures contracts in the manner described under
"The Funds' Investment Objectives and Policies"; or
(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.
AARP High Quality Bond Fund has adopted a non-fundamental policy that
it will not underwrite securities issued by entities regulated under Part II of
the Federal Power Act.
Neither AARP Insured Tax Free General Bond Fund nor AARP High Quality Tax Free
Money Fund may:
(p) purchase or sell any put or call options or combinations
thereof, except to the extent that the acquisition of Stand-by
Commitments or Participation Interests may be considered the
purchase or sale of a put option and except that the AARP
Insured Tax Free General Bond Fund may purchase and write
options on futures contracts in the manner and to the extent
described herein; or
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(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; or
(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 (B)(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 Balanced Stock and Bond Fund, the AARP Growth and Income Fund,
the AARP Capital Growth Fund and the AARP Global Growth Fund may:
(t) purchase or sell any put or call options or any combination
thereof, except that the Funds may each purchase and sell
options on stock indices in accordance with the requirements
of applicable regulations. The Funds may write (sell) covered
call option contracts on securities owned by the Fund up to,
but not in excess of, 25% of the value of the Fund's net
assets at the time such option contracts are written. The
Funds may also purchase call options for the purpose of
terminating their outstanding obligations with respect to
securities upon which covered call option contracts have been
written (i.e., "closing purchase transactions"). In connection
with the writing of ---- covered call options, the Funds may
pledge assets to an extent not greater than 25% of the value
of its net assets at the time such options are written; or
(u) purchase securities if, as a result thereof, more than 5% of
the value of the net assets would be invested in restricted
securities (for these purposes restricted security means a
security with a legal or contractual restriction on resale in
the principal market in which the security is traded).
(v) purchase warrants of any issuer if, as a result more than 2%
of the value of the total assets of the Fund would be invested
in warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange, or more than 5% of
the value of the total assets of the Fund would be invested in
warrants acquired by the Fund in units with or attached to
debt securities.
Neither the AARP Growth and Income Fund nor the AARP Capital Growth Fund may:
(w) pledge, mortgage or hypothecate its assets, except as provided
in subparagraph (t), above, and except that, to secure
borrowings permitted by subparagraph (A)(1) above, it may
pledge an amount not exceeding 15% of the Fund's total assets
taken at cost.
AARP Global Growth Fund may not:
(x) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(y) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of its net assets; or sell put
options on securities if, as a result, the aggregate value of
the obligations underlying such put options would exceed 50%
of the Fund's net assets;
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(z) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the Fund's
total assets, provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5% limit;
(aa) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the
time any loan is made; all loans of portfolio securities will
be fully collateralized and marked to market daily. The Fund
has no current intention of making loans of portfolio
securities that would amount to greater than 5% of the Fund's
total assets; or
(bb) borrow money, including reverse repurchase agreements, in
excess of 5% of its total assets (taken at market value)
except for temporary or emergency purposes, or borrow other
than from banks.
"Value" for the purposes of the above fundamental and non-fundamental
investment policies shall mean the value used in determining a Fund's net asset
value.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, the restricted
activity or, in the case of AARP High Quality Money Fund and the AARP Income
Funds, an acquisition or encumbrance of securities or assets of, or borrowings
by, the Fund.
PURCHASES
(See "OPENING AN ACCOUNT" and "ADDING TO YOUR INVESTMENT" in the Prospectus.)
General Information
Confirmations of each transaction will be sent following the
transaction by Scudder Investor Services, Inc., as the AARP Funds' agent. By
retaining year-to-date confirmations, an investor will have an historical record
of the account activity.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in United States Funds and must be drawn on a
United States financial institution.
If shares are purchased by a check which proves to be uncollectible,
the Trusts reserve the right to cancel the purchase immediately and the
purchaser will be responsible for any loss incurred by the Fund or the principal
underwriter by reason of such cancellation. Each Trust has the authority, as
agent of the shareholder, to redeem shares in the account to reimburse the Fund
or the principal underwriter for any loss incurred. Investors whose orders have
been canceled may be prohibited from or restricted in placing future orders in
any of the Funds in the Program or in other Funds advised by the AARP Funds'
investment adviser or an affiliate.
Share Price
Accepted purchases for shares in all the AARP Funds will be filled at
the net asset value next computed after receipt of payment by check or other
means. Each Fund's net asset value per share is currently determined once daily,
as of the close of regular trading on the New York Stock Exchange (the
"Exchange") (usually 4:00 p.m. Eastern time), on each day the Exchange is open
for trading. For AARP High Quality Money Fund and AARP High Quality Tax Free
Money Fund, Scudder Fund Accounting Corporation also determines net asset value
per share as of noon Eastern time on each day the Exchange is open for trading.
(See "NET ASSET VALUE," herein for additional information on how the Fund's net
asset value is calculated.) Orders received after the close of regular trading
will be filled at the next day's net asset value per share for the relevant
Fund.
There is no sales charge in connection with purchase of shares of any
of the AARP Funds.
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Share Certificates
In order to afford ease of redemption, ownership in the AARP Funds is
on a non-certificated basis. Share certificates now in a shareholder's
possession may be sent to the AARP Funds' transfer agent for cancellation and
credit to such shareholder's account. Shareholders who prefer may hold the
certificates now in their possession until they wish to exchange or redeem such
shares. See "EXCHANGING" and "ACCESS TO YOUR INVESTMENT" in the Funds'
Prospectus.
Direct Deposit Program
Investors can have Social Security or other checks from the U.S.
Government or any other regular income checks such as pension, dividends, and
even payroll checks automatically deposited directly to their accounts.
Investors may allocate a minimum of 25% of their income checks into any AARP
Fund. Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
Wire Transfers
In the case of wire purchases, failure to receive timely and complete
account information will delay investment and subsequent accrual of dividends
and will result in the federal funds being returned to the sender on the day
following receipt by State Street Bank and Trust Company (the "custodian").
Unlike shareholders subscribing by check, purchasers who wire funds will be able
to redeem shares so purchased by any method without any limitation as to the
period of time such shares have been on a Fund's books.
The bank sending federal funds by bank wire may charge for the service.
Presently, Scudder Investor Services, Inc. or the AARP Funds pay a fee for
receipt by the custodian of "wired funds," but the right to charge investors for
this service is reserved.
Holidays
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Martin Luther King, Jr. Day (the 3rd Monday in
January), Columbus Day (the 2nd Monday in October) and Veterans Day (November
11). Investors are not able to purchase shares by wiring federal funds on such
holidays because the custodians are not open to receive such federal funds on
behalf of a Fund.
Other Information
All purchase payments will be invested in full and fractional shares.
The Trusts and Scudder Investor Services, Inc., the AARP Funds'
principal underwriter, each have the right to limit the amount of shares
purchased of a Fund, to reject any purchase and to refuse to sell shares to any
person.
It should be noted that if purchases are made through a member of the
National Association of Securities Dealers other than Scudder Investor Services,
Inc., that member may, in its discretion, charge a fee for this service. It is
the responsibility of the broker, not the AARP Funds, to place the purchase
order by the time as of which the net asset value of the Funds is next
determined.
The Trusts may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of, the assets of any investment
company or personal holding company, subject to the requirements of the 1940
Act.
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REDEMPTIONS
(See "ACCESS TO YOUR INVESTMENT" in the Prospectus.)
General Information
If a shareholder redeems all shares in an account, the shareholder will
receive, in addition to the net asset value thereof, all declared but unpaid
dividends thereon. The AARP Funds do not impose a redemption charge.
The proceeds of redemption transactions are normally available to be
mailed or wired to the designated bank account within one business day, and in
any event will be available within seven calendar days, following receipt of a
redemption request in good order.
A shareholder's right to redeem shares of a Fund and to receive payment
therefore may be suspended at times (a) when the Exchange is closed, other than
customary weekend and holiday closings, (b) when trading on the Exchange is
restricted for any reason, (c) when an emergency exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets, or (d) when the SEC permits a suspension of the right of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b) or (c) exist.
The Trustees may suspend or terminate the offering of shares of a Fund
at any time.
Redemption by Telephone
Redemption by telephone is not available for shares for which share
certificates have been issued. Redemptions of such shares must be requested by
mail as explained in the section entitled "Redemption by Mail" below.
For other investors, the following procedures are available.
TO ADDRESS OF RECORD: New investors automatically receive the option,
without having to elect it, to redeem by telephone to their address of record
for any amount up to $100,000 per Fund. Telephone Redemption to Address of
Record may be used as long as the account registration address has not changed
within the last 15 days. In order to decline this feature, the shareholder must
notify the Program in writing. Any shareholder who refuses Telephone Redemption
to Address of Record can later establish the feature with a signature guaranteed
written request. This request must be done prior to utilizing this service for
the first time.
TO YOUR BANK--BY MAIL OR BY WIRE: In order to request redemptions by
telephone to their bank, shareholders must have completed the telephone
redemption authorization included in the enrollment form and have sent the
authorization to the Program. This authorization requires designation of a bank
account to which the redemption payment is to be sent. The proceeds will be
mailed or wired only to the designated bank account.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the enrollment form, and send it to the Program.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a predesignated bank account or who want to
change the bank account previously designated to receive
redemption payments should either enter the new information on
the "Telephone Option Form" which may be obtained by calling
the Program, or send a signature guaranteed letter identifying
the account and specifying the exact information to be
changed. In each case, the letter must be signed exactly as
the shareholder's name(s) appears on the account. All requests
for telephone redemption should be accompanied by a voided
check from the designated bank account. All signatures will
require a guarantee, which can be obtained from most banks,
credit unions or savings associations, or from broker/dealers,
government securities broker/dealers, national securities
exchanges, registered securities associations, or clearing
agencies deemed eligible by the SEC. An original signature and
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an original signature guarantee are required for each person
in whose name the account is registered. Signature guarantees
by notaries public are not acceptable.
In addition, if shares to be redeemed were purchased by check, mailing
of the redemption proceeds may be delayed long enough to assure that the
purchase check has cleared.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve wire to the bank account
designated on the application form unless a request is made that the redemption
be mailed to the designated bank account. For each wire redemption, the program
charges a $5.00 fee which is deducted from the proceeds of the redemption.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a participant in
the Federal Reserve System, redemption proceeds must be wired through a
commercial bank which is a correspondent of the savings bank. As this may delay
receipt by the shareholder's account, it is suggested that investors wishing to
use a savings bank discuss wire procedures with their bank and submit any
special wire transfer information with the telephone redemption authorization.
If appropriate wire information is not supplied, redemption proceeds will be
mailed to the designated bank.
The Trusts and their agents each reserve the right to modify,
interrupt, suspend or terminate the telephone redemption privilege at any time,
without notice. A shareholder may cancel the telephone redemption authorization
upon written notice. Each Trust employs procedures including recording telephone
calls, testing a caller's identity, and sending written confirmation of
telephone transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Trust does not follow such procedures, it may be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption by Mail or Fax
Any shareholder may redeem his or her shares by writing to the Program.
All written requests must be signed by at least one person on the account's
registration exactly as registered. In addition, for the protection of the
shareholder and to prevent fraudulent redemptions, a signature guarantee is
required on all written redemption requests for over $100,000. A signature
guarantee is also required on written redemption requests for any amount if the
check is made payable to someone other than the registered shareholder, if the
proceeds are to be forwarded to an address other than the address of record, or
if the address of record has changed in the last 15 days. In order to ensure
proper authorization before redeeming shares, the Program may request additional
documents such as, but not restricted to, stock powers, Trust instruments,
certificates of death, appointments as executor, certificates of corporate
authority and waivers of tax required in some states when settling estates.
Redemption to Address of Record for up to $100,000 without a signature
guarantee is an automatic feature of any AARP Fund account unless it has been
declined by the shareholder in writing. Any shareholder who refuses this feature
can later establish it with a written request containing a signature guarantee.
This request must be made prior to utilizing the feature for the first time.
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with the signature(s) guaranteed as explained
above. It is suggested that the shareholders holding certificated shares or
shares registered in other than individual names contact the Program prior to
requesting a redemption to ensure that all necessary documents accompany the
request. When shares are held in the name of a corporation, trust, fiduciary or
partnership, the transfer agent requires, in addition to the stock power,
certified evidence of authority to sign. These procedures are for the protection
of shareholders and should be followed to help ensure prompt payment. Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption will be sent within seven (7) days after receipt of a request
for redemption that complies with the above requirements. Delays of more than
seven (7) days for payment for shares tendered for repurchase or redemption may
result but only until the purchase check has cleared.
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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 and AARP Managed Investment Portfolios Trust
reserve the right to permit the AARP Balanced Stock and Bond Fund, AARP Growth
and Income Fund, the AARP Global Growth Fund, AARP Capital Growth Fund, AARP
International Stock Fund, AARP Small Company Fund, AARP U.S. Stock Index Fund,
AARP Diversified Income Portfolio and AARP Diversified Growth Portfolio, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or repurchase order by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for purposes of
computing the Fund's net asset value (a redemption-in-kind). If payment is made
in securities, a shareholder may incur transaction expenses in converting these
securities into cash. The AARP Growth Trust has elected, however, to be governed
by Rule 18f-1 under the 1940 Act as a result of which each Fund of the Trust is
obligated to redeem shares, with respect to any one shareholder during any 90
day period, solely in cash up to the lesser of $250,000 or 1% of the net asset
value of such Fund at the beginning of the period.
Other Information
The value of shares redeemed or repurchased may be more or less than
the shareholder's cost depending on the net asset value at the time of
redemption or repurchase. The Funds do not impose a redemption or repurchase
charge. Redemptions of shares, including redemptions undertaken to effect an
exchange for shares of another Fund in the Program, may result in tax
consequences (gain or loss) to the shareholder and the proceeds of such
redemptions may be subject to backup withholding (see "TAXES").
Shareholders who wish to redeem shares from Retirement Plans (see
"RETIREMENT PLANS," below) should contact the Trustee or custodian of the Plan
for information on proper procedures.
The Trustees have established certain amount size requirements. For
AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP GNMA and
U.S. Treasury Fund, the minimum investment is $500. For all other AARP Mutual
Funds, the minimum is $2,000. An account may be opened in any AARP Mutual Fund
for $500 if an Automatic Investment Plan of $100 per month is established. Each
Trust reserves the right to adopt a policy that if transactions at any time
reduce a shareholder's account in a Fund to below the applicable minimum, the
shareholder will be notified that, unless the account is brought up to at least
the applicable minimum the Fund will redeem all shares and close the account by
making payment to the shareholder. The shareholder has sixty days to bring the
account up to the applicable minimum before any action will be taken by the
Fund. Reductions in value that result solely from market activity will not
trigger an involuntary redemption. No transfer from an existing to a new account
may be for less than the minimums set forth above; otherwise the new account may
be redeemed as described above. (This policy applies to accounts of new
shareholders in a particular Fund, but does not apply to Retirement Plan
Accounts.) The Trustees have the authority to increase the minimum account size.
EXCHANGES
The procedure for exchanging shares from one AARP Fund to another AARP
Fund in the Program, when the account in the new AARP Fund is established with
the same registration, telephone option, dividend option and address as the
present account, is set forth under "EXCHANGING" in the Prospectus. If the
registration data for the account receiving the proceeds of the exchange is to
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be different in any respect from the account from which shares are to be
exchanged, the exchange request must be in writing and must contain a signature
guarantee as described under "SIGNATURE GUARANTEES" in the Prospectus. If an
exchange involves an initial investment in the Fund being acquired, the amount
to be exchanged must be at least $2000 for non-retirement plan accounts ($500
for AARP Balanced Stock & Bond Fund, AARP Growth and Income Fund and AARP GNMA
and U.S. Treasury Fund). For IRA, Keogh Plan and UGMA/UTMA accounts the amount
must be $250. If the exchange is made into an existing account, there is no
minimum requirement.
Only exchange orders received between 8:00 a.m. and 4:00 p.m. Eastern
time on any business day will ordinarily be accomplished at respective net asset
values determined on that day. Exchange orders received after 4:00 p.m. are
processed on the next business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one AARP Fund to an
existing account in another AARP Fund through the AARP Funds' Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the phone or in writing. Automatic Exchanges will continue until
the shareholder requests by phone or in writing to have the feature removed, or
until the originating account is depleted. The Trusts and the Transfer Agent
each reserve the right to modify, interrupt, suspend or terminate the privilege
of the Automatic Exchange Program at any time, without notice.
There is no charge to the shareholder for any exchange described above.
An exchange from any AARP Fund other than the AARP Money Funds is likely to
result in recognition of gain or loss to the shareholder.
Investors currently receive the exchange privilege automatically
without having to elect it. The Trusts and the AARP Funds' distributor, Scudder
Investor Services, Inc., reserve the right to suspend or terminate the exchange
privilege at any time. Telephone exchange may be initiated by anyone able to
identify the registration of an account, but the proceeds will only be invested
in another AARP Fund with the same registration. The AARP Funds employ
procedures to give reasonable assurance that telephone instructions are genuine,
including recording telephone calls, testing a caller's identity and sending
written confirmation of such transactions. If an AARP Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions.
All the AARP Funds in the Program into which investors may make an
exchange are described in the combined Prospectus and in this Statement of
Additional Information. Before making an exchange, shareholders should read the
information in the Prospectus regarding the Fund into which the exchange is
being contemplated.
TRANSACT BY PHONE
(See "INVESTOR SERVICES--TRANSACT BY PHONE" in the Prospectus.)
Shareholders, whose bank of record is a member of the Automated
Clearing House Network (ACH) and who have enrolled in the "Transact by Phone"
option, may purchase or redeem shares by telephone. Shareholders may purchase
shares valued at up to $250,000 but not less than $250. Shareholders may redeem
shares in an amount not less than $250.
In order to utilize the Transact by Phone service, shareholders must
have completed the Transact by Phone authorization. This authorization requires
designation of a bank account from which the purchase payment will be debited or
to which the redemption payment will be credited. New investors wishing to
establish the Transact by Phone service can do so by completing the appropriate
section on the enrollment form. Existing shareholders who wish to establish
Transact by Phone will need to complete a Transact by Phone Enrollment Form. If
a shareholder has previously elected the "Telephone Redemption to Bank of
Record" and/or the "Automatic Investment Plan" services, the banking information
must be identical for all of these services for each of the shareholder's Funds.
After sending in their enrollment forms, shareholders should allow 15 days for
the service to be activated. The Trusts and their agents each reserve the right
to modify, interrupt, suspend or terminate the Transact by Phone service at any
time, without notice.
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Purchasing Shares by Transact by Phone
To purchase shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time. Shares will be purchased at that
night's closing share price. The shareholder's bank account will be debited on
the first business day following the purchase request. Requests received after
4:00 p.m. will be purchased at the next business day's closing price.
Redeeming Shares by Transact by Phone
To redeem shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time to receive that night's closing
share price. Requests received after 4:00 p.m. will be sold at the next business
day's closing price. The shareholder's bank account will be credited with
redemption proceeds on the second or third business day following the redemption
request.
The AARP Funds employ procedures to give reasonable assurance that
telephone instructions are genuine, including recording telephone calls, testing
a caller's identity and sending written confirmation of such transactions. If an
AARP Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "STATEMENTS AND REPORTS," "EXCHANGING"
and "INVESTOR SERVICES" in the Prospectus.)
Automatic Dividend Reinvestment
Investors may elect on their enrollment form whether they wish to
receive any dividends from net investment income or any distributions from
realized capital gains in cash or to reinvest such dividends and distributions
in additional shares of the Fund paying the dividend or distribution. They may
also elect to have these payments invested in shares of any other AARP Fund in
the Program in which they have an account. If no election is made, dividends and
distributions will be reinvested in additional shares. A change of instructions
for the method of payment may be given to the Program at any time prior to a
record date.
Each distribution, whether by check or reinvested in a Fund, will
include a brief explanation of the source of the distribution.
Distributions Direct
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the AARP Funds'
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-253-2277. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Reports to Shareholders
The AARP Funds send to shareholders at least semiannually financial
statements, which are examined at least annually by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets, and financial highlights.
Investors receive a brochure entitled Your Guide to Simplified
Investment Decisions when they order an investment kit for the 15 AARP Funds
which also contains a prospectus. The Shareholder's Handbook is sent to all new
shareholders to help answer any questions they may have about investing. An IRA
Handbook is sent to all new IRA shareholders. Every month, shareholders will be
sent the newsletter, Financial Focus. Retirement plan shareholders will be sent
43
<PAGE>
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 Bond Fund for Income, AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP Global Growth Fund, AARP
Capital Growth Fund, AARP U.S. Stock Index Fund, AARP International Stock Fund
and AARP Small Company Stock Fund ("Eligible Funds") may be purchased in
connection with several types of tax-deferred retirement plans. These plans were
created for members of AARP. Each plan is briefly described below. The plans
provide convenient ways for AARP members to make investments which may be
tax-deductible for their retirement and have taxes on any income from their
investment deferred until their retirement, when they may be in a lower tax
bracket. Additional information on each plan may be obtained by contacting the
AARP Investment Program from Scudder, P.O. Box 2540, Boston, Massachusetts,
02208-2540, or by calling toll free, 1-800-253-2277. Investment professionals
and retirement-benefits experts estimate that prospective retirees will need 70%
to 80% of their current salaries during each year of their retirement, with
adjustment for changes in prices during retirement, to maintain their current
life-style. Investment professionals recommend diversifying investments among
stock, bonds and cash-equivalents when building retirement reserves. It is
advisable for an investor considering any of the plans described below to
consult with an attorney or tax advisor with respect to the terms, suitability
requirements and tax aspects of the plan.
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")
Shares of the Eligible Funds may be purchased as the underlying
investment for an AARP No-Fee IRA which meets the requirements of Section 408(a)
of the Internal Revenue Code. Any AARP member with earned income or wages is
eligible to make annual contributions to the AARP No-Fee IRA before the year the
member attains age 70 1/2. An individual may establish an AARP No-Fee IRA
whether or not he or she is an active participant in another tax-qualified
retirement plan, including a tax-sheltered annuity or government plan.
AARP No-Fee IRA participants may generally contribute to an AARP No-Fee
IRA up to the lesser of $2,000 or 100% of their compensation or earned income.
If both a husband and wife work, each may set up an AARP No-Fee IRA before the
year they attain age 70 1/2, permitting a potential maximum contribution of
$4,000 per year for both persons. Alternatively, if your compensation during the
taxable year exceeds your spouse's and you file a joint income tax return, you
may contribute up to the lesser of $4,000 or 100% of your aggregate income to
separate IRAs for yourself and your spouse, but no more than $2,000 to either
IRA.
An individual will be allowed a full deduction for contributions to an
AARP No-Fee IRA only if (1) neither the individual, nor his or her spouse, if
they file a joint return, is an active participant in an employer-maintained
retirement plan, or (2) the individual (and his or her spouse, if applicable)
has an adjusted gross income below a certain level ($25,050 for a single
individual, with a phase-out of the deduction for adjusted gross income between
$25,050 and $35,000; $40,050 for married individuals filing a joint return, with
a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000). However, an individual not permitted to make a deductible contribution
may nonetheless make a nondeductible contribution to an AARP No-Fee IRA.
Any AARP member who is entitled to receive a qualifying distribution
from a qualified retirement plan (including a tax-sheltered annuity plan) or
another IRA may make a rollover contribution of all or any portion of the
44
<PAGE>
distribution to the AARP No-Fee IRA, either in a direct rollover or within 60
days after receipt of the distribution, whether or not the member has attained
age 70 1/2. If a qualified rollover contribution is made, the distribution will
not be subject to Federal income tax until distributed from the AARP No-Fee IRA;
however, distributions not directly rolled over might be subject to automatic
20% federal tax withholding.
AARP Mutual Fund Representatives are available to help you transfer
your IRA to the AARP No-Fee IRA. You pay no transfer fees for this service. An
AARP Mutual Fund Representative can help you with the paperwork, contact your
present IRA custodian, help to transfer your funds to the AARP No-Fee IRA, and
send you a confirmation when your transfer is complete.
Earnings on the AARP No-Fee IRA are not subject to current Federal
income tax until distributed; distributions are taxed as ordinary income.
Withdrawals attributable to nondeductible contributions are not taxable
(however, early withdrawals of such amounts are subject to penalty). The assets
in an AARP No-Fee IRA may be withdrawn without penalty after the participant
reaches age 59 1/2 or becomes disabled, and must begin to be withdrawn by April
1st following the taxable year in which the participant reaches age 70 1/2.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- ---------------- ------------------- ------------------------- ----------------
Starting
Age of Annual Rate of Return
--------------------------------------------------------------
Contributions 5% 10% 15%
- ---------------- ------------------- ------------------------- ----------------
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
AARP Keogh Plan
Shares of the Eligible Funds may be purchased for the AARP Keogh Plan.
The AARP Keogh Plan (the "Plan") is designed as a tax-qualified retirement plan
consisting of a profit sharing plan and a money purchase pension plan which can
be adopted by self-employed persons who are members of AARP and by corporations
whose principal shareholders are members of AARP. Self-employed persons may make
annual tax-deductible contributions to the Plan equal to the lesser of $30,000
or 20% of their earned income. An adopting corporation may contribute for each
employee the lesser of $30,000 or 25% of the employee's taxable compensation. No
more than $150,000 (as adjusted) of earned income or taxable compensation may be
taken into account, however. If the Plan is "top heavy," a minimum contribution
may be required for certain employees. Additional information on contributions
to the Plan is found in Your Guide to the AARP Keogh Plan.
The Plan provides that contributions may continue to be made on behalf
of participants after they have reached the age of 70 1/2 if they are still
working.
Lump sum distributions from the Plan may be eligible to be taxed for
Federal income tax purposes according to a favorable 5-year averaging (or
10-year averaging for individuals who reached age 50 before 1986) method not
available to IRA distributions. Five-year averaging has been eliminated for
taxable years beginning after December 31, 1999. If members eligible to join
this Plan choose to roll over pension and profit-sharing distributions from
other tax-qualified retirement plans, they will retain the right to use the
averaging method for such distributions.
The Plans are prototype plans approved by the Internal Revenue Service.
45
<PAGE>
In general, distributions from tax-qualified plans, such as the AARP
Keogh Plan, must begin by April 1st in the year following the year in which the
participant reaches age 70 1/2, or following the year in which the participant
retires, if later, unless the participant is a 5% owner, whether or not he or
she continues to be employed. Excise taxes will apply to premature
distributions, and to taxpayers who are required, but fail, to receive a
distribution after reaching age 70 1/2. An additional excise tax may apply to
certain excess retirement accumulations. Special favorable tax treatment for
certain distributions is reduced or phased out, except where grandfathering
provisions apply.
Shares of the Eligible Funds may be purchased also as an investment for
an IRA or tax-qualified retirement plan (including a tax-sheltered annuity plan)
other than those described above, if permitted by the provisions of the relevant
plan.
OTHER PLANS
(See "INVESTOR SERVICES" in the Prospectus.)
Automatic Investment
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts. The minimum pre-authorized investment amount
is $500. New shareholders who open a Gift to Minors Account pursuant to the
Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA)
and who sign up for the Automatic Investment Plan will be able to open a Fund
account for less than $500 if they agree to increase their investment to $500
within a 10 month period. Investors may also invest in any AARP mutual fund for
$500 a month if they establish a plan with a minimum automatic investment of at
least $100 per month. This feature is only available to Gifts to Minors Account
investors. The Automatic Investment Plan may be discontinued at any time without
prior notice to a shareholder if any debit from their bank is not paid, or by
written notice to the shareholder at least thirty days prior to the next
scheduled payment to the Automatic Investment Plan.
Automatic Withdrawal Plan
Shareholders who own or purchase $10,000 or more of shares of a AARP
Fund may establish an Automatic Withdrawal Plan with that Fund. The investor can
then receive monthly, quarterly or periodic redemptions from his or her account
for any designated amount of $50 or more. Shareholders may designate which day
they want the automatic withdrawal to be processed. The check amounts may be
based on the redemption of a fixed dollar amount, fixed share amount or percent
of account value or declining balance. The Automatic Withdrawal Plan provides
for income dividends and capital gains distributions, if any, to be reinvested
in additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "SIGNATURE GUARANTEES" in the Prospectus. Any such request must
be received by the AARP Fund's transfer agent 10 days prior to the date of the
first automatic withdrawal. An Automatic Withdrawal Plan may be terminated at
any time by the shareholder, the AARP Funds or their agents on written notice,
and will be terminated when all shares of the Funds under the Plan have been
liquidated or upon receipt by the Funds of notice of death of the shareholder.
For more information concerning this plan, write to the AARP Investment Program
from Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
Direct Payment of Regular Fixed Bills
Shareholders who own or purchase $10,000 or more of shares of an AARP
Fund may arrange to have regular fixed bills such as rent, mortgage or other
payments of more than $50 made directly from their account. The arrangements are
virtually the same as for an Automatic Withdrawal Plan (see above). For more
information concerning this plan, write to the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
46
<PAGE>
DIVIDENDS AND YIELD
(See "UNDERSTANDING FUND PERFORMANCE" in the Prospectus.)
AARP Income Funds, AARP Growth Funds, AARP Tax Free General Bond Fund and AARP
Managed Investment Portfolios
Each AARP Fund intends to follow the practice of distributing
substantially all of its investment company taxable income (which includes, for
example, interest, dividends and any excess of net realized short-term capital
gains over net realized long-term capital losses, less deductible expenses), and
its net tax-exempt interest income, if any. Each AARP Fund also intends to
follow the practice of distributing any excess of net realized long-term capital
gains over net realized short-term capital losses after reduction for any
capital loss carryforwards. However, if it appears to be in the best interests
of a Fund and its shareholders, the Fund may retain all or part of such gain for
reinvestment.
AARP U.S. Stock Index Fund, AARP Balanced Stock and Bond Fund and AARP
Growth and Income Fund intend to pay dividends in March, June, September and
December of each year and any net realized capital gains after the September 30
fiscal year end. AARP Small Company Stock Fund, AARP International Stock Fund,
AARP Global Growth Fund and AARP Capital Growth Fund intend to pay dividends and
any realized capital gains over net realized short-term capital losses after
reduction for any capital loss carryforwards in December after the September 30
fiscal year end. See "TAXES."
Both types of distributions will be made in shares of the respective
AARP Fund and confirmations will be mailed to each shareholder unless a
shareholder has elected to receive cash, in which case a check will be sent.
The net income of each of the AARP Income Funds and the AARP Insured
Tax Free General Bond Fund, is determined as of the close of trading on the
Exchange (usually 4:00 p.m. Eastern time) on each day on which the Exchange is
open for business. All of the net income so determined normally will be declared
as a dividend daily to shareholders of record as of 4:00 p.m. on the preceding
day, and distributed monthly. Dividends commence on the next business day after
purchase. Dividends which are not paid by check will be reinvested in additional
shares of the particular Fund at the net asset value per share determined as of
a day selected within five days of the last business day of the month. Checks
will be mailed to shareholders no later than the fourth business day of the
following month, and consolidated statements confirming the month's dividends
will be mailed to shareholders electing to invest dividends in additional
shares. Dividends will ordinarily be invested on the last business day of each
month at the net asset value per share determined as of the close of regular
trading on the Exchange.
AARP Money Funds
The net investment income of the AARP Money Funds is determined as of
the close of regular trading on the Exchange, usually 4 p.m., eastern time, on
each day the Exchange is open for trading.
All the investment income of the AARP Money Funds so determined
normally will be declared as a dividend to shareholders of record as of
determination of the net asset value at twelve o'clock noon after the purchase
and redemption of shares. Shares purchased as of the determination of net asset
value made as of the close of the Exchange will not participate in that day's
dividend; in such cases dividends commence on the next business day. Checks will
be mailed to shareholders electing to take dividends in cash, and confirmations
will be mailed to shareholders electing to invest dividends in additional shares
for the month's dividends on the fourth business day of the next month.
Dividends will be invested at the net asset value per share, normally $1.00,
determined as of 4 p.m. on the first business day of each month.
Dividends are declared daily on each day on which the Exchange is open
for business. The dividends for a business day immediately preceding a weekend
or holiday will normally include an amount equal to the net income for the
subsequent days on which dividends are not declared. However, no daily dividend
will include any amount of net income in respect of a subsequent semi-annual
accounting period.
Because the net investment income of the AARP Money Funds is declared
as a dividend each time the net income of the Fund is determined, the net asset
value per share of the Fund (i.e., the fair value of the net assets of the Fund
47
<PAGE>
divided by the number of shares of the Fund outstanding) will remain at $1.00
per share immediately after each such determination and dividend declaration,
unless (i) there are unusual or extended fluctuations in short-term interest
rates or other factors, such as unfavorable changes in the creditworthiness of
issuers affecting the value of securities in the Fund's portfolio, or (ii) net
investment income is a negative amount.
Net investment income (from the time of the immediately preceding
determination thereof) consists of (i) all interest income accrued on the
portfolio assets of the Fund less (ii) all actual and accrued expenses. Interest
income included in the daily computation of net income is comprised of original
issue discount earned on discount paper accrued ratably to the date of maturity
as well as accrued interest. Expenses of the AARP Money Funds, including the
management fee payable to the Adviser, are accrued each day.
Normally the AARP Money Funds will have a positive net investment
income at the time of each determination thereof. Net investment income may be
negative if an unexpected liability must be accrued or a loss realized. If the
net investment income of the AARP Money Funds determined at any time is a
negative amount, the net asset value per share will be reduced below $l.00
unless one or more of the following steps are taken: the Trustees have the
authority (l) to reduce the number of shares in each shareholder's account, (2)
to offset each shareholder's pro rata portion of negative net investment income
from the shareholder's accrued dividend account or from future dividends, or (3)
to combine these methods in order to seek to maintain the net asset value per
share at $l.00. The AARP Money Funds may endeavor to restore the net asset value
per share to $l.00 by not declaring dividends from net investment income on
subsequent days until restoration, with the result that the net asset value per
share will increase to the extent of positive net investment income which is not
declared as a dividend.
Distributions of realized capital gains, if any, are paid in November
or December of the AARP Money Funds' taxable year although the Fund may make an
additional distribution within three months of the Fund's fiscal year end of
September 30. The AARP Money Funds expect to follow the practice of distributing
all net realized capital gains to shareholders and expect to distribute realized
capital gains at least annually. However, if any realized capital gains are
retained by the AARP Money Funds for reinvestment and federal income taxes are
paid thereon by the Fund, the Fund will elect to treat such capital gains as
having been distributed to shareholders; as a result, shareholders would be able
to claim their share of the taxes paid by the Fund on such gains as a credit
against their individual federal income tax liability.
Should the AARP Money Funds incur or anticipate any unusual or
unexpected significant expense, depreciation or loss which would affect
disproportionately the Fund's income for a particular period, the Trustees of
the Funds or the Executive Committee of the Trustees may at that time consider
whether to adhere to the dividend policy described above or to revise it in the
light of the then prevailing circumstances in order to ameliorate to the extent
possible the disproportionate effect of such expense or loss on then existing
shareholders. Such expenses may nevertheless result in a shareholder's receiving
no dividends for the period during which the shares are held and in receiving
upon redemption a price per share lower than that which was paid.
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, 1996 respectively, were 4.67% and 3.01%.
48
<PAGE>
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,
1996 respectively, were 4.78% and 3.06%.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and are
not intended to indicate future performance. Current yield and effective yield
will vary based on changes in market conditions and the level of Fund expenses.
In connection with communicating its current yield and effective yield
to current or prospective shareholders, a Fund also may compare these figures to
the performance of other mutual Funds tracked by mutual Fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
b) The AARP Money Funds, AARP Income Funds, AARP Growth Funds, AARP
Insured Tax Free General Bond Fund and AARP Managed Investment
Portfolios
From time to time, quotations of a Fund's total return may be included
in advertisements, sales literature or shareholder reports. This total return
figure is calculated in the following manner:
The total return is the average annualized compound rate of return for,
where applicable, the periods of one year, five years and ten years, all ended
on the last day of a recent calendar quarter. Total return quotations reflect
changes in the price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Total return is calculated by finding the average annualized
compound rates of return of a hypothetical investment over such periods,
according to the following formula (total return is then expressed as a
percentage):
T = (ERV/P)^1/n - 1
Where:
T = average annualized compound total rate of return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
<TABLE>
<CAPTION>
Total Return
-----------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/96 9/30/96 9/30/96(1)
------- ------- ----------
<S> <C> <C> <C>
AARP High Quality Money Fund 4.62% 3.74% 5.19%
AARP High Quality Tax Free Money Fund* 2.80% 2.35% 3.76%
AARP GNMA and U.S. Treasury 4.79% 5.95% 7.30%
AARP High Quality Bond 4.59% 6.86% 7.69%
AARP Bond Fund for Income+ n.a. n.a. n.a.
AARP Insured Tax Free General Bond 5.88% 6.99% 7.48%
AARP Balanced Stock and Bond Fund 13.08% n.a. 10.69%
AARP Growth and Income 20.20% 15.80% 13.74%
AARP U.S. Stock Index Fund+ n.a. n.a. n.a.
AARP Global Growth Fund n.a. n.a. 3.27%
49
<PAGE>
Total Return
-----------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/96 9/30/96 9/30/96(1)
------- ------- ----------
AARP Capital Growth 15.97% 12.05% 13.10%
AARP International Stock Fund+ n.a. n.a. n.a.
AARP Small Company Stock Fund+ n.a. n.a. n.a.
AARP Diversified Income Portfolio+ n.a. n.a. n.a.
AARP Diversified Growth Portfolio+ n.a. n.a. n.a.
</TABLE>
(1) For the ten fiscal years ended September 30, 1996 for each of the above
listed Funds except for the period February 1, 1994 (commencement of
operations) to September 30, 1996 for the AARP Balanced Stock and Bond
Fund and for the period February 1, 1996 (commencement of operations)
to September 30, 1996 for the AARP Global Growth Fund.
* Prior to August 1, 1991, the AARP High Quality Tax Free Money Fund
operated as the AARP Insured Tax Free Short Term Fund. The total return
figures for the five and ten years ended September 30, 1996 for the
AARP High Quality Tax Free Money Fund are representative of the Fund
prior to its conversion date except that the figures have been adjusted
to reflect its conversion to a money market fund.
+ AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund, AARP Small Company Stock Fund, AARP
Diversified Income Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
In addition to total return described above, the Funds may quote
nonstandard "cumulative total return."
The cumulative total return is the rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of a Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the rates of
return of a hypothetical investment over such periods, according to the
following formula. (Cumulative total return is then expressed as a percentage):
C = (ERV/P) -1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/96 9/30/96 9/30/96(1)
------- ------- ----------
<S> <C> <C>
AARP Balanced Stock and Bond Fund 13.08% n.a. 31.04%
AARP Growth and Income 20.20% 108.24% 262.51%
AARP U.S. Stock Index Fund+ n.a. n.a. n.a.
AARP Global Growth Fund n.a. n.a. 3.27%
AARP Capital Growth 15.97% 76.63% 242.55%
AARP International Stock Fund+ n.a. n.a. n.a.
AARP Small Company Stock Fund+ n.a. n.a. n.a.
AARP Diversified Growth Portfolio+ n.a. n.a. n.a.
</TABLE>
(1) For the period February 1, 1994 (commencement of operations) to
September 30, 1996 for the AARP Balanced Stock and Bond Fund and for
the period February 1, 1996 (commencement of operations) to September
30, 1996 for the AARP Global Growth Fund.
50
<PAGE>
+ AARP U.S. Stock Index Fund, AARP International Stock Fund, AARP Small
Company Stock Fund and AARP Diversified Growth Portfolio commenced
operations on February 1, 1997.
c) The AARP Income Funds, AARP Insured Tax Free General Bond Fund and AARP
Diversified Income Portfolio
From time to time, quotations of an AARP Fund's yield may be included
in advertisements, sales literature or shareholder reports. This yield is
calculated in the following manner.
The yield is the net annualized SEC yield based on a specified 30-day
(or one month) period assuming semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the period,
including (except for mortgage or receivable-backed
obligations) the amortization of market premium or
accretion of market discount. For mortgage or
receivables-backed obligations, this amount includes
realized gains or losses based on historic cost for
principal repayments received.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
Yield for the 30-day period
Fund ended September 30, 1996
---- ------------------------
AARP GNMA and U.S. Treasury 6.54%
AARP High Quality Bond 5.96
AARP Bond Fund for Income+ n.a.
AARP Insured Tax Free General Bond 4.72
AARP Diversified Income Portfolio+ n.a.
+ AARP Bond Fund for Income and AARP Diversified Income Portfolio commenced
operations on February 1, 1997.
d) AARP Insured Tax Free General Bond and AARP High Quality Tax Free Money
Fund
The tax equivalent yield is the net annualized after-tax yield based on
a specified seven day period for money market funds or on a specified 30-day
(one month) period for non-money market funds assuming a reinvestment of all
dividends paid during the period, i.e., compounding. Tax equivalent yield is
calculated by dividing that portion of the Fund's yield (as computed in the
yield description above) which is tax-exempt by one minus a stated income tax
rate and adding the product to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Equivalent Taxable Yields
period ended September 30, 1996
-------------------------------
Fund Tax Bracket: 28% 31%
----
AARP High Quality Tax Free Money 4.18% 4.36%
AARP Insured Tax Free General Bond 6.56% 6.84%
51
<PAGE>
(e) General Performance Information
Quotations of an AARP Fund's performance are based on historical
earnings and are not intended to indicate future performance of the Fund. An
investor's shares when redeemed may be worth more or less than their original
cost. Performance of a Fund will vary based on changes in market conditions and
the level of the Fund's expenses. In periods of declining interest rates a
Fund's quoted yield and 30-day current yield will tend to be somewhat higher
than prevailing market rates, and in periods of rising interest rates a Fund's
quoted yield and 30-day current yield will tend to be somewhat lower.
Comparison of non-standard performance data of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.
From time to time, in marketing and other AARP Fund literature, these
AARP Funds' performances may be compared to the performance of broad groups of
mutual funds with similar investment goals, as tracked by independent
organizations, such as Lipper Analytical Services, Inc. ("Lipper"), Investment
Company Data, Inc. ("ICD"), CDA Investment Technologies, Inc. ("CDA"), Value
Line Mutual Fund Survey, Morningstar, Inc. and other independent organizations.
For instance, AARP Growth Funds will be compared to funds in the growth fund
category; and so on. In similar fashion, the performance of the AARP GNMA and
U.S. Treasury Fund will be compared to that of certificates of deposit.
Evaluations of AARP Fund performance made by independent sources or independent
experts may also be used in advertisements concerning the AARP Funds, including
reprints of, or selections from, editorials or articles about these Funds.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to unmanaged
indices which may assume reinvestment of dividends or interest but generally do
not reflect deductions for administrative and management costs. Indices with
which the Fund may be compared include but are not limited to, the following:
Standard & Poor's 500 Stock Index (S&P 500), The Europe/Australia/Far East
(EAFE) Index, Morgan Stanley Capital International World Index, J.P. Morgan
Global Traded Bond Index, and Salomon Brothers World Government Bond Index.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
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.
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Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Federal Reserve Bulletin, a monthly publication that reports domestic and
international financial statistics, including short-term certificate of deposit
interest rates.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter published by Sheldon Jacobs that
includes mutual fund performance data and recommendations for the mutual Fund
investor.
No-Load Fund X, a monthly newsletter published by DAL Investment Company, Inc.
that reports on mutual fund performance, rates funds, and discusses investment
strategies for the mutual fund investor.
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Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because
they assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
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getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S.
investments strike the best balance between risk and reward.
TRUST ORGANIZATION
(See "FUND ORGANIZATION" in the Prospectus.)
Each of the AARP Funds is a separate series of a Massachusetts business
trust. AARP GNMA and U.S. Treasury Fund, AARP High Quality Bond Fund, and the
AARP Bond Fund for Income are series of AARP Income Trust. AARP High Quality Tax
Free Money Fund and AARP Insured Tax Free General Bond Fund are series of AARP
Tax Free Income Trust which changed its name from AARP Insured Tax Free Income
Trust on August 1, 1991. AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, AARP U.S. Stock Index Fund, AARP Global Growth Fund, AARP Capital
Growth Fund, AARP International Stock Fund and AARP Small Company Stock Fund are
series of AARP Growth Trust. Each of the above Trusts was established under a
separate Declaration of Trust dated June 8, 1984. AARP High Quality Money Fund
is a separate series of the AARP Cash Investment Funds, which was established
under a Declaration of Trust dated January 20, 1983. The original name of AARP
Cash Investment Funds was Master Investment Services Fund. That name was changed
to AARP Money Fund Trust on February 6, 1985, and to its present name on May 24,
1985. AARP Diversified Income Portfolio and AARP Diversified Growth Portfolio
are series of AARP Managed Investment Portfolios Trust which was established
under a Declaration of Trust on October 21, 1996. Each Trust's shares of
beneficial interest of $.01 (AARP High Quality Tax Free Money Fund $.001) par
value per share are issued in separate series. AARP Cash Investment Funds has
three series in addition to AARP High Quality Money Fund that are not currently
offered. None of the other Trusts has an existing series which is not currently
being offered. Other series may be established and/or offered by the Trusts in
the future. Each share of a series represents an interest in that series which
is equal to each other share of that series.
The assets received for the issue or sale of the shares of each series
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are specifically allocated to that series and constitute
the underlying assets of that series. The underlying assets of each series are
segregated on the books of account of the Trust, and are to be charged with the
liabilities of that series. The Trustees have determined that expenses with
respect to all series in a Trust are to be allocated in proportion to the net
asset value, or such other reasonable basis, of the respective series in that
Trust except where allocations of direct expenses can otherwise be more fairly
made. The officers of the Trusts, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to all the
series in a Trust. Each Trust's Declaration of Trust provides that allocations
so made to each series shall be binding on all persons. While each Declaration
of Trust provides that liabilities of a series may be satisfied only out of the
assets of that series, it is possible that if a series were unable to meet its
obligations, a court might find that the assets of other series in the Trust
should satisfy such obligations. In the event of the dissolution or liquidation
of a Trust, the holders of the shares of each series are entitled to receive as
a class the underlying assets of that series available for distribution to
shareholders.
Shareholders are entitled to one vote per share. Separate votes are
taken by each series on all matters except where the 1940 Act requires that a
matter be decided by the vote of shareholders of all series of a Trust voting
together or where a matter affects only one of the series, in which case only
shareholders of that series shall vote thereon. For example, a change in
investment policy for a series would be voted upon only by shareholders of the
series involved. Additionally, approval of each Trust's investment advisory
agreement is a matter to be determined separately by each series in that Trust.
Approval of the agreement by the shareholders of one series in a Trust is
effective as to that series whether or not enough votes are received from the
shareholders of other series in the Trust to approve such agreement as to the
other series.
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The Trustees of the Trusts have the authority to establish additional
series and to designate the relative rights and preferences as between the
series. All shares issued and outstanding of each series that is offered by a
Trust will be fully paid and non-assessable by the Trust, and redeemable as
described in this Statement of Additional Information and in the Prospectus.
Each Declaration of Trust provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust, that the Trustees and officers will not be liable for errors of judgment
or mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against litigation in which they may be involved because of their
offices with the Trust except if it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the Trust. However,
nothing in any of the Declarations of Trust protects or indemnifies a Trustee or
officer against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
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. Each Trust, except AARP Managed Investment Portfolios
Trust, has retained the Fund Manager pursuant to an Investment Management
Agreement with each Trust ("Management Agreement") dated February 1, 1994. AARP
Managed Investment Portfolios Trust has retained the Fund Manager to perform
management and investment advisory services for the Portfolios pursuant to an
Investment Management Agreement dated February 1, 1997.
Each Management Agreement provides that the Fund Manager will regularly
provide, or cause to be provided, to the AARP Funds investment research, advice
and supervision and furnish continuously an investment program for the AARP
Funds consistent with each Fund's investment objective and policies.
The Fund Manager assumes responsibility for the compensation and
expenses of all officers and executive employees of each Trust and makes
available or causes to be made available, without expense to the Trusts, the
services of such of its partners, directors, officers and employees as may duly
be elected officers or Trustees of a Trust, subject to their individual consent
to serve and to any limitations imposed by law, and pays the Trusts' office rent
and provides, or causes to be provided, investment advisory, research and
statistical facilities and related clerical services. For these services the
AARP Funds pay the Fund Manager a monthly fee consisting of a base fee and an
individual Fund fee. The base fee is based on average daily net assets of all
Funds in the AARP Investment Program, as follows:
Program Assets Annual Rate at Each
(Billions) Asset Level
---------- -----------
First $2 0.35%
Next $2 0.33
Next $2 0.30
Next $2 0.28
Next $3 0.26
Next $3 0.25
Over $14 0.24
Total program assets as of September 30, 1996 were over $13 billion.
All AARP Funds pay a flat individual Fund fee monthly based on the net
assets of that Fund, except AARP Diversified Investment Income Portfolio and
AARP Diversified Investment Growth Portfolio.
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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 Bond Fund for Income, 28/1200 of 1% (or approximately .28 of 1% on
an annual basis);
AARP High Quality Tax Free Money Fund, 10/1200 of 1% (or approximately
.10 of 1% on an annual basis);
AARP Insured Tax Free General Bond Fund, 19/1200 of 1% (or
approximately .19 of 1% on an annual basis);
AARP Balanced Stock and Bond Fund, 19/1200 of 1% (or approximately .19
of 1% on an annual basis);
AARP Growth and Income Fund, 19/1200 of 1% (or approximately .19 of 1%
on an annual basis);
AARP U.S. Stock Index Fund, 0/1200 of 1% (0 of 1% on an annual basis);
AARP Global Growth Fund, 55/1200 of 1% (or approximately .55 of 1% on
an annual basis);
AARP Capital Growth Fund, 32/1200 of 1% (or approximately .32 of 1% on
an annual basis);
AARP International Stock Fund, 60/1200 of 1% (or approximately .60 of
1% on an annual basis);
AARP Small Company Stock Fund, 55/1200 of 1% (or approximately .55 of
1% on an annual basis);
AARP Diversified Income Portfolio, n/a;
AARP Diversified Growth Portfolio, n/a.
The advisory fees from October 1, 1993 to January 31, 1994 under the
previous Management Agreement and under the present Management Agreement from
February 1, 1994 to September 30, 1994 and for the two fiscal years ended
September 30, 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund $ 1,244,322 $ 1,492,545 $1,522,929
AARP GNMA and U.S. Treasury Fund 26,198,841 22,095,173 21,113,592
AARP High Quality Bond Fund 2,952,999 2,600,629 2,550,245
AARP Bond Fund for Income** n.a. n.a. n.a.
AARP High Quality Tax Free Money Fund 568,107 493,693 453,559
AARP Insured Tax Free General Bond Fund 9,944,429 8,813,051 8,665,253
AARP Balanced Stock and Bond Fund@ 365,435 960,412 1,560,129
AARP Growth and Income Fund 9,533,476 12,406,325 17,423,770
AARP U.S. Stock Index Fund** n.a. n.a. n.a.
AARP Global Growth Fund* n.a. n.a. 266,155
AARP Capital Growth Fund 4,184,437 3,988,023 4,626,894
AARP International Stock Fund** n.a. n.a. n.a.
AARP Small Company Stock Fund** n.a. n.a. n.a.
AARP Diversified Income Portfolio** n.a. n.a. n.a.
AARP Diversified Growth Portfolio** n.a. n.a. n.a.
</TABLE>
@ AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Stock Fund, AARP Small Company Stock Fund, AARP Diversified Income
Portfolio and AARP Diversified Growth Portfolio commenced operations on
February 1, 1997.
Each Management Agreement provides that the Fund Manager will reimburse
the AARP Funds or the Trust for annual expenses in excess of the lowest expense
limitation imposed by the states in which the Funds of the particular Trust are
at the time offering their shares for sale, although no payments are required to
be made by the Fund Manager pursuant to this reimbursement provision in excess
of the annual fee paid by the funds of a Trust to the Fund Manager. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitation. The Fund Manager has agreed that its
obligation to reimburse the Funds will not be restricted to the amounts of the
management fees. Such agreement may be modified or withdrawn without shareholder
approval.
The expense ratios, net of voluntary and statutory fee waivers and
reimbursements of expenses, for the periods ended September 30, 1994, 1995 and
1996 were as follows:
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<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund 1.13% .98% .96%
AARP GNMA and U.S. Treasury Fund .66 .67 .64
AARP High Quality Bond Fund .95 .95 .91
AARP Bond Fund for Income** n.a. n.a. n.a.
AARP High Quality Tax Free Money Fund .90 .87 .85
AARP Insured Tax Free General Bond Fund .68 .69 .66
AARP Balanced Stock and Bond Fund@ 1.31+ 1.01 .88
AARP Growth and Income Fund .76 .72 .69
AARP U.S. Stock Index Fund** n.a. n.a. n.a.
AARP Global Growth Fund* n.a. n.a. 1.75+
AARP Capital Growth Fund .97 .95 .90
AARP International Stock Fund** n.a. n.a. n.a.
AARP Small Company Stock Fund** n.a. n.a. n.a.
AARP Diversified Income Portfolio** n.a. n.a. n.a.
AARP Diversified Growth Portfolio** n.a. n.a. n.a.
</TABLE>
@ AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Stock Fund, AARP Small Company Stock Fund, AARP Diversified Income
Portfolio and AARP Diversified Growth Portfolio commenced operations on
February 1, 1997.
For the fiscal year ended September 30, 1994, the reimbursement by the
Fund Manager based on the expense limitation then in effect was $8,083 to AARP
High Quality Tax Free Money Fund. For the fiscal year ended September 30, 1996,
the reimbursement by the Fund Manager based on the expense limitation in effect
was $175,025 to AARP Global Growth Fund.
If reimbursement is required, it will be made as promptly as
practicable after the end of each Fund's fiscal year. However, no fee payment
will be made to the Fund Manager during any fiscal year which will cause
year-to-date expenses to exceed the cumulative pro rata expense limitation at
the time of such payment. The amortization of organizational costs is described
herein under "ADDITIONAL INFORMATION-- Other Information."
Under the Management Agreements, each Trust is responsible for all of
its other expenses including organizational expenses; clerical salaries; fees
and expenses incurred in connection with membership in investment company
organizations; brokers' commissions; any fees for portfolio pricing paid to a
pricing agent; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the cost of preparing share
certificates, if any, and any other expenses including clerical expenses of
issue, redemption or repurchase of shares; the expenses and fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees of the
Trust who are not affiliated with the Fund Manager, Scudder, Stevens & Clark,
Inc., AARP Financial Services Corporation or AARP; the cost of preparing and
distributing reports and notices to shareholders; and the fees and disbursements
of custodians. Each Trust may arrange to have third parties assume all or part
of the expenses of sale, underwriting and distribution of shares of the Trust.
Each Trust is also responsible for its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees with respect thereto. The custodian
agreement for each Trust provides that the custodian shall compute the net asset
value for that Trust.
Each Management Agreement provides that the Fund Manager shall not be
required to pay expenses of distribution of the Funds' shares to the extent that
(i) such distribution expenses are, pursuant to a written contract, to be borne
by a principal underwriter of the Trust ("Scudder Investor Services, Inc." is
principal underwriter for the AARP Trusts), (ii) the Trust shall have adopted a
plan in conformity with Rule 12b-1 under the 1940 Act ("Rule 12b-1 plan")
providing for the Trust (or the Funds or some other party) to assume some or all
of such expenses, or (iii) such expenses are required to be paid by the Fund
Manager. To the extent such expenses of distribution are not to be borne by a
principal underwriter, or are not permitted to be paid by the Trust (or a Fund
or such other party) pursuant to a Rule 12b-1 plan, they are to be assumed by
the Fund Manager. (The adoption of a Rule 12b-1 plan by a Trust would
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<PAGE>
require the approval of the Trustees, including a majority of those Trustees who
are not interested persons of the Trust, and of a majority of the outstanding
voting securities of each Fund.)
The Investment Management Agreements for all Funds except AARP Global
Growth Fund, AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund, and AARP Small Company Stock Fund will remain in
effect until August 31, 1997 and from year to year thereafter only if their
continuance is specifically approved at least annually by the vote of a majority
of those Trustees who are not parties to such Agreements or "interested persons"
of the Fund Manager or the particular Trust cast in person at a meeting called
for the purpose of voting on such approval and either by vote of a majority of
the Trustees or, with respect to each Fund, by a majority of the outstanding
voting securities of that Fund. The Supplement to Investment Management
Agreement for the AARP Global Growth Fund will remain in effect until August 31,
1997 and from year to year thereafter only if its continuance is specifically
approved at least annually by the vote of a majority of those Trustees who are
not parties to such Agreement or "interested persons" of the Fund Manager,
Scudder, Stevens & Clark, Inc. or the particular Trust cast in person at a
meeting called for the purpose of voting on such approval and either by vote of
a majority of the Trustees or, by a majority of the outstanding voting
securities of the AARP Global Growth Fund. The Supplement to Investment
Management Agreement for the AARP Bond Fund for Income, AARP U.S. Stock Index
Fund, AARP International Stock Fund, and AARP Small Company Stock Fund and the
Investment Management Agreement for the AARP Diversified Income Portfolio and
AARP Diversified Growth Portfolio will remain in effect until August 31, 1998
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 or the
particular Trust cast in person at a meeting called for the purpose of voting on
such approval and either by vote of a majority of the Trustees or, by a majority
of the outstanding voting securities of the particular AARP 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 for
all Funds except AARP Global Growth Fund were last approved by the Trustees
(including a majority of the Trustees who are not "interested persons") on June
18, 1996 and by the shareholders on January 13, 1994. The Supplement to
Investment Management Agreement for AARP Global Growth Fund dated February 1,
1996 was approved by the Trustees on December 13, 1995 and by the initial
shareholder on January 24, 1996. The Supplement to Investment Management
Agreement for the AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund and AARP Small Company Stock Fund, dated February 1,
1997 was approved by the Trustees on December 16, 1996 and by the initial
shareholder of each Fund on January 30, 1997. 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.
Pursuant to a Subadvisory Agreement entered into between the Fund
Manager and Bankers Trust Company on February 1, 1997, Bankers Trust Company
(the "Subadviser") provides subadvisory services relating to the management of
the AARP U.S. Stock Index Fund. The fee paid to the Subadviser is calculated on
a quarterly basis and depends on the level of total assets in the AARP U.S.
Stock Index Fund. The fee rate decreases as the level of total assets for the
Fund increases. The fee rate for each level of assets is: .07% of the first $100
million of average daily net assets, .03% of such assets in excess of $100
million, and .01% of such assets in excess of $200 million with a minimum annual
fee of $75,000. For the first twelve months of management, the Subadviser has
agreed to waive a portion of its fee. After the first year, the full fee will be
charged.
A Special Servicing Agreement (the "Service Agreement") has been
entered into among the Fund Manager, the Underlying AARP Mutual Funds, Scudder
Service Corporation, Scudder Fund Accounting Corporation, Scudder Investor
Services, Inc. and the AARP Managed Investment Portfolios Trust on February 1,
1997. Under the Service Agreement, the Fund Manager will arrange for all
services pertaining to the operation of the Trust including the services of
Scudder Service Corporation and Scudder Fund Accounting Corporation to act as
Shareholder Servicing Agent and Fund Accounting Agent, respectively, for each
Portfolio. In addition, the Service Agreement will provide that, if the officers
of any Underlying AARP Mutual Fund, at the direction of the Board of Trustees,
determine that the aggregate expenses of a Portfolio are less than the estimated
savings to the Underlying AARP Mutual Fund from the operation of that Portfolio,
the Underlying AARP Mutual Fund will bear those expenses in proportion to the
average daily value of its shares owned by that Portfolio. No Underlying AARP
Mutual Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly in
the Underlying AARP Mutual Funds and the resulting reduction in shareholder
servicing costs. In this regard, the shareholder servicing costs to any
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Underlying AARP Mutual Fund for servicing one account registered to the Trust
would be significantly less than the cost to that same Underlying AARP Mutual
Fund of servicing the same pool of assets contributed in the typical fashion by
a large group of individual shareholders owning small accounts in each
Underlying AARP Mutual Fund.
Based on actual expense data from the Underlying AARP Mutual Funds and
certain very conservative assumptions with respect to the Trust, the Fund
Manager, the Underlying AARP Mutual Funds, Scudder Service Corporation, Scudder
Investor Services, Inc., Scudder Fund Accounting Corporation, Scudder Trust
Company and the Managed Investment Portfolios anticipate that the aggregate
financial benefits to the Underlying AARP Mutual Funds from these arrangements
will exceed the costs of operating the Portfolios. If such turns out to be the
case, there will be no charge to the Trust for the services under the Service
Agreement. Rather, in accordance with the Service Agreement, such expenses will
be passed through to the Underlying AARP Mutual Funds in proportion to the value
of each Underlying AARP Mutual Fund's shares held by each Portfolio.
In the event that the aggregate financial benefits to the Underlying
AARP Mutual Funds do not exceed the costs of a Portfolio, the Fund Manager will
pay, on behalf of that Portfolio, that portion of costs, as set forth herein,
determined to be greater than the benefits. The determination of whether and the
extent to which the benefits to the Underlying AARP Mutual Funds from the
organization of the Trust will exceed the costs to such funds will be made based
upon the analysis criteria set forth in the Order. This cost-benefit analysis
was initially reviewed by the Trustees of the Underlying AARP Mutual Funds
before participating in the Service Agreement. For future years, there will be
an annual review of the Service Agreement to determine its continued
appropriateness for each Underlying AARP Mutual Fund.
Certain non-recurring and extraordinary expenses will not be paid in
accordance with the Service Agreement including: the fees and costs of actions,
suits or proceedings and any penalties or damages in connection therewith, to
which a Portfolio may incur directly, or may incur as a result of its legal
obligation to provide indemnification to its officers, trustees and agents; the
fees and costs of any governmental investigation and any fines or penalties in
connection therewith; and any federal, state or local tax, or related interest
penalties or additions to tax, incurred, for example, as a result of the
Portfolios' failure to distribute all of its earnings, failure to qualify under
subchapter M of the Internal Revenue Code, or failure to timely file any
required tax returns or other filings. Under unusual circumstances, the parties
to the Service Agreement may agree to exclude certain other expenses.
Scudder, Stevens & Clark, Inc. is one of the most experienced
investment management firms in the United States. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual Fund to the public. In 1953, Scudder introduced Scudder International
Fund, the first Fund available in the U.S. investing internationally in
securities of issuers in several foreign countries. The principal source of the
Fund Manager's income is professional fees received from providing continuous
investment advice, and the firm derives no income from banking, brokerage or
underwriting of securities. Today, it provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. In addition,
it manages Montgomery Street Income Securities, Inc., Scudder California Tax
Free Trust, Scudder Cash Investment Trust, Scudder Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment
Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia
Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder
Portfolio Trust, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, Scudder World Income Opportunities Fund,
Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., 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.
60
<PAGE>
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 Investment Management Agreement provides that the Fund Manager
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with matters to which the respective
agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Fund Manager in the performance of its
duties or from reckless disregard by the Fund Manager of its obligations and
duties under the respective agreement.
In reviewing the terms of each Investment Management Agreement and in
discussions with the Fund Manager concerning such agreements, the Trustees of
each Trust who are not "interested persons" of that Trust have been represented
by independent counsel at the Trust's expense.
Pursuant to a Member Services Agreement with the Fund Manager, dated
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,
1997 and from year to year thereafter only if its continuance is specifically
approved at least annually by the vote of a majority of those Trustees who are
not "interested persons" of the Fund Manager, AFSC, or the Funds cast in person
at a meeting called for the purpose of voting on such approval and either by
vote of a majority of the Trustees or, with respect to each Fund, by a majority
of the outstanding voting securities of that Fund. The continuance of the Member
Services Agreement was last approved by the Trustees (including a majority of
the Trustees who are not such "interested persons") on June 18, 1996 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 March 20, 1996
among the Trusts, except for AARP Managed Investment Portfolios Trust, the Fund
Manager and AARP, use of the AARP service marks by a Trust and its Funds will be
terminated, unless otherwise agreed to by AARP, upon termination of that Trust's
Management Agreement.
Officers and employees of the Fund Manager from time to time may have
transactions with various banks, including the AARP Funds' custodian bank. It is
the Fund Manager's opinion that the terms and conditions of those transactions
which have occurred were not influenced by existing or potential custodial or
other Fund relationships.
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.
61
<PAGE>
Personal Investments by Employees of Scudder
Employees of Scudder are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in Scudder's
Code of Ethics. The Code of Ethics contains provisions and requirements designed
to identify and address certain conflicts of interest between personal
investment activities and the interests of investment advisory clients such as
the Funds. Among other things, the Code of Ethics, which generally complies with
standards recommended by the Investment Company Institute's Advisory Group on
Personal Investing, prohibits certain types of transactions absent prior
approval, imposes time periods during which personal transactions may not be
made in certain securities, and requires the submission of duplicate broker
confirmations and monthly reporting of securities transactions. Additional
restrictions apply to portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular circumstances
after review by appropriate personnel.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Linda Coughlin##* (45) Chairman of the Managing Director of Scudder, Director and Senior
Board and Trustee Stevens & Clark, Inc. Vice President
Horace B. Deets+* (58) Vice Chairman and Executive Director, American --
Trustee Association of Retired Persons
Carole Lewis Anderson (52) Trustee President, MASDUN Capital --
3616 Reservoir Road, N.W. Advisors; Formerly Principal,
Washington, DC Suburban Capital Markets, Inc.;
Director, VICORP Restaurants,
Inc.; Member of the Board,
Association for Corporate Growth
of Washington, D.C.; Trustee,
Hasbro Children's Foundation and
Mary Baldwin College
Adelaide Attard (66) Trustee Gerontology Consultant; Member, --
270-28N Grand Central Parkway New York City Department of
Floral Park, NY Aging Advisory Council--
Appointed by Mayor (1995); Board
Member, American Association on
International Aging (1981 to
present); Commissioner, County
of Nassau, New York, Dept. of
Senior Citizen Affairs
(1971-1991); Chairperson,
Federal Council on Aging
(1981-1986)
Cyril F. Brickfield+* (78) Trustee Honorary President and Special --
Counsel, American Association of
Retired Persons
62
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Robert N. Butler, M.D. (70) Trustee Director, International --
211 Central Park West Longevity Center and Professor
Apt. 7F of Geriatrics and Adult
New York, NY Development; Chairman, Henry L.
Schwartz Department of
Geriatrics and Adult
Development, Mount Sinai Medical
Center (1982 to present);
Formerly Director, National
Institute on Aging, National
Institute of Health (1976-1982)
Esther Canja+* (69) Trustee Vice President, American --
Association of Retired Persons;
Trustee and Chair, AARP Group
Health Insurance Plan; Board
Liaison, National Volunteer
Leadership Network Advisory
Committee; Chair, Board
Operations Committee; AARP State
Director of Florida (1990-1992)
Edgar R. Fiedler (67) Trustee Senior Fellow and Economic --
845 Third Ave. Counselor
New York, NY
Cuyler Findlay#* (64) Trustee Advisory Managing Director of --
Scudder, Stevens & Clark, Inc.
Lt. Gen. Eugene P. Forrester (70) Trustee Lt. General (Retired), U.S. --
1101 S. Arlington Ridge Rd. Army; International Trade
Arlington, VA Counselor (1983 to present);
Consultant
Wayne F. Haefer+* (60) Trustee Director, Membership Division of --
AARP; Formerly Secretary,
Employee's Pension and Welfare
Trusts of AARP and Retired
Persons Services, Inc.
George L. Maddox, Jr. (71) Trustee Professor Emeritus and Director, --
P.O. Box 2920 Long Term Care Resources
Duke Univ. Medical Center Program, Duke University Medical
Durham, NC Center; Professor Emeritus of
Sociology, Departments of
Sociology and Psychiatry, Duke
University
63
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Robert J. Myers (84) Trustee Actuarial Consultant (1983- --
9610 Wire Ave. present); Formerly Chairman,
Silver Spring, MD Commission on Railroad
Retirement Reform (1988-90);
Deputy Commissioner, Social
Security Administration
(1981-1982); Member, National
Commission on Social Security
(1978-1981); Formerly Executive
Director, National Commission on
Social Security Reform
(1982-1983); Director: NASL
Series Trust, Inc. and North
American Funds, Inc.; Member,
Prospective Payment Assessment
Commission.
James H. Schulz (60) Trustee Professor of Economics and --
158 Scruton Pond Road Kirstein Professor of Aging
Barrington, NH Policy, Policy Center on Aging,
Florence Heller School, Brandeis
University
Gordon Shillinglaw (71) Trustee Professor Emeritus of --
196 Villard Ave. Accounting, Columbia University
Hastings-on-Hudson, NY Graduate School of Business
Thomas W. Joseph## (57) Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer and
Assistant Clerk
David S. Lee## (63) Vice President and Managing Director of Scudder, President, Assistant
Assistant Treasurer Stevens & Clark, Inc. Treasurer and Director
Thomas F. McDonough## (50) Vice President and Principal of Scudder, Stevens & Assistant Clerk
Assistant Secretary Clark, Inc.
Pamela A. McGrath## (43) Vice President and Managing Director of Scudder, --
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell# (51) Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
James W. Pasman## (44) Vice President Principal of Scudder, Stevens & --
Clark, Inc.
Kathryn L. Quirk# (44) Vice President and Managing Director of Scudder, Senior Vice President
Secretary Stevens & Clark, Inc. and Clerk
64
<PAGE>
Howard Schneider## (39) Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Cornelia M. Small# (52) President Managing Director of Scudder, --
Stevens & Clark, Inc.
</TABLE>
* Messrs. Brickfield, Deets, Findlay, Haefer and Ms. Canja and Ms. Coughlin
are Trustees of each of the Trusts and are considered by the Trusts and
their counsel to be persons who are "interested persons" of the Trusts
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
# Address: 345 Park Avenue, New York, New York
## Address: Two International Place, Boston, Massachusetts
+ Address: 601 E Street, N.W., Washington, D.C.
As of December 31, 1996, 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, 1996 no person owned
beneficially more than 5% of the outstanding shares of any of the Trusts.
REMUNERATION
Several of the officers and Trustees of the Trusts may be officers or
employees of Scudder, Stevens & Clark, Inc., Scudder Service Corporation,
Scudder Investor Services, Inc., Scudder Fund Accounting Corp., or Scudder Trust
Company and will participate in the fees received by such entities. No
individual affiliated with AARP will participate directly in any such fees. The
Trusts pay no direct remuneration to any officer of the Trusts. However, each of
the Trustees who is not affiliated with Scudder, Stevens & Clark, Inc. or AARP
will be paid by the Trust(s) for which he or she serves as Trustee. Until
September 30, 1996, each of these unaffiliated Trustees received 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 received $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. Effective October 1, 1996, each unaffiliated Trustee will
receive an annual retainer of $10,000 for serving as a Trustee of the AARP
Investment Program. In addition, each Trustee will receive from each Fund, a fee
of $175 for attending each Trustees' meeting; $150 for attending each audit and
contract committee meeting; $100 for attending each nominating committee
meeting; and $125 for attending each additional committee meeting. For the year
ended September 30, 1996, the Trustees' fees and expenses for nine of the Funds
were as follows:
Fund Expense
---- -------
AARP High Quality Money Fund $19,028
AARP GNMA and U.S. Treasury Fund 29,609
AARP High Quality Bond Fund 29,612
AARP High Quality Tax Free Money Fund 25,712
AARP Insured Tax Free General Bond Fund 25,715
AARP Balanced Stock and Bond Fund 24,005
AARP Growth and Income Fund 24,002
65
<PAGE>
Fund Expense
---- -------
AARP Global Growth Fund 15,157
AARP Capital Growth Fund 24,009
The following table shows the aggregate compensation received by each
unaffiliated Trustee from each Trust and from all AARP Trusts and Scudder Fund
complex for the year ended December 31, 1996.
<TABLE>
<CAPTION>
AARP All AARP Trusts+
AARP Cash AARP Tax Free AARP and Scudder
Name Investment Fund+++ Income Trust@ Income Trust# Growth Trust## Fund Complex
- ---- ---------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Carole L. Anderson $3,837 $7,974 $1,854 3,708 $17,380
(9 funds)
Adelaide Attard $927 $7,274 $1,854 $15,668 $25,730
(9 funds)
Robert N. Butler $752 $7,093 $1,504 $14,371 $23,727
(9 funds)
Mary Johnston Evans $1,162 $0 $2,324 $5,438 $21,174
(8 funds)
Edgar R. Fiedler $3,337 $6,974 $6,674 $2,508 $108,082**
(20 funds)
Eugene P. Forrester $802 $7,674 $7,974 $3,208 $19,665
(9 funds)
William B. Macomber $0 $0 $1,673 $4,137 $5,810
(6 funds)
George L. Maddox, Jr. $802 $7,674 $7,974 $3,208 $19,665
(9 funds)
Robert J. Myers $3,831 $7,658 $1,604 $15,510 $28,610
(9 funds)
James H. Schulz $927 $1,854 $7,274 $15,938 $26,000
(9 funds)
Gordon Shillinglaw $3,731 $1,604 $7,458 $15,710 $119,918
(19 funds)
</TABLE>
+++ AARP Cash Investment Fund consists of one Fund: AARP High Quality Money
Fund.
@ AARP Income Trust consists of three Funds: AARP GNMA and U.S. Treasury
Fund, AARP High Quality Bond Fund, and AARP Bond Fund for Income.*
# AARP Tax Free Income Trust consists of two Funds: AARP High Quality Tax
Free Money Fund and AARP Insured Tax Free General Bond Fund.
## AARP Growth Trust consists of seven Funds: AARP Balanced Stock and Bond
Fund, AARP U.S. Stock Index Fund,* AARP Growth and Income Fund, AARP
Global Growth Fund,* AARP Capital Growth Fund, AARP International Stock
Fund,* and AARP Small Company Stock Fund.*
+ AARP Diversified Income Portfolio and AARP Diversified Growth
Portfolio, series of AARP Managed Investment Portfolios Trust,
commenced operations on February 1, 1997.
* AARP Global Growth Fund commenced operations on February 1, 1996. AARP
Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Stock Fund, and AARP Small Company Stock Fund commenced operations on
February 1, 1997.
** Mr. Fiedler received $40,927 through a deferred compensation program.
As of December 31, 1996, Mr. Fiedler had a total of $420,490 accrued in
a deferred compensation program for serving on the Board of Directors
of Scudder Institutional Fund, Inc. and Scudder Fund, Inc.
66
<PAGE>
DISTRIBUTOR
Each of the Trusts has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), a Massachusetts corporation, which is a
subsidiary of Scudder, Stevens & Clark, Inc., a Delaware corporation. The
underwriting agreements for all of the Trusts except AARP Managed Investment
Portfolios Trust dated September 4, 1985 will remain in effect until August 31,
1997 and from year to year thereafter only if their continuance is approved
annually by a majority of the members of the Board of Trustees of each Trust who
are not parties to such agreement or interested persons of any such party and
either by vote of a majority of the Board of Trustees of each Trust or a
majority of the outstanding voting securities of each Trust. The underwriting
agreement for AARP Managed Investment Portfolios Trust is dated February 1, 1997
and will remain in effect until August 31, 1998 and from year to year
thereafter.
Under each Trust's principal underwriting agreement, the Trust is
responsible for: the payment of all fees and expenses in connection with the
preparation and filing with the SEC of its registration statement and prospectus
and any amendments and supplements thereto; the registration and qualification
of shares for sale in the various states, including registering the Trust as a
broker or dealer; the fees and expenses of preparing, printing and mailing
prospectuses (see below for expenses relating to prospectuses paid by the
Distributor), notices, proxy statements, reports or other communications
(including newsletters) to shareholders of the Trust; the cost of printing and
mailing confirmations of purchases of shares and the prospectuses accompanying
such confirmations; any issue taxes or any initial transfer taxes; a portion of
shareholder toll-free telephone charges; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); and the cost of printing and postage of business reply envelopes.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of shares of the
Funds to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Funds to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
customer service representatives, a portion of the cost of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by each Trust.
Note: Although each Trust does not currently have a Rule 12b-1 Plan and
shareholder approval would be required in order to adopt one, the underwriting
agreements provide that the Trust will also pay those fees and expenses
permitted to be paid or assumed by that Trust pursuant to a Rule 12b-1 Plan, if
any, adopted by each Trust, notwithstanding any other provision to the contrary
in the underwriting agreement and each Trust or a third party will pay those
fees and expenses not specifically allocated to the Distributor in the
underwriting agreement.
As agent, the Distributor currently offers shares of the Funds to
investors in all states. Each underwriting agreement provides that the
Distributor accepts orders for shares at net asset value because no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of any of the Funds.
TAXES
(See "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" in the Prospectus.)
Each AARP Fund has qualified and intends to elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code (the "Code"), as amended, since its inception and intends to
continue to so qualify. (Such qualification does not involve supervision of
management or investment practices or policies by a government agency.) In any
year in which a Fund so qualifies and distributes at least 90% of its investment
company taxable income, and at least 90% of its net tax-exempt income, if any,
the Fund generally is not subject to Federal income tax to the extent that it
distributes to shareholders its investment company taxable income and net
realized capital gains in the manner required under the Code.
Each AARP Fund must distribute its taxable income according to a
prescribed formula and will be subject to a 4% nondeductible excise tax on
amounts not so distributed. The formula requires a Fund to distribute each
calendar year at least 98% of its ordinary income (excluding tax-exempt income)
67
<PAGE>
for the calendar year, at least 98% of the excess of its capital gains over
capital losses (adjusted for certain ordinary losses) realized during the
one-year period ending October 31 of such year, and any ordinary income and
capital gains for prior years that was not previously distributed.
To qualify under Subchapter M, gains from the sale of stock, securities
and certain options, futures and forward contracts held for less than three
months must be limited to less than 30% of each Fund's annual gross income.
Moreover, short-term gains (i.e., gains from the sale of securities held for one
year or less) are taxed as ordinary income when distributed to shareholders.
Options, futures and forward activities of the AARP Funds may increase the
amount of the short-term gains and gains that are subject to the 30% limitation.
The determination of the nature and amount of investment company
taxable income of a Fund will be based solely on the transactions in, and on the
income received and expenses incurred by or allocated to, the Fund. Each AARP
Fund intends to offset any realized net capital gains against any capital loss
carryforward before making capital gains distributions to shareholders.
Distributions of any investment company taxable income (which includes
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss, less expenses) are taxable to shareholders as ordinary
income. If a portion of a Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible for
the corporate dividends-received deduction.
Generally, each Fund will distribute any net capital gains (the excess
of its net realized long-term capital gain over its net realized short-term
capital loss). If a Fund retains its net capital gains for investment, requiring
Federal income tax to be paid thereon by the Fund, the Fund intends to elect to
treat such capital gains as having been distributed to its shareholders. As a
result, shareholders (a) will be required to include in income for Federal
income tax purposes, as long-term capital gains, their proportionate share of
such undistributed amounts and (b) will be entitled to credit their
proportionate share of the Federal income tax paid thereon by the Fund against
their Federal income tax liability. In the case of shareholders whose long-term
capital gains would be taxed at a lower rate, the amount of the credit for tax
paid by a Fund in excess of the shareholder's actual tax on capital gains may be
applied to reduce the net amount of tax otherwise payable by such shareholders
in respect of their other income or, if no tax is payable, the excess may be
refunded. For Federal income tax purposes, the tax basis of shares owned by a
shareholder of a Fund will be increased by an amount equal to the difference
between its pro rata share of such gains and its tax credit. If a Fund retains
net capital gains, it may not be treated as having met the excise tax
distribution requirement.
Distributions of net capital gains that a Fund designates as capital
gains dividends are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Fund have been held by such
shareholders and are not eligible for the corporate dividends - received
deduction. Any loss realized upon the redemption of shares held at the time of
redemption for six months or less will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain on
such shares.
Distributions of investment company taxable income and net realized
capital gains by a Fund will be taxable as described above, whether made in
shares or in cash. Shareholders electing to receive distributions in the form of
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
68
<PAGE>
capital gain during such six-month period. A gain realized on a redemption, sale
or exchange will not be affected by a reacquisition of shares. A loss realized
on a redemption, sale or exchange, however, will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by a Fund upon payment of a premium in connection
with the purchase of a put or call option. The character of any gain or loss
recognized (i.e., long-term or short-term) will generally depend in the case of
a lapse or sale of the option on the Fund's holding period for the option and in
the case of an exercise of a put option on the Fund's holding period for the
underlying security. The purchase of a put option may constitute a short sale
for federal income tax purposes, causing an adjustment in the holding period of
the underlying security or a substantially identical security of the Fund. If a
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as a
short-term capital gain or loss. If a call option written by a Fund is
exercised, the character of the gain or loss depends on the holding period of
the underlying security. The exercise of a put option written by a Fund is not a
taxable transaction for the Fund.
Many futures contracts, certain foreign currency forward contracts and
all listed nonequity options (including options on debt securities, options on
futures contracts, options on securities indices and options on broad-based
stock indices) will constitute "section 1256 contracts." Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or losses. Also, section 1256 contracts held by the
Funds at the end of each taxable year (and, for purposes of the 4% excise tax,
on October 31) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60% long-term and 40% short-term capital gain or loss. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options, and
similar financial instruments entered into or acquired by a Fund will be treated
as ordinary income.
Positions of a Fund which consist of at least one security and at least
one option or other position with respect to the security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
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
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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. If a Fund invests
in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Fund by its corporate shareholders, to the extent attributable
to such portion of accrued original issue discount, may be eligible for this
deduction for dividends received by corporations if so designated by the Fund in
a written notice to shareholders.
In addition, some of the debt securities may be purchased by the Funds
at a discount which exceeds the original issue discount on such debt securities,
if any. This additional discount represents market discount for Federal income
tax purposes. The gain realized on the disposition of many debt securities,
including tax-exempt securities, having market discount will be treated as
ordinary income to the extent it does not exceed the accrued market discount on
such debt security. Generally, market discount accrues on a daily basis for each
day the debt security is held by the Funds at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Funds, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest.
The Funds will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. All such distributions and proceeds may be subject to
withholding of Federal income tax at the rate of 31% in the case of non-exempt
shareholders who fail to furnish the Funds with their taxpayer identification
numbers and with required certifications regarding their status under Federal
income tax laws. Withholding may also be required if a Fund is notified by the
IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions or proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Investors may wish to consult their tax advisers about the applicability of the
backup withholding provisions.
In addition to Federal taxes, shareholders of the Funds may be subject
to state and local taxes on distributions from the Funds. Under the laws of
certain states, distributions of investment company taxable income are taxable
to shareholders as dividend income even though a substantial portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by the resident of such state, would be exempt from such
state's income tax. Shareholders should consult their own tax advisers with
respect to the tax status of distributions from the Funds in their own state and
localities.
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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.
Special Information Regarding the AARP Managed Investment Portfolios:
Distribution of an underlying AARP Mutual Fund's investment company taxable
income are taxable as ordinary income to an AARP Managed Investment Portfolio
which invests in the Fund. Distribution of the excess of an underlying AARP
Mutual Fund's net long-term capital gain over its net short-term capital loss,
which are properly designated as "capital gain dividends, " are taxable as
long-term capital gain to an AARP Managed Investment Portfolio which invests in
the Fund, regardless of how long the Portfolio held the Fund's shares, and are
not eligible for the corporate dividends-received deduction. Upon the sale or
other disposition by an AARP Managed Investment Portfolio of shares of an
underlying AARP Mutual Fund, the Portfolio generally will realize a capital gain
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or loss which will be long-term or short-term, generally depending upon the
Portfolio's holding period for the shares. The AARP Managed Investment
Portfolios will not be eligible to elect to "pass through" to their shareholders
the ability to claim a deduction or credit with respect to foreign income and
similar taxes paid by an underlying AARP Mutual Fund.
BROKERAGE AND PORTFOLIO TURNOVER
Brokerage Commissions
To the maximum extent feasible the AARP Funds' investment adviser will
place orders for portfolio transactions through the Distributor, which in turn
will place orders on behalf of the AARP Funds with other brokers and dealers.
The Distributor receives no commission, fees or other remuneration from the
Funds for this service.
Allocation of brokerage is supervised by the Fund Manager.
Purchases and sales of fixed-income securities for the AARP Funds are
generally placed by the Fund Manager with primary market makers for these
securities on a net basis, without any brokerage commission being paid by a
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The primary objective of the Fund Manager in placing orders for the
purchase and sale of assets for the AARP Funds' portfolios is to obtain the most
favorable net results, taking into account such factors as price, commission
(which is negotiable in the case of national securities exchange transactions),
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Fund Manager seeks to evaluate the overall reasonableness of
brokerage commissions paid through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the AARP Funds to reported commissions paid by others. The
Fund Manager reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
AARP Diversified Portfolio Investments are made directly in Underlying
AARP Funds with no commissions.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Fund Manager's practice to place such orders
with brokers and dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes, or who supply research, market and
statistical information to the Funds or the Fund Manager. The term "research,
market and statistical information" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and concerning the performance
of accounts. The Fund Manager is not authorized, when placing portfolio
transactions for the AARP Funds, except for the AARP Growth Funds, to pay a
brokerage commission in excess of that which another broker might have charged
for executing the same transaction solely on account of the receipt of research,
market or statistical information. The Fund Manager will not place orders with
brokers or dealers on the basis that the broker or dealer has or has not sold
shares of the Funds. Except for implementing the policy stated above, there is
no intention to place portfolio transactions with particular brokers or dealers
or groups thereof. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the AARP Funds and to the Fund Manager, it
is the opinion of the Fund Manager that such information is only supplementary
to its own research effort since the information must still be analyzed,
weighed, and reviewed by the Fund Manager's staff. Such information may be
useful to the Fund Manager in providing services to clients other than the AARP
Funds, and not all such information is used by the Fund Manager in connection
with the AARP Funds. Conversely, such information provided to the Fund Manager
by brokers and dealers through whom other clients of the Fund Manager effect
securities transactions may be useful to the Fund Manager in providing services
to the AARP Funds.
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For the fiscal years ended September 30, 1994, 1995 and 1996 the AARP
Growth and Income Fund paid brokerage commissions of $2,319,113, $1,690,604 and
$3,453,660 and the AARP Capital Growth Fund paid brokerage commissions of
$1,156,320, $2,636,662, and $1,011,500, both respectively. For the fiscal period
ended September 30, 1994, and for the fiscal years ended September 30, 1995 and
1996, the AARP Balanced Stock and Bond Fund paid brokerage commissions of
$152,376, $149,816, and $201,070, respectively. For the fiscal period February
1, 1996 (commencement of operations) until September 30, 1996, the AARP Global
Growth Fund paid brokerage commissions of $209,773. In the fiscal year ended
September 30, 1996, $2,850,943 (83% of the total brokerage commissions paid by
AARP Growth and Income Fund) and $885,271 (88%) 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 $731,645,828 for the AARP Capital Growth Fund, (77% of
all brokerage transactions) and $1,675,776,125 (72% of all brokerage
transactions) for the AARP Growth and Income Fund. The balance of such brokerage
was not allocated to any particular broker or dealer or with regard to the
above-mentioned or other special factors. For the fiscal year ended September
30, 1996, $179,452 (89%) 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 $116,364,001 for AARP Balanced Stock
and Bond Fund, (31% of all brokerage transactions). For the fiscal period ended
September 30, 1996, $133,074 (63%) of the total brokerage commissions paid by
AARP Global Growth Fund resulted from orders placed, consistent with the policy
of obtaining the most favorable net results, with brokers and dealers who
provided supplementary research information to the Funds or the Fund Manager.
The amount of such transactions aggregated $45,080,153 for AARP Global Growth
Fund (53% 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 portfolio turnover rates for the fiscal years ended
September 30, 1994, 1995, and 1996 for five of the non-money market Funds were:
AARP GNMA and U.S. Treasury Fund, 114.54%, 70.35%, and 83.44%; AARP High Quality
Bond Fund, 63.75%, 201.07%, and 169.96%; AARP Insured Tax Free General Bond
Fund, 38.39%, 17.45%, and 18.69%; AARP Growth and Income Fund, 31.82%, 31.26%,
and 25.02%; AARP Capital Growth Fund, 79.65%, 98.44%, and 64.84%, all
respectively. The portfolio turnover rate for the period ended September 30,
1994 and for the fiscal years ended September 30, 1995 and 1996 for the AARP
Balanced Stock and Bond Fund was 49.32%, 63.77%, and 35.22%, respectively. The
portfolio turnover rate for AARP Global Growth Fund for the period February 1,
1996 (commencement of operations) to September 30, 1996 was 12.56%. Under normal
investment conditions, it is anticipated that the AARP Bond Fund for Income's,
the AARP U.S. Stock Index Fund's, the AARP International Stock Fund's or the
AARP Small Company Stock Fund's annual portfolio turnover rate will not exceed
75% for the initial fiscal year. It is also anticipated that the annual
portfolio turnover rate for AARP Diversified Growth Portfolio and AARP
Diversified Income Portfolio will not exceed 50% for the initial fiscal year.
NET ASSET VALUE
AARP Money Funds
The net asset value per share of the Funds are computed twice daily as
of twelve o'clock noon and the close of regular trading on the Exchange,
normally 4 p.m. eastern time, on each day when the Exchange is open for trading.
The Exchange is normally closed on the following national holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
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Thanksgiving, and Christmas. Net asset value is determined by dividing the total
assets of the Fund, less all of its liabilities, by the total number of shares
of the Fund outstanding. The AARP High Quality Money Fund uses the
penny-rounding method of security valuation as permitted under Rule 2a-7 under
the 1940 Act. Under this method, portfolio securities for which market
quotations are readily available and which have remaining maturities of more
than 60 days from the date of valuation are valued at the mean between the
over-the-counter bid and asked prices. Securities which have remaining
maturities of 60 days or less are valued by the amortized cost method; if
acquired with remaining maturities of 61 days or more, the cost thereof for
purposes of valuation is deemed to be the value on the 61st day prior to
maturity. Other securities are appraised at fair value as determined in good
faith by or on behalf of the Trustees of the Fund. For example, securities with
remaining maturities of more than 60 days for which market quotations are not
readily available are valued on the basis of market quotations for securities of
comparable maturity, quality and type. Determinations of net asset value per
share for the Fund made other than as of the close of the Exchange may employ
adjustments for changes in interest rates and other market factors.
The valuation of AARP High Quality Tax Free Money Fund's portfolio
securities is based upon their amortized cost which does not take into account
unrealized securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price AARP High Quality Tax Free Money Fund would
receive if it sold the instrument. During periods of declining interest rates,
the quoted yield on shares of AARP High Quality Tax Free Money Fund may tend to
be higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized cost
by AARP High Quality Tax Free Money Fund resulted in a lower aggregate portfolio
value on a particular day, a prospective investor in the Fund would be able to
obtain a somewhat higher yield if he purchased shares of the Fund on that day,
than would result from investment in a fund utilizing solely market values, and
existing investors in the Fund would receive less investment income. The
converse would apply in a period of rising interest rates. Other securities and
assets for which market quotations are not readily available are valued in good
faith at fair value using methods determined by the Trustees and applied on a
consistent basis. For example, securities with remaining maturities of more than
60 days for which market quotations are not readily available are valued on the
basis of market quotations for securities of comparable maturity, quality and
type. The Trustees review the valuation of AARP High Quality Tax Free Money
Fund's securities through receipt of regular reports from the Adviser at each
regular Trustees' meeting. Determinations of net asset value made other than as
of the close of the Exchange may employ adjustments for changes in interest
rates and other market factors.
AARP Non-Money Market Funds
The net asset value of shares of the Funds are computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of the Fund, less all liabilities, by the total
number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any sales, the security is valued
at the most recent bid quotation. The value of an equity security not quoted on
the NASDAQ System, but traded in another over-the-counter market, is its most
recent sale price. Lacking any sales, the security is valued at the Calculated
Mean. Lacking a Calculated Mean, the security is valued at the most recent bid
quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturities of sixty days or less are valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
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methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
Trading in securities on foreign securities exchanges is normally
completed before the close of regular trading on the Exchange. Trading on these
foreign exchanges may not take place on all days on which there is regular
trading on the Exchange, or may take place on days on which there is no regular
trading on the Exchange. If events materially affecting the value of a Fund's
portfolio securities occur between the time when these foreign exchanges close
and the time when the Fund's net asset value is calculated, such securities will
be valued at fair value as determined by each Trust's Board of Directors. Shares
of AARP Underlying Funds in which the AARP Diversified Portfolios invest in next
determine net asset value after the order is placed.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial statements of the AARP Funds included in the Annual
Report to shareholders dated September 30, 1996, 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.
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Ratings of Corporate Bonds
The three highest ratings of Moody's for corporate bonds are Aaa, Aa
and A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they comprise what are generally known as high-grade bonds. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa securities. Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Although factors
giving security to principal and interest on bonds rated A are adequate, other
elements may be present which suggest a susceptibility to impairment sometime in
the future.
The three highest ratings of S&P for corporate bonds are AAA (Prime),
AA (High-grade) and A. Bonds rated AAA have the highest rating assigned by S&P
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rating issues only in small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
more susceptible to the adverse effects of changes in circumstances and economic
conditions. Bonds rated BBB have an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
Ratings of Commercial Paper
The ratings Prime-1 and Prime-2 are the highest commercial paper
ratings assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; 6) trend of
earnings over a period of ten years; (7) financial strength of a parent company
and the relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
Prime-2 ratings are assigned by Moody's to commercial paper issuers
which have a strong capacity for meeting their obligations in a timely fashion.
However, their financial, economic and managerial capacities will be less than
that of Prime-1 borrowers. Financial characteristics such as earnings, coverage
ratios and capitalization will be more affected by external economic factors
than Prime-1 borrowers. Liquidity is still believed to be ample.
The two highest ratings of S&P for commercial paper are A-1 and A-2.
Commercial paper rated A-1 or better by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements; long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed; the
issuer has access to at least two additional channels of borrowing; basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; the reliability and quality of
management are unquestioned.
S&P will assign an A-2 rating to the commercial paper of companies
which have the capacity for timely payment on issues. However, the relative
degree of safety is less than for issuers rated A-1.
Ratings of Municipal Bonds
The three highest ratings of Moody's for municipal bonds are Aaa, Aa,
and A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they comprise what are generally known as high-grade bonds. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
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.
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The three highest ratings of S&P for municipal bonds are AAA (Prime),
AA (High-grade), and A (Good grade). Bonds rated AAA have the highest rating
assigned by S&P to a municipal obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in a
small degree. Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of Funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
S&P's top ratings for municipal notes are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The ratings F-1+ and F-1 are the two highest ratings assigned by Fitch.
Among the factors considered by Fitch in assigning these rating are: (1) the
issuer's liquidity; (2) its standing in the industry; (3) the size of its debt;
(4) its ability to service its debt; (5) its profitability; (6) its return on
equity; (7) its alternative sources of financing; and (8) its ability to access
the capital markets. Analysis of the relative strength or weakness of these
factors and others determines whether an issuer's commercial paper is within
these two ratings.
Other Information
Each AARP Fund has a fiscal year ending on September 30.
The CUSIP for AARP High Quality Money Fund is 000036E-10-7.
The CUSIP for AARP GNMA & U.S. Treasury Fund is 00036M-10-9.
The CUSIP for AARP High Quality Bond Fund is 00036M-20-8.
The CUSIP for AARP Bond Fund for Income Fund is 00036M-30-7.
The CUSIP for AARP Tax Free Money Fund is 00036Q-10-0.
The CUSIP for AARP Insured Tax Free General Bond Fund is 00036Q-20-9.
The CUSIP for AARP Balanced Stock & Bond is 00036J-30-4.
The CUSIP for AARP Growth & Income Fund is 00036J-10-6.
The CUSIP for AARP Capital Growth Fund is 00036J-20-5.
The CUSIP for AARP Global Growth Fund is 00036J-40-3.
The CUSIP for AARP U.S. Stock Index Fund is 00036J-50-2.
The CUSIP for AARP International Stock Fund is 00036J-60-1.
The CUSIP for AARP Small Company Stock is 00036J-70-0.
The CUSIP for AARP Diversified Income Portfolio is 00036W-10-7.
The CUSIP for AARP Diversified Growth Portfolio is 00036W-20-6.
Portfolio securities of the AARP Funds except AARP Global Growth Fund
are held separately, pursuant to a custodian agreements with each Trust, by
State Street Bank and Trust Company of Boston as Custodian.
Portfolio securities of AARP Global Growth Fund are held separately,
pursuant to a custodian agreement with AARP Growth Trust on behalf of AARP
Global Growth Fund, by Brown Brothers Harriman & Co. of Boston as Custodian.
Each Trust has shareholder servicing agreements with Scudder Service
Corporation ("SSC"), a subsidiary of Scudder, Stevens & Clark, Inc. SSC is the
transfer agent, dividend disbursing and shareholder service agent for each Fund.
Shareholder service expenses charged by SSC were for AARP High Quality Money
Fund, $1,526,580; AARP GNMA and U.S. Treasury Fund, $7,340,012; AARP High
Quality Bond Fund, $1,586,232; AARP High Quality Tax Free Money Fund, $304,924;
AARP Insured Tax Free General Bond Fund, $1,925,762; AARP Balanced Fund,
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$724,796; AARP Growth and Income Fund, $3,850,612; and AARP Capital Growth Fund,
$1,176,990, for the fiscal year ended September 30, 1996. Shareholder service
expenses charged by SSC for AARP Global Growth Fund were $178,759 for the period
February 1, 1996 (commencement of operations) to September 30, 1996. Not all of
these fees were paid in full at the fiscal year end.
The firm of Dechert Price & Rhoads of Washington, D.C. is counsel for
the Trusts.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of Scudder, Stevens & Clark, Inc.,
computes net asset value for each Fund. AARP High Quality Money Fund and AARP
High Quality Tax Free Money Fund each pay Scudder Fund Accounting an annual fee
equal to 0.020% on the first $150 million of average daily net assets, 0.0060%
of such assets in excess of $150 million, up to and including $1 billion and
0.0035% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. AARP Insured Tax Free General Bond Fund pays Scudder
Fund Accounting an annual fee equal to 0.024% on the first $150 million of
average daily net assets, 0.0070% on such assets in excess of $150 million up to
and including $1 billion, and 0.0040% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. AARP GNMA and U.S.
Treasury Fund, AARP High Quality Bond Fund and AARP Bond Fund for Income each
pay Scudder Fund Accounting an annual fee equal to 0.025% of the first $150
million of average daily net assets, 0.0075% of such assets in excess of $150
million up to and including $1 billion, and 0.0045% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP U.S. Stock Index Fund,
AARP Capital Growth Fund and AARP Small Company Stock Fund each pay Scudder Fund
Accounting an annual fee equal to 0.025% on the first $150 million of average
daily net assets, 0.0075% of such assets in excess of $150 million up to and
including $1 billion, and 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges. AARP Global Growth Fund and Scudder
International Stock Fund each pay Scudder Fund Accounting Corporation an annual
fee equal to 0.065% on the first $150 million of average daily net assets,
0.0400% of such assets in excess of $150 million up to and including $1 billion,
and 0.0200% of such assets in excess of $1 billion, plus holding and transaction
charges for this service.
Many of the investment changes in the Funds will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders. These transactions will reflect investment decisions
made by the Fund Manager in light of the objectives and policies of the Funds,
and such factors as its other portfolio holdings and tax considerations, and
should not be construed as recommendations for similar action by other
investors.
Costs of $13,000 incurred by AARP Bond Fund for Income in conjunction
with its organization are amortized over the five year period beginning February
1, 1997.
Costs of $16,000 incurred by AARP U.S. Stock Index Fund in conjunction
with its organization are amortized over the five year period beginning February
1, 1997.
Costs of $13,000 incurred by AARP International Stock Fund in
conjunction with its organization are amortized over the five year period
beginning February 1, 1997.
Costs of $13,000 incurred by AARP Small Company Stock Fund in
conjunction with its organization are amortized over the five year period
beginning February 1, 1997.
Costs of $23,000 incurred by AARP Diversified Income Portfolio in
conjunction with its organization are amortized over the five year period
beginning February 1, 1997.
Costs of $23,000 incurred by AARP Diversified Growth Portfolio in
conjunction with its organization are amortized over the five year period
beginning February 1, 1997.
Each Trust is located at Two International Place, Boston, Massachusetts
02110-4103 (telephone: 1-800-253-2277). Each has filed with the Securities and
Exchange Commission, Washington, D.C. 20549, a Registration Statement under the
Securities Act of 1933, as amended, with respect to the shares of the Funds
offered by the Prospectus. The Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statements, certain parts of which are omitted in accordance with Rules and
Regulations of the SEC. The Registration Statements may be inspected at the
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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 1997
calendar year.
<TABLE>
<CAPTION>
1996 Taxable Income To Equal Hypothetical Tax-Free Yields of 5%,
Brackets 7% and 9%, a Taxable Investment Would
Have To Earn**
Individual Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
<S> <C> <C> <C> <C>
$0 - $24,650 15.0% 5.88% 8.24% 10.59%
$24,651 - $59,750 28.0% 6.94% 9.72% 12.50%
$59,751 - $124,650 31.0% 7.25% 10.14% 13.04%
$124,651 - $271,050 36.0% 7.81% 10.94% 14.06%
Over $271,050 39.6% 8.28% 11.59% 14.90%
Joint Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
$0 - $41,200 15.0% 5.88% 8.24% 10.59%
$41,201 - $99,600 28.0% 6.94% 9.72% 12.50%
$99,601 - $151,750 31.0% 7.25% 10.14% 13.04%
$151,751 - $271,050 36.0% 7.81% 10.94% 14.06%
Over $271,050 39.6% 8.28% 11.59% 14.90%
</TABLE>
** 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
$121,200 ($60,600 in the case of a married individual filing a separate
return), or of (ii) the gradual phaseout of the personal exemption amount
for taxpayers whose federal adjusted gross income exceeds $121,200 (for
single individuals) or $181,800 (for married individuals filing jointly).
The effective federal tax rates and equivalent yields for such taxpayers
would be higher than those shown above.
Example:*
Based on 1997 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $50,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
There is no guarantee that a Fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
* Net amount subject to federal income tax after deductions and exemptions,
exclusive of the alternative minimum tax.
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FINANCIAL STATEMENTS
The financial statements and notes, including the investment portfolio,
of each AARP Fund, together with the Report of Independent Accountants and
Supplementary Information are incorporated by reference herein.
80
