<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
PROSPECTUS
FEBRUARY 1, 1998
The family of 15 AARP Mutual Funds offers a choice of pure no-load(TM) mutual
funds, generally each of whose goal is to seek to provide competitive returns
but with less risk of loss to its portfolio than similar mutual funds, as
measured by the frequency and amount by which total return fluctuates downward.
This risk of loss, as described in this Prospectus, may also be referred to as
"downside risk." The 15 Funds are organized into five Trusts.
Trusts AARP Mutual Funds
AARP Cash Investment Funds AARP High Quality Money Fund
AARP Income Trust AARP High Quality Short Term Bond Fund
AARP GNMA and U.S. Treasury Fund
AARP Bond Fund for Income
AARP Tax Free Income Trust AARP High Quality Tax Free Money Fund
AARP Insured Tax Free General Bond Fund
AARP Growth Trust AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund
AARP Global Growth Fund
AARP Capital Growth Fund
AARP International Growth and Income Fund
AARP Small Company Stock Fund
AARP Managed Investment AARP Diversified Income With Growth Portfolio
Portfolios Trust AARP Diversified Growth Portfolio
This combined Prospectus provides information about the AARP Investment Program
from Scudder that as a prospective investor you should be familiar with before
investing. Please keep this document for future reference.
The U.S. Government does not and has never insured or guaranteed shares of any
mutual fund, including the AARP Mutual Funds. The AARP High Quality Money Fund
and the AARP High Quality Tax Free Money Fund each seeks to maintain a constant
net asset value of $1.00 per share. However, the Fund Manager cannot assure
investors that these Funds will be able to maintain a stable $1.00 per share or
constant net asset value.
You may get more detailed information in the combined Statement of Additional
Information (SAI) dated February 1, 1998, as amended from time to time. The SAI
is considered part of this Prospectus by reference to it. The SAI is on file
with the Securities and Exchange Commission (SEC) and is available along with
other related materials on the SEC's Internet Web Site (http://www.sec.gov).
You may get a copy of the SAI or a LARGE PRINT version of this Prospectus
without charge by calling 1-800-253-2277, or by writing to Scudder Investor
Services, Inc., P.O. Box 2540, Boston, MA 02208-2540.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
This Page
intentionally
left blank.
PROSPECTUS
2
<PAGE>
INFORMATION CONTAINED IN THE PROSPECTUS
AND WHERE TO FIND IT
PAGE
A GLANCE AT THE AARP MUTUAL FUNDS FROM SCUDDER .................. 4
FUND EXPENSES ................................................... 6
FINANCIAL HIGHLIGHTS ............................................ 10
A BRIEF OVERVIEW OF THE AARP INVESTMENT PROGRAM FROM SCUDDER .... 21
SPECIAL FEATURES OF THE AARP INVESTMENT PROGRAM ................. 22
INVESTMENT OBJECTIVES AND POLICIES .............................. 27
AARP MONEY MARKET FUNDS
AARP HIGH QUALITY MONEY FUND ................................ 29
AARP HIGH QUALITY TAX FREE MONEY FUND ....................... 31
AARP INCOME FUNDS
AARP HIGH QUALITY SHORT TERM BOND FUND ...................... 35
AARP GNMA AND U.S. TREASURY FUND ............................ 37
AARP INSURED TAX FREE GENERAL BOND FUND ..................... 39
AARP BOND FUND FOR INCOME ................................... 41
AARP GROWTH AND INCOME FUNDS
AARP BALANCED STOCK AND BOND FUND ........................... 46
AARP GROWTH AND INCOME FUND ................................. 48
AARP U.S. STOCK INDEX FUND .................................. 50
AARP GROWTH FUNDS
AARP CAPITAL GROWTH FUND .................................... 54
AARP SMALL COMPANY STOCK FUND ............................... 56
AARP INTERNATIONAL FUNDS
AARP GLOBAL GROWTH FUND ..................................... 60
AARP INTERNATIONAL GROWTH AND INCOME FUND ................... 63
AARP MANAGED INVESTMENT PORTFOLIOS
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO ............... 68
AARP DIVERSIFIED GROWTH PORTFOLIO ........................... 68
OTHER INVESTMENT POLICIES AND RISK FACTORS ...................... 72
INVESTMENT RESTRICTIONS ......................................... 78
ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES ............ 78
FUND ORGANIZATION 80
UNDERSTANDING FUND PERFORMANCE .................................. 83
UNDERSTANDING SHARE PRICE ....................................... 85
OPENING AN AARP MUTUAL FUND ACCOUNT ............................. 85
WIRE TRANSFERS .................................................. 86
ADDING TO YOUR INVESTMENT ....................................... 86
EXCHANGES AND REDEMPTIONS ....................................... 87
SIGNATURE GUARANTEES ............................................ 87
STATEMENTS AND REPORTS .......................................... 87
OTHER MAILINGS .................................................. 87
INVESTOR SERVICES ............................................... 88
SOME COMMONLY ASKED QUESTIONS ................................... 89
SERVICE PROVIDERS OF THE AARP MUTUAL FUNDS ...................... 90
TRUSTEES AND OFFICERS ........................................... 91
PROSPECTUS
3
<PAGE>
A GLANCE AT THE AARP
- --------------------------------------------------------------------------------
AARP INVESTMENT
MUTUAL FUNDS OBJECTIVE*
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
AARP High Quality Money Fund Current income and
stability of principal
- --------------------------------------------------------------------------------
AARP High Quality Tax Free Money Fund Current income free from federal
income taxes and stability and
safety of principal
- --------------------------------------------------------------------------------
INCOME FUNDS
- --------------------------------------------------------------------------------
AARP High Quality Short Term Bond Fund High current income
- --------------------------------------------------------------------------------
AARP GNMA and U.S. Treasury Fund High current income
- --------------------------------------------------------------------------------
AARP Insured Tax Free General Bond Fund High current income free from
federal income taxes
- --------------------------------------------------------------------------------
AARP Bond Fund for Income High current income
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUNDS
- --------------------------------------------------------------------------------
AARP Balanced Stock and Bond Fund Long-term capital growth
and income
- --------------------------------------------------------------------------------
AARP Growth and Income Fund Long-term capital growth
and income
- --------------------------------------------------------------------------------
AARP U.S. Stock Index Fund Long-term capital growth
and income
- --------------------------------------------------------------------------------
GROWTH FUNDS
- --------------------------------------------------------------------------------
AARP Capital Growth Fund Long-term capital growth
- --------------------------------------------------------------------------------
AARP Small Company Stock Fund Long-term capital growth
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUNDS
- --------------------------------------------------------------------------------
AARP Global Growth Fund Long-term capital growth
- --------------------------------------------------------------------------------
AARP International Growth and Income Fund Long-term capital growth
and income
- --------------------------------------------------------------------------------
MANAGED INVESTMENT PORTFOLIOS
- --------------------------------------------------------------------------------
AARP Diversified Income with Growth Current income with
Portfolio modest long-term
appreciation
- --------------------------------------------------------------------------------
AARP Diversified Growth Portfolio Long-term capital growth
- --------------------------------------------------------------------------------
* Each Fund's investment objective and investments are described in more detail
in the section entitled "Objectives and Policies." (See Table of Contents for
the page number for each Fund.)
PROSPECTUS
4
<PAGE>
MUTUAL FUNDS FROM SCUDDER
- --------------------------------------------------------------------------------
YOUR EXPECTED INVESTS
TIME HORIZON PRIMARILY IN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1 year + Money market securities
- --------------------------------------------------------------------------------
1 year + Federally tax-exempt high quality, short-term
municipal securities
- --------------------------------------------------------------------------------
3 years + High-quality short-term U.S. Government and
corporate and other fixed-income securities
- --------------------------------------------------------------------------------
3 years + High-quality GNMA securities and U.S. Treasury
bills, notes and bonds
- --------------------------------------------------------------------------------
3 years + High quality federally tax-exempt municipal
securities that are insured
- --------------------------------------------------------------------------------
3 years + Short-, medium-, and long-term investment grade
debt securities
- --------------------------------------------------------------------------------
3-5 years + Mix of dividend-paying stocks, high-quality bonds
and cash reserves
- --------------------------------------------------------------------------------
5 years + Dividend-paying stocks and fixed-income securities
convertible into common stocks
- --------------------------------------------------------------------------------
5 years + Stocks of S&P 500 companies
- --------------------------------------------------------------------------------
5 years + Stocks and convertible securities
- --------------------------------------------------------------------------------
5 years + Stocks of small U.S. companies
- --------------------------------------------------------------------------------
5 years + Stocks of established companies in a variety of
developed companies
- --------------------------------------------------------------------------------
5 years + Dividend-paying stocks of established companies
listed on foreign exchanges in developed non-U.S.
and foreign convertible securities
- --------------------------------------------------------------------------------
3-5 years + Managed Portfolio of AARP Stock and Bond Mutual
Funds with an emphasis on bond funds
- --------------------------------------------------------------------------------
5 years + Managed Portfolio of AARP Stock and Bond Mutual
Funds with an emphasis on stock funds
- --------------------------------------------------------------------------------
None of the AARP Mutual Funds invest in securities issued by tobacco-producing
companies. Purchasing, exchanging and redeeming information is described in more
detail later in this prospectus.
PROSPECTUS
5
<PAGE>
FUND EXPENSES
================================================================================
Shareholder Transaction Expenses
The AARP Mutual Funds do not charge sales fees or commissions--100% of your
investment goes to work for you.
o No fees to open your account
o No fees to open or maintain an AARP IRA or AARP Keogh Plan account
o No fees to buy shares
o No fees to exchange (move investments from one fund to another)
o No fees to sell (redeem) shares
o No marketing fees or distribution fees (12b-1 fees)
o No fees to reinvest dividends
Annual Fund Operating Expenses
There are Annual Fund Operating Expenses for each of the AARP Mutual Funds, but
you do not pay these expenses directly. The AARP Mutual Funds pay these expenses
before distributing net investment income to you. These expenses include the
management fee paid to Scudder Kemper Investments, Inc., (the "Fund Manager")
and other expenses for services, such as maintaining shareholder records and
furnishing shareholder statements and fund reports. The expenses are reflected
in the AARP Mutual Funds' share prices or dividends and are not directly charged
to shareholder accounts.
The following tables present information on the projected costs and expenses of
investing in an AARP Fund. Use these tables to compare the fees and expenses of
the AARP Mutual Funds with other mutual funds.
PROSPECTUS
6
<PAGE>
Annual Fund Operating Expenses are expressed as a percentage of each AARP Fund's
average daily net assets.
The following table shows the expenses for each AARP Fund for the fiscal year
ended September 30, 1997.
Annual Fund Operating Expenses
-------------------------------------
Fund Management Other Total (%)
Fee Rate (%) Expenses (%)
AARP High Quality Money
Fund 0.39 0.52 0.91
AARP High Quality Tax Free
Money Fund 0.39 0.46 0.85
AARP High Quality Short
Term Bond Fund 0.48 0.45 0.93
AARP GNMA and U.S.
Treasury Fund 0.41 0.24 0.65
AARP Insured Tax Free
General Bond Fund 0.48 0.18 0.66
AARP Bond for Income (1) 0.00 0.25 0.25
AARP Balanced Stock and
Bond Fund 0.48 0.43 0.91
AARP Growth and Income
Fund 0.48 0.23 0.71
AARP U.S. Stock Index
Fund (2) 0.00 0.50 0.50
AARP Capital Growth Fund 0.61 0.31 0.92
AARP Small Company Stock
Fund (2) 0.35 1.40 1.75
AARP Global Growth
Fund (3) 0.84 0.98 1.82
AARP International Growth
and Income Fund (2) 0.00 1.75 1.75
(1) As of 2/1/98, the Expense Ratio will become 0.25
(2) Estimated for first year of operations
(3) Expense limitation of 1.75% expired on 1/31/98
* The AARP Mutual Funds' fee structure is designed to recognize the degree
to which the pooled resources of the Program provide economies in the
management of the AARP Mutual Funds. The fee consists of two elements: a
"Base Fee" and an "Individual Fund Fee." The combined Base Fee and
Individual Fund Fee is called the Effective Management Fee Rate.
@ The AARP Managed Investment Portfolios are expected to operate at a zero
expense level. However, each Portfolio's shareholders will indirectly bear
that Portfolio's pro rata share of fees and expenses incurred by the
underlying AARP Mutual Funds in which that Portfolio is invested. The
investment returns of each Portfolio, therefore, will be net of that
Portfolio's share of the expenses of the underlying AARP Mutual Funds in
which that Portfolio is invested. The chart on the previous page shows the
expense ratios of each underlying AARP Mutual Fund after fee waiver or
reimbursement where applicable. Based on this information, the range for
the average weighted expense ratio borne by the AARP Diversified Income
With Growth Portfolio is expected to be .10% to 1.26%, and .30% to 1.58%
for the AARP Diversified Growth Portfolio. A range is provided since the
average assets of each Portfolio invested in each of the underlying AARP
Mutual Funds will fluctuate. Using the midpoint of the ratios set forth
above, an example of the expenses of each Portfolio is included in the
chart below.
PROSPECTUS
7
<PAGE>
EXAMPLES OF WHAT THE EXPENSES WOULD BE ON A $1,000
INVESTMENT IN EACH AARP FUND
Based on the level of assets as of September 30, 1997, we have calculated the
forecasted total expenses of a $1,000 investment in each AARP Fund over
specified periods. These examples assume a 5% annual return. It has also been
assumed that redemptions occur at the end of each period, that all dividends and
distributions are reinvested, and that total fund operating expenses remain the
same each year.
Fund 1 Year 3 Years 5 Years 10 Years
AARP High Quality Money Fund $9.00 $29.00 $50.00 $112.00
AARP High Quality Tax Free
Money Fund $9.00 $27.00 $47.00 $105.00
AARP High Quality Short Term
Bond Fund $9.00 $30.00 $51.00 $114.00
AARP GNMA and U.S. Treasury Fund $7.00 $21.00 $36.00 $81.00
AARP Insured Tax Free
General Bond Fund $7.00 $21.00 $37.00 $82.00
AARP Bond Fund for Income (1) $3.00 $8.00 N/A N/A
AARP Balanced Stock and
Bond Fund $9.00 $29.00 $50.00 $112.00
AARP Growth and Income Fund $7.00 $23.00 $40.00 $88.00
AARP U.S. Stock Index Fund $9.00 $16.00 N/A N/A
AARP Capital Growth Fund $18.00 $29.00 $51.00 $113.00
AARP Small Company Stock
Fund $18.00 $55.00 N/A N/A
AARP Global Growth Fund (2) $18.00 $57.00 $99.00 $214.00
AARP International Growth and
Income Fund $18.00 $55.00 N/A N/A
AARP Diversified Growth
Portfolio (3) $10.00 $32.00 N/A N/A
AARP Diversified Income With
Growth Portfolio (4) $8.00 $26.00 N/A N/A
(1) As of 2/1/98, the Expense Ratio will become 0.25
(2) Expense limitation of 1.75% expired on 1/31/98
(3) Based on the foregoing, the range for the average weighted expense ratio
borne by the AARP Diversified Growth Portfolio is expected to be 1.64% to
0.40%. A range is provided since the average assets of the Portfolio
invested in each of the Underlying Scudder Funds will fluctuate. The
midpoint of the ratios is used for this example.
(4) Based on the foregoing, the range for the average weighted expense ratio
borne by the AARP Diversified Growth and Income Portfolio is expected to
be 1.29% to 0.30%. A range is provided since the average assets of the
Portfolio invested in each of the Underlying Scudder Funds will fluctuate.
The midpoint of the ratios is used for this example.
You should not consider these examples as representations of past or future
expenses or returns. Actual fund expenses may be higher or lower in the future.
PROSPECTUS
8
<PAGE>
PROSPECTUS
9
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
On the next eleven pages, you will find information about the income and
expenses of each AARP Fund. You will also find the following: (1) the net gain
or loss on the investments, (2) the distributions, if any, of income and gain,
and, (3) the change in net asset value per share from the beginning to the end
of the stated periods. Price Waterhouse LLP, the AARP Mutual Funds' independent
accountants, has examined this information. The Annual Report to Shareholders
includes their report on the Funds' most recent five years.
To request a free copy of the most recent Annual Report to Shareholders, which
includes more detailed information concerning the Funds' performance, complete
portfolio listings and audited financial statements, call us at 1-800-253-2277.
AARP High Quality Money Fund For the Years Ended September 30
-------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning of
Period .................. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
---------------------------------------------------------------------------------------------------------
Net Investment
Income .................. .046 .045 .049 .028 .021 .040 .060 .073 .080 .060
Distributions from
Net Investment
Income .................. (.046) (.045) (.049) (.028) (.021) (.040)(a) (.060) (.073) (.080) (.060)
---------------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period ........ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
---------------------------------------------------------------------------------------------------------
Total Return % (b) ....... 4.72 4.62 4.99 2.84 2.13 4.12 6.22 7.58 8.32 6.15
Net Assets End
of Period ($ millions) .. 471 412 384 333 254 323 357 376 324 224
Ratio of Operating
Expenses to Average
Net Assets % ............ .91 .963 .978 1.125 1.312 1.151 1.053 1.058 1.071 1.097(c)
Ratio of Operating
Expenses Before
Expense Reductions to
Average Net Assets % .... .91 .963 .978 1.125 1.312 1.190 1.132 1.169 1.181 1.178
Ratio of Net
Investment Income to
Average Net Assets % .... 4.63 4.54 4.89 2.89 2.12 3.61 6.05 7.32 8.06 6.03
</TABLE>
(a) Includes approximately $.005 per share of net realized short-term capital
gains.
(b) Total returns would have been lower had certain expenses not been reduced.
(c) Reflects fees not imposed by the Fund Manager of $.001 per share.
PROSPECTUS
10
<PAGE>
AARP High Quality Tax Free Money Fund For the Years Ended September 30
----------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991(b) 1990 1989 1988
---- ---- ---- ---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period ...... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $.996 $.998 $1.008 $.998
--------------------------------------------------------------------------------------------------------
Net Investment Income ..... .028 .028 .029 .017 .016 .026 .055 .061 .059 .055
Net Realized &
Unrealized Investment
Gain (Loss) .............. -- -- -- -- -- -- .004 (.002) (.010) .010
--------------------------------------------------------------------------------------------------------
Total from
Investment
Operations ............... .028 .028 .029 .017 .016 .026 .059 .059 .049 .065
--------------------------------------------------------------------------------------------------------
Distributions from Net
Investment Income ........ (.028) (.028) (.029) (.017) (.016) (.026) (.055) (.061) (.059) (.055)
--------------------------------------------------------------------------------------------------------
Total Distributions ....... (.028) (.028) (.029) (.017) (.016) (.026) (.055) (.061) (.059) (.055)
--------------------------------------------------------------------------------------------------------
Net Asset Value at End
of Period ................ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $.996 $.998 $1.008
--------------------------------------------------------------------------------------------------------
Total Return % ............ 2.80 2.80 2.99 1.76(a) 1.62(a) 2.58 6.10 6.02 4.98 6.65
Net Assets End of
Period ($ millions) ...... 103 111 120 129 134 127 119 98 90 79
Ratio of Operating
Expenses Net to
Average Net Assets % ..... .85 .85 .87 .90 .93 .95 1.06 1.12 1.17 1.27
Ratio of Operating
Expenses Before
Expense Reductions to
Average Net Assets % ..... .85 .85 .87 .91 1.15 1.13 1.13 1.12 1.17 1.30
Ratio of Net
Investment Income to
Average Net Assets % ..... 2.76 2.77 2.94 1.75 1.60 2.54 5.43 6.06 5.85 5.47
Portfolio Turnover
Rate % ................... -- -- -- -- -- -- -- 39.88 21.28 62.73
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
(b) On August 1, 1991 the Fund implemented a 15.17 to 1.00 stock split and
adopted its present name and investment objectives. Prior to that date,
the Fund was known as the AARP Insured Tax Free Short Term Fund. Financial
information prior to August 1, 1991 has been restated to reflect the stock
split and should not be considered representative of the present Fund.
PROSPECTUS
11
<PAGE>
AARP GNMA and U.S. Treasury Fund For the Years Ended September 30
-----------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period ....................... $14.91 $15.19 $14.73 $15.96 $16.19 $15.72 $14.95 $14.98 $15.11 $14.89
-------------------------------------------------------------------------------------------
Net Investment Income ............ .98 .99 1.01 .93 1.15 1.22 1.26 1.31 1.31 1.37
Net Realized & Unrealized
Investment Gain (Loss) .......... .25 (.28) .46 (1.23) (.23) .47 .77 (.03) (.13) .22
-------------------------------------------------------------------------------------------
Total from Investment
Operations ...................... 1.23 .71 1.47 (.30) .92 1.69 2.03 1.28 1.18 1.59
-------------------------------------------------------------------------------------------
Distributions from Net
Investment Income ............... (.98) (.99) (.98) (.93) (1.15) (1.22) (1.26) (1.31) (1.31) (1.37)
Distributions from Capital ....... -- -- (.03) -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------
Total Distributions .............. (.98) (.99) (1.01) (.93) (1.15) (1.22) (1.26) (1.31) (1.31) (1.37)
-------------------------------------------------------------------------------------------
Net Asset Value at End of
Period .......................... $15.16 $14.91 $15.19 $14.73 $15.96 $16.19 $15.72 $14.95 $14.98 $15.11
-------------------------------------------------------------------------------------------
Total Return % ................... 8.49 4.79 10.31 (1.90) 5.89 11.19 14.12 8.86 8.17 11.07
Net Assets End of
Period ($ millions) ............. 4,584 4,904 5,252 5,585 6,712 5,232 3,311 2,583 2,518 2,837
Ratio of Operating Expenses
to Average Net Assets % ......... .65 .64 .67 .66 .70 .72 .74 .79 .79 .81
Ratio of Net Investment
Income to Average Net Assets % .. 6.51 6.55 6.77 6.09 7.15 7.69 8.23 8.71 8.76 9.09
Portfolio Turnover Rate % ........ 86.76 83.44 70.35 114.54 105.49 74.33 86.64 60.54 48.35 84.72
</TABLE>
PROSPECTUS
12
<PAGE>
AARP High Quality Short Term Bond Fund For the Years Ended September 30*
------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period ......................... $15.82 $16.01 $15.05 $17.19 $16.44 $15.71 $14.63 $15.04 $14.80 $14.45
-------------------------------------------------------------------------------------------
Net Investment Income .............. .93 .92 .94 .85 .93 1.03 1.10 1.17 1.23 1.27
Net Realized & Unrealized
Investment Gain (Loss) ............ .31 (.19) .95 (1.76) .93 .73 1.08 (.41) .24 .46
-------------------------------------------------------------------------------------------
Total from Investment
Operations ........................ 1.24 .73 1.89 (.91) 1.86 1.76 2.18 .76 1.47 1.73
-------------------------------------------------------------------------------------------
Distributions from Net
Investment Income ................. (.93) (.92) (.93) (.85) (.93) (1.03) (1.10) (1.17) (1.23) (1.27)
Distributions from Net
Realized Gains .................... -- -- -- -- (.18) -- -- -- -- (.05)
Distributions from Capital ........ -- -- -- -- -- -- -- -- -- (.06)
Distributions in Excess of
Net Realized Gains ................ -- -- -- (.38) -- -- -- -- -- --
-------------------------------------------------------------------------------------------
Total Distributions ................ (.93) (.92) (.93) (1.23) (1.11) (1.03) (1.10) (1.17) (1.23) (1.38)
-------------------------------------------------------------------------------------------
Net Asset Value at End of
Period ............................ $16.13 $15.82 $16.01 $15.05 $17.19 $16.44 $15.71 $14.63 $15.04 $14.80
-------------------------------------------------------------------------------------------
Total Return % (a) ................. 8.15 4.59 12.98 (5.55) 11.88 11.56 15.44 5.21 10.38 12.38
Net Assets End of
Period ($ millions) ............... 455 512 533 568 604 384 201 151 129 123
Ratio of Operating Expenses
to Average Net Assets % ........... .93 .91 .95 .95 1.01 1.13 1.17 1.14 1.16 1.17
Ratio of Operating Expenses
Before Expense Reductions to
Average Net Assets % .............. 5.84 .91 .95 .95 1.01 1.13 1.17 1.20 1.21 1.20
Ratio of Net Investment
Income to Average Net Assets % .... 5.84 5.76 6.13 5.31 5.64 6.40 7.26 7.86 8.33 8.55
Portfolio Turnover Rate % .......... 83.26 169.96 201.07 63.75 100.98 63.00 90.43 47.39 57.69 23.57
</TABLE>
* The Fund changed its name from AARP High Quality Bond Fund on February 1,
1998.
PROSPECTUS
13
<PAGE>
AARP Insured Tax Free General Bond Fund For the Years Ended September 30
------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period ......................... $17.90 $17.74 $16.93 $19.00 $17.88 $17.30 $16.12 $16.61 $16.02 $15.00
------------------------------------------------------------------------------------------
Net Investment Income .............. .88 .87 .87 .86 .90 .93 1.00 1.04 1.08 1.08
Net Realized & Unrealized
Investment Gain (Loss) ............ .61 .16 .81 (1.67) 1.55 .75 1.18 (.24) .59 1.02
------------------------------------------------------------------------------------------
Total from Investment
Operations ........................ 1.49 1.03 1.68 (.81) 2.45 1.68 2.18 .80 1.67 2.10
------------------------------------------------------------------------------------------
Distributions from Net
Investment Income ................. (.88) (.87) (.87) (.86) (.90) (.93) (1.00) (1.04) (1.08) (1.08)
Distributions of Net Realized
Gains ............................. (.09) -- -- (.34) (.43) (.17) -- (.25)
Distributions in Excess of
Net Realized Gains ................ -- -- -- (.06) --
------------------------------------------------------------------------------------------
Total Distributions ................ (.97) (.87) (.87) (1.26) (1.33) (1.10) (1.00) (1.29) (1.08) (1.08)
------------------------------------------------------------------------------------------
Net Asset Value at End of
Period ............................ $18.42 $17.90 $17.74 $16.93 $19.00 $17.88 $17.30 $16.12 $16.61 $16.02
------------------------------------------------------------------------------------------
Total Return % ..................... 8.57 5.88 10.21 (4.48) 14.31 10.01 13.85 4.89 10.66 14.39
Net Assets End of
Period ($ millions) ............... 1,712 1,755 1,807 1,914 2,087 1,487 1,068 771 527 312
Ratio of Operating Expenses
to Average Net Assets % ........... .66 .66 .69 .68 .72 .74 .77 .80 .84 .92
Ratio of Net Investment
Income to Average Net Assets % .... 4.87 4.83 5.06 4.80 4.90 5.31 5.92 6.29 6.52 6.95
Portfolio Turnover Rate % .......... 7.61 18.69 17.45 38.39 47.96 62.45 32.18 48.24 148.94 163.51
</TABLE>
PROSPECTUS
14
<PAGE>
AARP Bond Fund For Income
-------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30,1997
-----------------
Net Asset Value at Beginning of Period ......................... $15.00
------
Net Investment Income .......................................... .69
Net Realized & Unrealized Investment Gain (Loss) ............... .20
---
Total from Investment Operations ............................... .89
---
Distribution from Net Investment Income ........................ (.69)
----
Net Asset Value at End of Period ............................... $15.20
------
Total Return % (a) ............................................. 6.06 (b)
Net Assets End of Period ($ millions) .......................... 58
Ratio of Operating Expenses Net to Average Net Assets % ....... -- (c)
Ratio of Operating Expenses to Average Net
Assets Before Expense Reductions % ........................... 1.53 (c)
Ratio of Net Investment Income to Average Net Assets % ......... 7.03 (c)
Portfolio Turnover Rate % ...................................... 13.69 (c)
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
AARP Balanced Stock and Bond Fund For the Years Ended September 30
------------------------------------------------------------------
<TABLE>
<CAPTION>
1997(a) 1996 1995 1994(b)
------- ---- ---- -------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period .................... $17.63 $16.40 $14.64 $15.00
-----------------------------------------------
Net Investment Income ..................................... .72 .66 .61 .25
Net Realized & Unrealized Investment Gain (Loss) .......... 3.98 1.44 1.79 (.37)(c)
-----------------------------------------------
Total from Investment Operations .......................... 4.70 2.10 2.40 (.12)
-----------------------------------------------
Distributions from Net Investment Income .................. (.72) (.66) (.60) (.24)
Distributions from Net Realized Gains ..................... (.21) (.21) (.04) --
Total Distributions ....................................... (.93) (.87) (.64) (.24)
-----------------------------------------------
Net Asset Value at End of Period .......................... $21.40 $17.63 $16.40 $14.64
-----------------------------------------------
Total Return % ............................................ 27.34 13.08 16.80 (.78)(e)
Net Assets End of Period ($ millions) ..................... 638 403 247 175
Ratio of Operating Expenses to Average Net Assets % ....... .91 .88 1.01 1.31(f)
Ratio of Net Investment Income to Average Net Assets % .... 3.71 4.09 4.12 3.58(f)
Portfolio Turnover Rate % ................................. 26.79 35.22 63.77 49.32(f)
Average Commission Rate Paid (d) .......................... $.0547 $.0549 -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period February 1, 1994, commencement of operations, through
September 30, 1994.
(c) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and
repurchases of Fund shares in relation to fluctuating market values during
the period.
(d) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
(e) Not annualized.
(f) Annualized.
PROSPECTUS
15
<PAGE>
AARP Growth and Income Fund For the Years Ended September 30
------------------------------------------------------------
<TABLE>
<CAPTION>
1997(a) 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of
Period ............................ $43.94 $38.36 $34.13 $32.91 $28.67 $26.97 $22.30 $26.11 $20.94 $25.54
------------------------------------------------------------------------------------------
Net Investment Income .............. 1.19 1.17 1.11 .94 .83 .97 1.11 1.11 1.01 1.04
Net Realized & Unrealized
Investment Gain (Loss) ............ 16.00 6.40 5.44 1.62 4.58 2.11 4.78 (3.69) 5.20 (3.93)
------------------------------------------------------------------------------------------
Total from Investment Operations ... 17.19 7.57 6.55 2.56 5.41 3.08 5.89 (2.58) 6.21 (2.89)
------------------------------------------------------------------------------------------
Distributions from Net
Investment Income ................. (1.19) (1.15) (1.09) (1.13) (.87) (.90) (1.17) (1.15) (1.04) (.94)
Distributions from Net Realized
Gains ............................. (1.72) (.84) (1.23) (.21) (.30) (.48) (.05) (.08) -- (.77)
------------------------------------------------------------------------------------------
Total Distributions ................ (2.91) (1.99) (2.32) (1.34) (1.17) (1.38) (1.22) (1.23) (1.04) (1.71)
------------------------------------------------------------------------------------------
Net Asset Value at End of Period ... $58.22 $43.94 $38.36 $34.13 $32.91 $28.67 $26.97 $22.30 $26.11 $20.94
------------------------------------------------------------------------------------------
Total Return % ..................... 40.70 20.20 20.43 7.99 19.38 11.59 27.19 (10.19) 30.58 (10.75)
Net Assets End of
Period ($ millions) ............... 6,606 4,219 3,007 2,312 1,560 748 392 248 236 228
Ratio of Operating Expenses to
Average Net Assets % .............. .71 .69 .72 .76 .84 .91 .96 1.03 1.04 1.06
Ratio of Operating Expense
Before Expense Reductions to
Average Net Assets % .............. .71 .69 .72 .76 .84 .91 .96 1.03 1.04 1.06
Ratio of Net Investment Income
to Average Net Assets % ........... 2.38 2.94 3.28 3.00 3.08 3.84 4.61 4.76 4.19 4.52
Portfolio Turnover Rate % .......... 33.4 25.02 31.26 31.82 17.44 36.40 53.68 58.47 55.21 61.34
Average Commission Paid Rate (b) ... $.0619 $.0542 -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after September 1, 1995.
PROSPECTUS
16
<PAGE>
AARP U.S. Stock Index Fund
--------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997 (d)
----------------------
Net Asset Value at Beginning of Period ............. $15.00
------
Net Investment Income .............................. .20
Net Realized & Unrealized Investment Gain (Loss) ... 2.97
----
Total from Investment Operations ................... 3.17
----
Distributions from Net Investment Income ........... (.18)
----
Net Asset Value at End of Period ................... $17.99
------
Total Return % (a) ................................. 21.22 (b)
Net Assets End of Period ($ millions) .............. 38
Ratio of Operating Expenses Net to
Average Net Assets % .............................. .50 (c)
Ratio of Operating Expenses to Average
Net Assets Before Expense Reductions% ............. 2.38 (c)
Ratio of Net Investment Income to Average
Net Assets % ...................................... 1.94 (c)
Portfolio Turnover Rate % .......................... 14.52 (c)
Average Commission Rate Paid ....................... $.0288
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
(d) Based on monthly average shares outstanding during the period.
AARP International Growth and Income Fund*
------------------------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997
------------------
Net Asset Value at Beginning of Period ............. $15.00
------
Net Investment Income .............................. .23
Net Realized & Unrealized Investment Gain (Loss) ... 2.13
----
Total from Investment Operations ................... 2.36
----
Net Asset Value at End of Period ................... $17.36
------
Total Return % (a) ................................. 15.73 (b)
Net Assets End of Period ($ millions) .............. 20
Ratio of Operating Expenses Net to Average
Net Assets % ...................................... 1.75 (c)
Ratio of Operating Expenses to Average Net
Assets Before Expense Reductions % ................ 4.28 (c)
Ratio of Net Investment Income to Average
Net Assets % ...................................... 2.35 (c)
Portfolio Turnover Rate % .......................... 50.73 (c)
Average Commission Rate Paid ....................... $.0309
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
* The Fund changed its name from AARP International Stock Fund on February
1, 1998.
PROSPECTUS
17
<PAGE>
AARP Capital Growth Fund For the Years Ended September 30
---------------------------------------------------------
<TABLE>
<CAPTION>
1997(a) 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of
Period ............................ $43.47 $38.36 $31.74 $36.20 $30.30 $30.23 $23.32 $34.17 $23.88 $27.55
----------------------------------------------------------------------------------------------
Net Investment Income .............. .34 .42 .36 .00 .06 .15 .24 .54(c) .21 .10
Net Realized & Unrealized
Investment Gain (Loss) ............ 18.43 5.59 6.91 (1.51) 7.19 1.09 9.05 (9.27) 10.17 (1.97)
----------------------------------------------------------------------------------------------
Total from Investment Operations ... 18.77 6.01 7.27 (1.51) 7.25 1.24 9.29 (8.73) 10.38 (1.87)
----------------------------------------------------------------------------------------------
Distributions from Net
Investment Income ................. (.41) (.39) (.01) (.05) (.14) (.23) (.59) (.19) (.09) (.15)
Distributions from Net Realized
Gains ............................. (3.99) (.51) (.64) (2.90) (1.21) (.94) (1.79) (1.93) -- (1.65)
----------------------------------------------------------------------------------------------
Total Distributions ................ (4.40) (.90) (.65) (2.95) (1.35) (1.17) (2.38) (2.12) (.09) (1.80)
----------------------------------------------------------------------------------------------
Net Asset Value at End of Period ... $57.84 $43.47 $38.36 $31.74 $36.20 $30.30 $30.23 $23.32 $34.17 $23.88
----------------------------------------------------------------------------------------------
Total Return % (d) ................. 46.72 15.97 23.47 (4.70) 24.53 3.94 42.81 (26.94) 43.62 (5.44)
Net Assets End of Period
($ millions) ...................... 1,228 826 692 683 607 424 242 160 180 91
Ratio of Operating Expenses to
Average Net Assets % .............. .92 .90 .95 .97 1.05 1.13 1.17 1.11 1.16 1.23
Ratio of Operating Expenses
Before Expense Reductions to
Average Net Assets % .............. .92 .90 .95 .97 1.05 1.13 1.17 1.14 1.16 1.40
Ratio of Net Investment Income
to Average Net Assets % ........... .70 1.05 1.00 .02 .22 .61 .90 2.00 .89 .37
Portfolio Turnover Rate % .......... 39.04 64.84 98.44 79.65 100.63 89.20 99.62 83.28 63.51 45.37
Average Commission Rate Paid (b) ... $.0576 $.0614 -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after September 1, 1995.
(c) Net investment income per share includes a non-recurring dividend
amounting to $.18 per share.
(d) Total returns would have been lower had certain expenses not been reduced.
PROSPECTUS
18
<PAGE>
AARP Small Company Stock Fund
-----------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997 (d)
----------------------
Net Asset Value at Beginning of Period ............. $15.00
------
Net Investment Income .............................. .04
Net Realized & Unrealized Investment Gain (Loss) ... 4.98
Total from Investment Operations ................... 5.02
Net Asset Value at End of Period ................... $20.02
------
Total Return % (a) ................................. 33.53 (b)
Net Assets End of Period ($ millions) .............. 50
Ratio of Operating Expenses Net to
Average Net Assets % .............................. 1.75 (c)
Ratio of Operating Expenses to Average
Net Assets Before Expense Reductions % ............ 2.79 (c)
Ratio of Net Investment Income to Average
Net Assets % ...................................... 0.40 (c)
Portfolio Turnover Rate % .......................... 5.01 (c)
Average Commission Rate Paid ....................... $.0274
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
(d) Based on monthly average shares outstanding during the period.
AARP Global Growth Fund
-----------------------
For the period
February 1, 1996
(commencement of
Year Ended operations) to
September 30, 1997 September 30, 1996
------------------ ------------------
Net Asset Value at Beginning of Period ... $15.49 $15.00
------ ------
Net Investment Income .................... .09 .06
Net Realized & Unrealized
Investment Gain (Loss) .................. 3.72 .43
---- ---
Total from Investment Operations ......... 3.81 .49
---- ---
Less distributions from Net
Investment Income ....................... (.06) --
---- --
Net Asset Value at End of Period ......... $19.24 $15.49
------ ------
Total Return % (a) ....................... 24.67 3.27 (b)
Net Assets End of Period ($ millions) .... 148 78
Ratio of Operating Expenses Net
to Average Net Assets % ................. 1.75 1.75 (c)
Ratio of Operating Expenses to
Average Net Assets Before
Expense Reductions % .................... 1.82 2.31 (c)
Ratio of Net Investment Income
to Average Net Assets % ................. 0.55 1.03 (c)
Portfolio Turnover Rate % ................ 31.34 12.56 (c)
Average Commission Rate Paid ............. $.0004 $.0150
(a) Total return would have been lower had certain expenses not been reduced.
(b) Not Annualized.
(c) Annualized.
PROSPECTUS
19
<PAGE>
AARP Diversified Income with Growth Portfolio*
----------------------------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997
------------------
Net Asset Value at Beginning of Period .................. $15.00
------
Net Investment Income ................................... .43
Net Realized & Unrealized Investment Gain (Loss) ........ .96
---
Total from Investment Operations ........................ 1.39
----
Distributions from Net Investment Income ................ (.43)
----
Net Asset Value at End of Period ........................ $15.96
------
Total Return % (a) ...................................... 9.35 (b)
Net Assets End of Period ($ millions) ................... 43
Ratio of Operating Expenses to Average Net Assets % ..... -- (d)
Ratio of Net Investment Income to Average Net Assets % .. 5.13 (c)
Portfolio Turnover Rate % ............................... 5.57 (c)
(a) If the Fund Manager had not maintained some of the underlying AARP Mutual
Funds' expenses, the total return for this Fund would have been lower.
(b) Not Annualized.
(c) Annualized.
(d) This Portfolio invests in other AARP Mutual Funds, and although the
Portfolio did not incur any direct expenses for the period, the Portfolio
did bear its share of the operating, administrative and advisory expenses
of the Underlying AARP Mutual Funds.
* The Fund changed its name from AARP Diversified Income on February 1,
1998.
AARP Diversified Growth Portfolio
---------------------------------
For the period
February 1, 1997
(commencement of
operations) to
September 30, 1997 (e)
----------------------
Net Asset Value at Beginning of Period .................. $15.00
------
Net Investment Income ................................... .34
Net Realized & Unrealized Investment Gain (Loss) ........ 2.06
----
Total from Investment Operations ........................ 2.40
----
Net Asset Value at End of Period ........................ $17.40
------
Total Return % (a) ...................................... 16.00 (b)
Net Assets End of Period ($ millions) ................... 62
Ratio of Operating Expenses to Average Net Assets % ..... -- (d)
Ratio of Net Investment Income to Average Net Assets % .. 3.52 (c)
Portfolio Turnover Rate % ............................... 7.67 (c)
(a) If the Fund Manager had not maintained some of the underlying AARP Mutual
Funds' expenses, the total return for this Fund would have been lower.
(b) Not Annualized.
(c) Annualized.
(d) This Portfolio invests in other AARP Mutual Funds, and although the
Portfolio did not incur any direct expenses for the period, the Portfolio
did bear its share of the operating, administrative and advisory expenses
of the Underlying AARP Mutual Funds.
(e) Based on monthly average shares outstanding during the period.
PROSPECTUS
20
<PAGE>
A BRIEF OVERVIEW OF THE AARP INVESTMENT PROGRAM FROM SCUDDER
================================================================================
AARP is a nonprofit organization dedicated to addressing the needs and interests
of persons aged 50 and older. It seeks through education, advocacy, and service
to enhance the quality of life for all by promoting independence, dignity, and
purpose. In the early 1980s, research conducted by AARP indicated that many
members were not taking steps to invest adequately for their future. To
encourage members to plan for their retirement and beyond, AARP decided to make
available a family of mutual funds specially designed to provide members with
distinct investment choices and to be managed by an experienced investment
adviser. After comprehensive review of the capabilities of several investment
management firms, AARP selected Scudder, Stevens & Clark, Inc. (now Scudder
Kemper Investments, Inc., referred to throughout this Prospectus as "Scudder" or
"the Fund Manager") to develop and manage the Funds.
Who is Scudder Kemper Investments, Inc.?
Scudder Kemper Investments, Inc. is one of the largest and most experienced
worldwide investment management organizations. It was created following an
agreement in 1997 between Scudder, Stevens & Clark, Inc. and the Zurich Group, a
worldwide provider of financial services, to form an alliance. The firm manages
more than $210 billion in assets globally for mutual fund investors, retirement
and pension plans, institutional and corporate clients, insurance companies, and
private family and individual accounts. It is one of the largest mutual fund
sponsors in the U.S., offering no-load funds directly to investors and load
funds through various types of intermediaries.
Scudder Kemper Investments, Inc. has a rich heritage of innovation, integrity
and client-focused service, combining two long-established and accomplished
investment firms: Scudder, Stevens & Clark, Inc., founded in 1919 as one of the
nation's first investment counsel organizations, and Zurich Kemper Investments,
Inc. (referred to throughout this Prospectus as "Zurich Kemper"), with 50 years
of mutual fund and investment management experience. Headquartered in the U.S.,
Scudder Kemper Investments, Inc. offers a full range of investment counsel and
asset management capabilities, based on a combination of proprietary research
and disciplined, long-term investment strategies. With its global investment
resources and perspective, the firm seeks investment opportunities in markets
throughout the world to meet the needs of its clients.
Scudder Kemper Investments, Inc., the global asset management firm, represents
one of the four core businesses of the Zurich Group. The Zurich Group is an
internationally recognized leader in financial services, including
property/casualty insurance, life insurance, reinsurance, and asset management.
What impact does the alliance with the Zurich Group have on the AARP Investment
Program from Scudder?
The Program's longstanding commitment to risk managed investment performance
offered through our no-load mutual funds remains. In fact, we
PROSPECTUS
21
<PAGE>
expect that this new alliance should offer benefits to investors over time,
resulting from the Program's access to more resources--human and capital--to
better help the Program meet the investment needs of aging Americans.
The roles of AARP and Scudder
The AARP Investment Program from Scudder is made available to investors in
accordance with specific criteria agreed to by AARP and Scudder. These criteria
include the following:
o The offer of a specially-designed family of no-load funds, generally each
of whose goals is to provide competitive returns but with less risk of
loss to its portfolio than that of the similar mutual funds, measured by
the frequency and amount total return fluctuates downward;
o Easy access to the Program for all AARP Mutual Funds' shareholders;
o The commitment to the highest quality of service in keeping with AARP's
standards; and
o The availability of a comprehensive selection of easy-to-understand
publications on the "how-to"s of investing and planning for retirement and
other important life events that affect the financial affairs of aging
Americans.
Scudder Kemper Investments, Inc. and its affiliates provide investment
management and other services for the AARP Mutual Funds, bringing more than 75
years of investment management experience to the Program. AARP brings a wealth
of experience and knowledge about the needs of aging Americans. Association
staff monitor investment performance, service quality and Program communications
in keeping with the rigorous standards that are applied to the delivery of all
of its member services. Members of AARP's leadership also serve as Trustees for
the AARP Mutual Funds.
SPECIAL FEATURES OF THE AARP INVESTMENT PROGRAM
================================================================================
The AARP Investment Program from Scudder was developed by Scudder and AARP to
help meet the investment needs of individual AARP members as they plan for and
live into their retirement years. A choice of 15 mutual funds is offered to
investors. An investor in the Program benefits from the following features:
o No Sales Fees or Commissions: All AARP Mutual Funds are pure no-load,
meaning that you won't pay any sales fees or commissions to purchase,
exchange or sell (redeem) shares. In addition, none of these Funds charges
a 12b-1 fee (a form of a sales charge that covers marketing and
distribution expenses). The net result is that 100% of your investment
goes to work for you.
o No Fees to Open and Maintain an AARP IRA or AARP Keogh Plan Account: There
are no separate fees to open or maintain a retirement plan account. This
way, all of your money goes to work for your retirement.
PROSPECTUS
22
<PAGE>
o Low Initial Investment: You can open an account with just $500 by
investing in the AARP GNMA and U.S. Treasury Fund, AARP Balanced Stock and
Bond Fund and the AARP Growth and Income Fund. The minimum initial
investment for the other AARP Mutual Funds is just $2,000. You can open an
AARP IRA or AARP UGMA/UTMA with an initial investment of just $250 per
fund account.
o Professional Investment Management by Scudder: Scudder brings over 75
years of investment management experience to the AARP Mutual Funds.
o Risk-Oriented Investment Management: The Program offers a choice of 15
AARP Mutual Funds, generally each of whose goal is to seek to provide
competitive returns but with less risk of loss to its portfolio than
similar mutual funds, as measured by the frequency and amount by which
total return fluctuates downward. Designed specially to meet the needs of
aging Americans, we know of no other family of funds that includes a
risk-oriented management mandate for all of its funds.
o High Quality, Personal Service from AARP Mutual Fund Representatives:
Helpful and knowledgeable service representatives are ready to answer your
questions, execute your transactions, or help you to decide whether
investing makes sense for you and which investments may be appropriate. To
reach an AARP Mutual Fund Representative, call 1-800-253-2277 toll-free,
Monday through Friday, from 8 a.m. to 8 p.m. eastern time.
o Convenient Access to Your Investments: You can access your investments
easily and for no charge by calling toll-free, or in writing. Your AARP
Mutual Fund investments are not "locked in."
o Informative Communications: The Program helps keep shareholders abreast of
important topics that can affect their financial situation. Newsletters
are published monthly and included with your account statement. They
provide information about recent developments in the markets, important
tax changes and other Program-specific information. Upon request, free
educational guides are available on a variety of topics, such as planning
for retirement, living in retirement, understanding IRA distributions, and
more.
o Help and Guidance at Important Times in Your Life: We are here to help you
when you need to make important financial decisions as they relate to your
savings and investments. For example, by taking advantage of the AARP Lump
Sum Service, you can work with a representative who is specially trained
to help you understand tax implications and your investment options. A
representative can also assist you in working through the "red tape" that
is sometimes involved with a lump sum distribution. Or you can simply call
us for our free Guide on Receiving a Lump Sum Distribution.
PROSPECTUS
23
<PAGE>
o Low Expenses: We strive to maintain expense ratios for the AARP Mutual
Funds that are lower than the industry averages of the applicable asset
categories.
You will also benefit from:
o Consolidated monthly statements or quarterly AARP IRA or AARP Keogh Plan
statements;
o Prompt transaction confirmations;
o Special services designed to make investing simple and convenient; and
o AARP's commitment to represent your interests.
Why do we emphasize risk-managed performance?
Individuals planning for and living into retirement have told us that while they
are interested in investments that provide competitive returns, they are as
interested in funds that will offer the potential of at least somewhat lower
risk--even if they are funds in higher risk categories, such as international
funds and small company funds.
We have therefore designed and manage all of the AARP Mutual Funds with share
price fluctuation--including those in higher risk categories, such as the AARP
International Growth and Income Fund and the AARP Small Company Stock Fund--to
be managed with the potential for less risk of loss than similar funds in their
respective asset categories.
Why do we focus on the "downside risk" of loss to a fund's portfolio instead of
the volatility--up and down--of total return?
Most investors view risk as related to the chance of a loss and the likely size
of that loss. We therefore measure the extent to which each portfolio management
team has controlled risk by evaluating the frequency and amount by which each
fund's total return which is capital change plus income fluctuates
downward--absolutely and compared to similar funds.
Scudder has developed a proprietary performance measurement system by which the
portfolio managers and investors can evaluate the investment performance of the
AARP Mutual Funds compared to that of similar funds, not just as it relates to
total return but to the management of risk.
A Cautionary Note
While the AARP Mutual Funds are actively managed to reduce the potential for
"downside risk" to their portfolios, it is important to remember that your
principal can never be insured or guaranteed, and that the value of your
investment and your return will move up and down as market conditions change.
There is no assurance that Scudder will be successful in limiting downside risk
relative to comparable funds. For more complete details, read the "Investment
Objectives and Policies" section.
PROSPECTUS
24
<PAGE>
Points to keep in mind as you consider investing in the AARP Mutual Funds:
Information about each AARP Fund is included in this Prospectus and focuses on
how the AARP Mutual Funds differ from each other as this relates to their
potential return and to their level of risk. Before investing, you should
determine your investment objectives and time horizons. If you need help with
this aspect of the decision-making process don't hesitate to call our Mutual
Fund Representatives. They know what questions you should ask yourself and what
factors you need to consider to determine your investment objective and expected
time horizon. The length of time you are committed to investing will have a
bearing on the types of investments that are most appropriate for you. If, for
example, you are in a position to commit your investment dollars for five years
or more, then funds that offer the potential for higher returns but greater
volatility may be well suited to your needs. If your time horizon is
shorter--say two or three years--then it may be appropriate for you to consider
funds that offer the potential of lower returns but with less volatility.
The following is a brief summary of the investment needs the AARP Mutual Funds
seek to meet. Your investment time horizon will have a bearing on which funds
are appropriate for you.
If you are investing for stability of principal and income:
Consider the AARP High Quality Money Fund or the AARP High Quality Tax Free
Money Fund. Each provides opportunities to meet short-term needs (one year or
less) while providing money market rates of return. Both seek to provide
stability of principal through a constant $1.00 share price, although this may
not always be achieved. Both AARP Money Funds invest in short-term securities
whose yields tend to follow changes in short-term interest rates. If short-term
interest rates rise or fall dramatically, so could the yields of the AARP Money
Funds in relatively short periods of time. Keep in mind, the income paid by the
AARP High Quality Money Fund is taxable, whereas the income paid by the AARP
High Quality Tax Free Money Fund is normally free from federal income taxes.
If you are investing for the longer term and are interested in current income:
Consider the AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury
Fund, AARP Bond Fund for Income, AARP Insured Tax Free General Bond Fund or the
AARP Diversified Income With Growth Portfolio. Remember that both the value of
shares and yield will change daily, generally in reaction to shifting interest
rates. In most cases, as interest rates rise, the value of investments in these
Funds tends to fall. As interest rates fall, the value of investments in these
Funds tends to rise. Investing in these Funds offers the opportunity for current
income and potential appreciation in the value of shares. The AARP Diversified
Income With Growth Portfolio provides income on a quarterly basis; all of the
other funds listed above provide monthly income. While each of these Funds is
managed to seek competitive returns with less "downside risk" to its portfolio
compared to that of similar funds, the value of your investment can decline.
That's why you should be prepared to tolerate fluctuation in both the value of
your investment and the income you earn. You
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should also be in a position to invest for the longer term (three to five years
or more for the AARP Diversified Income With Growth Portfolio, which normally
invests in both AARP Stock and Bond Funds, and three years or more for the other
Funds listed above).
If you are investing for the long term and you are interested in growth:
Consider the AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund,
AARP U.S. Stock Index Fund, AARP Global Growth Fund, AARP Capital Growth Fund,
AARP International Growth and Income Fund, AARP Small Company Stock Fund, and
the AARP Diversified Growth Portfolio. Remember that investments in stock mutual
funds involve greater risk and that the value of your shares will fluctuate
daily. The share price of these AARP Mutual Funds will tend to rise when the
stock markets rise, and decline when the stock markets decline. Investing in
these Funds offers the opportunity for gain through potential appreciation in
the value of your investment and from any income that the investment earns.
While each of these Funds is managed to seek competitive returns with less
"downside risk" to its portfolio compared to that of similar mutual funds, the
value of your investment can decline. That's why you should consider your
investment as one that you can afford to let work for you over time--generally
for a period of three to five years or more for the AARP Balanced Stock and Bond
Fund and five years or more for the other equity funds listed above.
How will my investment be managed?
The AARP Mutual Funds are managed to seek competitive returns with less risk of
loss ("downside risk") to their portfolios than that of comparable mutual funds.
Each AARP Mutual Fund is managed by a team of Scudder investment professionals
(Bankers Trust acts as subadviser to the Scudder U.S. Stock Index Fund).
Experienced portfolio managers develop investment strategies and select
securities for each AARP Fund's portfolio. The Scudder portfolio managers are
supported by an experienced staff of economists, research analysts, traders, and
other investment specialists who work in offices across the United States and
abroad. Scudder also maintains a large staff of independent researchers to
assist portfolio managers in assessing economic and industry trends and security
valuations as they make investment decisions. Generally speaking, Scudder
portfolio managers do not take a short-term approach to investing. Instead, they
seek to add value over the long term, carefully selecting investments they
believe have superior potential for achieving each Fund's objectives. None of
the AARP Mutual Funds invest in securities issued by tobacco-producing
companies.
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OBJECTIVES AND POLICIES
================================================================================
The following pages provide detail on the investment objectives and policies of
the AARP Mutual Funds. Included for each Fund are:
o the Fund's objectives
o examples of investment needs the Fund is designed to meet
o a description of the types of securities in which the Fund can invest
o a discussion of the Fund's potential risks
o minimum investment requirements and the schedule of distributions; and
o a review of the Fund's portfolio management team.
As with any investment, there is no guarantee that the AARP Mutual Funds will
successfully meet their investment objectives. Be sure to read the section
entitled "Other Investment Policies and Risk Factors."
The Trustees can modify a Fund's objectives without the approval of a majority
of that Fund's shareholders. If there is a change in investment objective,
shareholders should consider whether the Fund is still an appropriate
investment.
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AARP MONEY MARKET FUNDS
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AARP HIGH QUALITY MONEY FUND
================================================================================
Fund objective:
To provide current income. In doing so, the Fund seeks to maintain stability and
safety of principal and a constant net asset value of $1.00 per share while
offering liquidity. There may be circumstances under which this goal cannot be
achieved. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP High Quality Money Fund is appropriate for investors with short-term
time horizons. It may also be appropriate for those who are not comfortable with
the risks of investing in stocks or bonds. Examples of types of investors for
whom the AARP High Quality Money Fund may be appropriate include:
o Investors creating a diversified portfolio who want a portion of their
assets in an investment designed to offer safety and stability.
o Investors seeking a short-term investment prior to making longer-term
investment choices.
o Investors seeking money market income to meet regular needs.
o Investors who need immediate access to their money through free
checkwriting.
The Fund is also available for the AARP IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer current income, while maintaining stability and
safety of principal. In addition, it provides a convenient way to easily access
your money through free checkwriting.
What does the Fund invest in?
The Fund invests in high-quality short-term securities. These securities will
have remaining maturities of 397 calendar days or less, except for U.S.
Government securities, which may have maturities up to 762 calendar days. The
average dollar-weighted maturity of the Fund's investments is 90 days or less.
All of the securities purchased are U.S. dollar-denominated. The securities must
meet credit standards applied by the Fund Manager, following procedures
established by the Trustees. Amendments have been adopted to the federal rules
regulating quality, maturity and diversification requirements of money market
funds, like the Fund. Money market funds must comply with the revised rule by
July 1, 1998. The Fund intends to be in compliance with the amended requirements
by that date.
The money market securities in which the Fund may invest include obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
obligations of supranational organizations such as the International Bank for
Reconstruction and Development (the World Bank); obligations of domestic banks
and their foreign branches, including bankers' acceptances, certificates of
deposit, deposit notes and time deposits; obligations of savings and loan
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institutions; instruments whose credit has been enhanced by: banks (letters of
credit), insurance companies (surety bonds), or other corporate entities
(corporate guarantees); corporate obligations, including commercial paper,
notes, bonds, loans and loan participations; securities with variable or
floating interest rates; asset-backed securities and other synthetic securities,
including certificates, participations and notes; municipal securities including
notes, bonds and participation interests, either taxable or tax-free, as
described in more detail for the AARP High Quality Tax Free Money Fund;
securities with guarantee features; and repurchase agreements.
All of the securities that the Fund purchases, or that underlie its repurchase
agreements, are considered to be high quality. Generally, the Fund may purchase
only securities rated, or issued by an entity with comparable securities rated,
within the two highest quality rating categories of one or more rating agencies
such as: Moody's Investors Service, Inc. (Moody's), Standard & Poor's
Corporation (S&P), and Fitch Investors Service, Inc. (Fitch). Securities rated
by only one agency may be purchased if the rating falls within the categories
above. Unrated securities may be purchased if the Fund Manager judges them to be
comparable in quality to securities described above. Generally, the Fund will
invest in securities rated in the highest quality rating by at least two of
these rating agencies. If a security ceases to be rated or is reduced below the
Fund's standards, it will be sold unless the Trustees determine that disposing
of the security would not be in the best interests of the Fund.
The Fund has certain non-fundamental policies designed to maintain
diversification. These policies may be changed without shareholder approval. The
amount of total assets of the Fund that may be invested in the securities of a
single issuer is limited in accordance with federal law.
What are the risks?
The risk to your principal is low, since the Fund seeks to maintain a stable
share price of $1.00. While the Fund has maintained a stable share price of
$1.00 since it began in June 1985, there may be situations under which this goal
cannot be achieved. The level of income you receive will be affected by
movements up and down in short-term interest rates. By investing generally in
highest-quality securities, the Fund may offer less income than a money market
fund investing in other high-quality money market securities. See "Other
Investment Policies and Risk Factors."
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500, if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Generally,
net realized capital gain or loss is included in the daily declaration of
income.
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Who at Scudder manages my investment?
Lead Portfolio Manager Frank J. Rachwalski, Jr. assumed responsibility for
setting the Fund's investment strategy and for overseeing the Fund's day-to-day
management in January, 1998. Frank joined Zurich Kemper's Fixed Income
Department in 1973 as its Money Market Specialist. He has been responsible for
the trading and portfolio management of Zurich Kemper's money market fund since
its initial offering in 1974. John W. Stuebe, Portfolio Manager, joined Zurich
Kemper in 1979 as a Fixed Income Trader for Money Market Securities. He is
currently a Specialist and Trader for the Adviser's taxable, non-government
money market funds.
AARP HIGH QUALITY TAX FREE MONEY FUND
================================================================================
Fund objective:
To provide current income free from federal income taxes. In doing so, the Fund
seeks to maintain stability and safety of principal and a constant net asset
value of $1.00 per share while offering liquidity. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP High Quality Tax Free Money Fund may be appropriate for investors in
high tax brackets who have a short-term time horizon or who are not comfortable
with the risks of investing in stocks or bonds. These include:
o Investors creating a diversified portfolio who want a portion of their
assets in an investment designed to offer safety and stability
o Investors seeking a short-term investment prior to making longer-term
investment choices
o Investors seeking tax-free money market income to meet regular day-to-day
expenses; and
o Investors who need immediate access to their money through free
checkwriting
This Fund is not available for the AARP IRA or the other retirement plan
accounts.
What does the Fund offer to investors?
The Fund is designed to offer current income free from federal income tax, while
providing stability and safety of principal. Depending on your tax bracket, the
after-tax income from the Fund may be higher than from a taxable investment of
comparable quality and risk. In addition, it provides a convenient way to easily
access your money through checkwriting.
What does the Fund invest in?
The Fund invests in high-quality, short-term municipal securities. These
securities will have remaining maturities of 397 calendar days or less. The
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average dollar-weighted maturity of its investments is 90 days or less. These
municipal securities may include obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia.
Interest from these securities is, in the opinion of the issuer's bond counsel,
exempt from federal income taxes. The Fund has no current intention to invest in
securities whose income is subject to federal income tax, including the
individual alternative minimum tax (AMT). Amendments have been adopted to the
federal rules regulating quality, maturity and diversification requirements of
money market funds, like the Fund. Money market funds must comply with the
revised rule by July 1, 1998. The Fund intends to be in compliance with the
amended requirements by that date.
Municipal securities may include municipal notes such as tax anticipation notes,
revenue anticipation notes, bond anticipation notes and construction loan notes;
municipal bonds, which include general obligation bonds secured by the issuer's
pledge of its faith, credit and taxing power for payment of principal and
interest; and revenue bonds (including private activity bonds), which are
generally paid from the revenues of a particular facility, a specific excise
tax, or other source. The Fund's municipal investments may also include
participation interests in bank holdings of municipal securities, municipal
lease obligations, securities with variable or floating interest rates, demand
obligations, and tax-exempt commercial paper. The Fund may also purchase
securities on a "when-issued" or "forward delivery" basis, and may enter into
stand-by commitments, which are securities that may be sold back to the seller
at the Fund's option.
All of the securities that the Fund purchases, or that underlie its repurchase
agreements, are considered to be high quality. These securities are generally
rated or issued by an issuer rated within the two highest quality ratings of two
or more rating agencies such as: Moody's (Aaa and Aa, M1G1 and M1G2, and P1),
S&P (AAA and AA, SP1+ and SP1, A1+ and A1) and Fitch (AAA and AA, F1 and F2).
The Fund may purchase a security rated by only one rating agency if it meets the
above rating standards. An unrated security may be purchased if the Fund Manager
judges it to be of comparable quality to securities described above. Generally,
the Fund will invest in securities rated in the highest quality rating by at
least two of these rating agencies.
Ordinarily, the Fund expects that 100% of its portfolio securities will be in
federally tax-exempt securities.
As a fundamental policy, under normal circumstances, at least 80% of the Fund's
net assets will be invested in tax-exempt securities. Up to 20% of the Fund's
net assets may be invested in taxable securities. For defensive purposes, or if
unusual circumstances make it advisable, the Fund may purchase U.S. Government
securities and repurchase agreements collateralized by such securities. For
temporary defensive purposes, the Fund's investment in taxable securities may
exceed 20% when the Fund Manager deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such strategies may be utilized.
All of the securities purchased are U.S. dollar-denominated. The securities must
meet credit standards applied by the Fund Manager, following procedures
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established by the Trustees. If a security ceases to be rated, or its rating is
reduced below the Fund's standard, it will be sold unless the Trustees determine
that disposing of the security would not be in the best interests of the Fund.
As a matter of non-fundamental policy, which may be changed without a
shareholder vote, the Fund, with respect to 75% of its total assets, may not
invest more than 5% of its total assets in securities subject to puts from any
one issuer.
What are the risks?
The risk to your principal is low, since the Fund seeks to maintain a stable
share price of $1.00. While the Fund has maintained a stable share price of
$1.00 since it began operating as a tax-free money fund in August 1991, there
may be situations under which this goal cannot be achieved. The level of income
you receive will be affected by movements up and down in short-term interest
rates. By investing generally in highest-quality securities, the Fund may offer
less income than a money market fund investing in other high-quality money
market securities. See "Other Investment Policies and Risk Factors."
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP UGMA/UTMA with an initial investment of only $250.
Will I be subject to taxes on this Fund?
All income distributed by the Fund is expected to be exempt from federal income
taxes, but income may be subject to state and local income taxes. Each year you
will be provided with a breakdown of the Fund's investments by state so that you
can determine your state and local income tax liability. Your state or local
Department of Revenue or tax advisor can answer questions regarding taxability
of distributions. Should there be any income from taxable securities, it would
not be exempt from federal income taxes.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30
and is usually taxable.
Who at Scudder manages my investment?
Lead Portfolio Manager Frank J. Rachwalski, Jr. assumed responsibility for
setting the Fund's investment strategy and overseeing the Fund's day-to-day
management in January 1998. Frank joined Zurich Kemper's Fixed Income Department
in 1973 as its Money Market Specialist. He has been responsible for the trading
and portfolio management of Zurich Kemper's money market fund since its initial
offering in 1974. Jerri I. Cohen, Portfolio Manager, joined Zurich Kemper's
Investment Accounting Department in 1981. She has been responsible for investing
Zurich Kemper's tax-exempt money market funds since she joined the Fixed Income
Department in 1992.
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AARP INCOME FUNDS
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AARP HIGH QUALITY SHORT TERM BOND FUND
================================================================================
Fund objective:
To produce a high level of current income but with less risk of loss to the
Fund's portfolio than other short-term bond mutual funds, measured by the
frequency and amount by which total return fluctuates downward. The Fund,
formerly known as AARP High Quality Bond Fund, pursues this investment objective
by investing primarily in high-quality, short-term U.S. Government, corporate
and other fixed-income securities. The Fund also has an educational objective to
help shareholders, especially individuals planning for and living in retirement,
make informed investment decisions.
The Fund changed its name from AARP High Quality Bond Fund on February 1, 1998.
For whom is the Fund designed?
The AARP High Quality Short Term Bond Fund is suitable for investors who want
high current income from a portfolio comprised primarily of high-quality,
short-term debt securities. You should be prepared to invest for the
intermediate term (at least three years) and be comfortable with some
fluctuation in the value of your principal. The Fund is also available for the
AARP IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer a high level of current income from a portfolio
comprised primarily of high-quality short-term debt securities. The Fund should
typically provide a higher and more stable level of income than available from
the AARP High Quality Money Fund. However, the Fund's share price is expected to
fluctuate moderately. Consistent with the Program's conservative orientation,
the Fund seeks to offer less share price volatility than other short-term bond
funds.
What does the Fund invest in?
Under normal circumstances, the Fund will invest substantially all, and no less
than 65%, of its assets in high-quality short-term U.S. Government, corporate
and other fixed-income securities. All the Fund's securities will be rated or
judged by the Fund Manager to be equivalent to those rated investment-grade or
higher by Moody's (Aaa, Aa, A, and Baa), or S&P (AAA, AA, A and BBB), and at
least 65% of the Fund's assets must be in securities rated in the two highest
rating categories by Moody's or S&P. Securities rated Baa by Moody's or BBB by
S&P are neither highly protected nor poorly secured. These securities normally
pay higher yields and are regarded as having adequate capacity to repay
principal and pay interest, but involve potentially greater price variability
than higher-quality securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics.
The Fund does not purchase securities rated below investment-grade, commonly
known as "junk" bonds.
Subject to the Fund's duration policy, the Fund may invest in any investment
eligible for the AARP GNMA and U.S. Treasury Fund. It may also purchase
corporate notes and bonds, including convertible issues, and obligations of
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federal agencies that are not backed by the full faith and credit of the U.S.
Government. Additionally, the Fund may purchase obligations of international
agencies, U.S. dollar-denominated foreign debt securities, trust preferred
securities, mortgage-backed and other asset-backed securities, and money market
instruments such as commercial paper, bankers' acceptances, privately placed
obligations, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Fund may invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar, but no more
than 5% of the Fund's total assets will be represented by a given foreign
currency. The Fund may also purchase when-issued securities and invest in
repurchase agreements.
The types of securities held by the Fund will vary with current market
conditions. The weighted average effective duration of the Fund's portfolio,
however, may not exceed three years. Within this limitation, the Fund may
purchase individual securities with remaining stated durations greater than
three years. The non-governmental investments of the Fund will be spread among a
variety of companies and will not be concentrated in any one industry. See
"Other Investment Policies" section.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares will
fluctuate up and down with changes in interest rates and other market
conditions. By focusing on shorter-term debt securities, the Fund will normally
have less share price volatility than the AARP GNMA and U.S. Treasury Fund and
the AARP Bond Fund for Income, but also will offer less monthly income and less
long-term return potential than these two other AARP Bond Funds.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by
emphasizing high-quality investments, diversifying widely among bond issuers and
market sectors, and limiting average portfolio duration through active portfolio
management. The extent to which the portfolio management team is controlling for
"downside risk" to the Fund's portfolio is measured by tracking the frequency
and amount by which total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500, if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Stephen A. Wohler, Lead Portfolio Manager, is responsible for implementing the
Fund's portfolio strategy and timing issue selection. He has been involved with
the Fund since 1979, where he has managed a variety of institutional bond
portfolios including pension, foundation, insurance and mutual fund assets.
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Robert Cessine, Portfolio Manager, joined Zurich Kemper in January 1993, and is
responsible for the Fund's investment strategy; including duration management,
asset allocation, security selection and trading, as well as fund compliance and
marketing.
AARP GNMA AND U.S. TREASURY FUND
================================================================================
Fund objective:
To produce a high level of current income but with less risk of loss to the
Fund's portfolio than other GNMA mutual funds, measured by the frequency and
amount by which total return fluctuates downward. The Fund pursues current
income by investing primarily in high-quality Government National Mortgage
Association (GNMA) securities and U.S. Treasury bills, notes and bonds issued or
backed by the full faith and credit of the U.S. Government. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP GNMA and U.S. Treasury Fund is suitable for conservative investors who
want high current income from a portfolio comprised primarily of GNMA and U.S.
Treasury Securities. You should be prepared to invest for the longer term (three
years or more) and be comfortable with fluctuation in the value of your
principal. The Fund is also available for the AARP IRA or the other retirement
plans.
What does the Fund offer to investors?
The Fund is designed to offer current income from a portfolio of high-quality
securities. The level of income should generally be higher than that available
from fixed-price money market mutual funds, government-insured bank accounts and
fixed-rate, government-insured CDs. By including short-term U.S. Treasury
securities in its portfolio, the Fund seeks to offer less risk of loss to its
portfolio than other GNMA mutual funds, although its yield may be lower.
What does the Fund invest in?
The Fund invests principally in U.S. Treasury bills, notes, bonds, and dollar
rolls and other securities issued or backed by the full faith and credit of the
U.S. Government. These include Government National Mortgage Association (GNMA)
securities. GNMA securities represent part ownership of a pool of U.S.
Government-guaranteed mortgage loans each of which is insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. Each pool
of mortgages is also guaranteed by GNMA as to the timely payment of principal
and interest (regardless of whether the mortgagors actually make their
payments). This guarantee by GNMA represents the full faith and credit of the
U.S. Government. However, this guarantee is not related to the Fund's yield or
the value of shareholders' investments, which will fluctuate daily.
The maturities and types of securities held by the Fund may vary with current
market conditions. At any time, the Fund may invest a substantial portion of its
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assets in securities of a particular maturity. With GNMA securities, principal
is paid back to the Fund over the life of the bond, rather than at maturity. The
Fund will receive monthly scheduled payments of principal and interest and may
receive unscheduled principal payments resulting from prepayments of the
underlying mortgages. The Fund may realize a gain or loss upon receiving
principal payments. The Fund typically reinvests all payments and prepayments of
principal in additional GNMA securities or other U.S. Government-guaranteed
securities. The Fund may also purchase "when-issued" securities and invest in
repurchase agreements.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares will
fluctuate up and down with changes in interest rates and other market
conditions. The level of income you receive will also be affected by movements
up or down in interest rates. Like bonds, the value of mortgage-backed
securities decreases when interest rates rise. However, when interest rates
fall, their value may not rise as much as does the value of bonds because of the
anticipation of prepayment of the underlying mortgages. This prepayment may
expose the Fund to a lower rate of return upon reinvestment. Thus, the
prepayment rate may also tend to limit any increase in net asset value. See
"Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by investing
in a combination of short-, intermediate-, and long-term securities. The Fund
may also, on occasion, use portfolio management techniques to seek to reduce
risk. These techniques, which are subject to applicable regulatory guidelines,
may include limited transactions in financial futures contracts and related
option transactions which are unrated (see "Other Investment Policies and Risk
Factors"). The Fund may write (sell) covered call options to enhance investment
returns. These techniques will be entered into to reduce risk, but such
techniques involve risks themselves and could reduce current income. The extent
to which the portfolio management team is controlling for "downside risk" to the
Fund's portfolio is measured by tracking the frequency and amount by which total
return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $500. You can open an AARP IRA or an AARP
UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Richard L. Vandenberg, Lead Portfolio Manager, is responsible for overall fund
strategy including duration and convexity management and sector allocation. He
has 25 years experience in all aspects of fixed income investing, including
various derivatives. Portfolio Manager Scott E. Dolan, who joined Scudder in
1989 as a Compliance Analyst and the Fund in _______. He is responsible for
_______.
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AARP INSURED TAX FREE GENERAL BOND FUND
================================================================================
Fund objective:
To produce a high level of current income free from federal income taxes but
with less risk of loss to its portfolio than other insured tax-free bond mutual
funds, measured by the frequency and amount by which total return fluctuates
downward. The Fund pursues high level of current income by investing primarily
in high-quality, federally tax-exempt municipal securities that are insured to
protect against default by the municipality. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Insured Tax Free General Bond Fund is suitable for investors in higher
tax brackets who want high income free from federal income taxes. You should
invest for the longer term (at least three years or more) and be comfortable
with fluctuation in the value of your principal. The Fund is not available for
the AARP IRA or the other retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer high income free from federal tax. Depending on an
investor's tax bracket, the after-tax income from the Fund may be higher than
that from a taxable investment of comparable quality and risk. The Fund will
typically pay higher income than the AARP High Quality Tax Free Money Fund,
although yield and principal value will fluctuate up and down with market
conditions. By including short- and medium-term bonds in its portfolio, the Fund
seeks to reduce the risk of loss to its portfolio compared to other long-term
municipal bond funds, although its yield may be lower.
The Fund is one of a distinct group of tax-free mutual funds with insurance on
the majority of its investments. Insurance on its securities protects the Fund
against loss from default by the municipal issuer. However, it does not protect
the investor from fluctuation in yield or share price.
What does the Fund invest in?
The Fund invests primarily in a mix of short-, intermediate-, and long-term
municipal securities that are insured against default by private insurers. The
municipal securities purchased by the Fund will be only high-grade securities or
repurchase agreements on such securities. These may include obligations issued
by or on behalf of states, territories and possessions of the United States and
the District of Columbia to raise money for public purposes. Interest from these
securities is, in the opinion of the issuer's bond counsel, exempt from federal
income taxes. The Fund has no current intention of investing in securities whose
income is subject to federal income tax, including the individual alternative
minimum tax (AMT). However, under unusual circumstances, the Fund may invest in
taxable securities for defensive purposes or to benefit from disparities in the
financial markets.
Municipal securities may include municipal notes, municipal bonds, municipal
lease obligations, participation interests in bank holdings of municipal
securities, securities with variable or floating interest rates, demand
obligations, and tax-exempt commercial paper. The Fund may purchase securities
on a
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"when-issued" or "forward delivery" basis, and may enter into stand-by
commitments in which securities may be sold back to the seller at the Fund's
option. Also, the Fund may use approved portfolio techniques, if appropriate,
such as limited use of financial futures contracts and related options
transactions. See "Other Investment Policies and Risk Factors."
What portion of the securities is insured?
At least 65% of the Fund's assets are fully insured by private insurers as to
payment of face value and interest to the Fund, when due. If uninsured
securities or securities not directly or indirectly backed or guaranteed by the
U.S. Government are purchased and expected to be held for 60 days or more,
insurance will be obtained within 30 days to ensure that 65% of the Fund's
assets are insured by the issuer or arranged for by the Fund. If at least 65% of
its assets are not insured securities, the Fund will obtain insurance for a
portion of its U.S. Government guaranteed or backed securities so that the 65%
standard is achieved.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares will
move up and down as interest rates and other market conditions change. The level
of income you receive will be affected by movements up and down in interest
rates. Income from the high-quality securities that the Fund purchases may be
lower than the income from lower-quality securities. See "Other Investment
Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by investing
in securities of varying maturities. The Fund may also use approved portfolio
management techniques.
Insurance on the securities held by the Fund protects the Fund in case of
default by the municipal issuer. It does not protect an investor from
fluctuation in the Fund's yield or value per share, which change daily.
Insurance also involves a cost to the Fund which will reduce yield.
Historically, the yields on insured securities have been attractive in
comparison to the yields on uninsured securities of comparable quality. There
can be no assurance, however, that this relationship will continue. Moreover, to
the extent the Fund must purchase insurance on U.S. Government securities, this
will involve a cost to the Fund while not increasing the quality rating since
U.S. Government-guaranteed or backed securities are already high quality.
Although the financial condition of each insurer of its securities is
periodically reviewed by the Fund, there can be no guarantee that insurers can
honor their obligations under all circumstances. See "Other Investment Policies
and Risk Factors."
The extent to which the portfolio management team is controlling "downside risk"
to the Fund's portfolio is measured by tracking the frequency and amount by
which total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
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investment of at least $100 until your account reaches $2,000. You can open an
AARP UGMA/UTMA with an initial investment of only $250.
Will I be subject to taxes on this Fund?
All income distributed by the Fund is expected to be exempt from federal income
taxes, but income may be subject to state and local income taxes. Ordinarily,
the Fund expects that 100% of its portfolio securities will be in federally
tax-exempt securities. As a fundamental policy, under normal circumstances, at
least 80% of the Fund's net assets will be invested in federally tax-exempt
securities. Up to 20% of the Fund's net assets may be invested in federally
taxable securities. For defensive purposes, or if unusual circumstances make it
advisable, the Fund may purchase U.S. Government securities and repurchase
agreements collateralized by such securities. For temporary defensive purposes,
the Fund's investment in federally taxable securities may exceed 20%. Each year
you will be provided with a breakdown of the Fund's investments by state so that
you can determine your state and local income tax liability. Your state or local
Department of Revenue or tax advisor can answer questions regarding the
taxability of distributions.
In the event there is income from taxable securities, it would not be exempt
from federal income taxes. In addition, any capital gains earned by the Fund are
usually taxable.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30
and is usually taxable.
Who at Scudder manages my investment?
Lead Portfolio Manager Philip G. Condon, who is responsible for investment
strategy and overseeing the Fund's day-to-day management, joined the Adviser in
1983 and has more than 19 years of investment experience. Mr. Condon's
responsibilities include management of the firm's municipal credit and market
research and municipal research personnel. Portfolio Manager M. Ashton Patton
joined the Adviser in 1986; her responsibilities include managing and trading
for the tax-free funds.
AARP BOND FUND FOR INCOME
================================================================================
Fund objective:
To produce a high level of current income but with less risk of loss to its
portfolio than other long-term bond mutual funds, measured by the frequency and
amount the total return fluctuates downward. The Fund pursues current income by
investing primarily in short-, medium- and long-term investment-grade debt
securities. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP Bond Fund for Income is suitable for investors who want high current
income, but are willing to accept interest rate, credit, and other risks
associated
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with a portfolio of investment-grade and, to a lesser extent, below
investment-grade bonds (up to 35% of total assets). You should be prepared to
invest for the longer term (at least three years or more) and be comfortable
with fluctuation in the value of your principal. The Fund is also available for
the AARP IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund is designed to offer investors a convenient way to enjoy high monthly
income through a professionally managed, diversified portfolio of largely
investment-grade bonds. The Fund should offer higher income than any other AARP
Income Fund, although its share price volatility will normally be higher. The
Fund also can help add balance to a portfolio holding stocks or stock mutual
funds.
By including short- and medium-term bonds in its portfolio, the Fund seeks to
reduce the size and frequency of loss to its portfolio compared to other
long-term bond mutual funds, although its yield may be lower.
What does the Fund invest in?
In pursuit of its investment objectives, under normal market conditions, the
Fund invests at least 65% of its assets in investment-grade debt securities.
Investment-grade securities are securities that are rated Aaa, Aa, A, or Baa by
Moody's or AAA, AA, A, or BBB by S&P, or, if unrated, are of equivalent quality
as determined by the Fund Manager. In addition, the Fund may invest up to 35% of
its assets in securities rated Ba or B by Moody's or BB or B by S&P. No more
than 10% of the Fund's assets may be invested in securities rated B by Moody's
or S&P. These two grades of securities are considered to be below investment
grade. Below investment-grade securities are considered predominantly
speculative with respect to their capacity to pay interest and repay principal.
They generally involve a greater risk of default and, at times, can have more
price volatility than higher rated securities. See "Other Investment Policies
and Risk Factors."
The Fund may invest in U.S. Treasury and Agency securities, corporate bonds and
notes, dollar rolls, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies or
investment-grade foreign institutions, and money market instruments such as
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks. The Fund may invest up to 20% of
total assets in foreign debt securities denominated in currencies other than the
U.S. dollar, but no more than 5% of the Fund's total assets will be represented
by a given foreign currency. The Fund may also invest in "when-issued"
securities and repurchase agreements.
For temporary defensive purposes, the Fund may invest without limit in money
market and short-term instruments or invest all or a substantial portion of its
assets in high-quality domestic debt securities when the Fund Manager deems such
a position advisable in light of economic or market conditions.
What are the risks?
While the Fund is designed to provide monthly income, it is not a fixed price
money market fund. The value of its shares and the level of income provided will
fluctuate up and down with changes in interest rates and other market
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conditions. Due to the greater overall interest rate and credit risk of the
securities in which it invests, the Fund should offer higher income but have a
more variable share price over time than the AARP GNMA and U.S. Treasury Fund or
the AARP High Quality Short Term Bond Fund. See "Other Investment Policies and
Risk Factors."
The Fund can invest a limited portion of its assets in below investment-grade
securities, sometimes referred to as "junk" bonds. Investing in high yielding,
lower-quality bonds involves various types of risks, including the risk that
issuers of bonds held in the portfolio will not make timely payment of either
interest or principal, or may default entirely. This risk of default can
increase with changes in the financial condition of a company or with changes in
the U.S. economy, such as a recession. Compared to investing in higher quality
issues, investors may be rewarded for the additional risk of high yield bonds
through higher interest payments and the opportunity for greater capital
appreciation.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio through
active portfolio management and diversification. The Fund Manager will invest in
a broad number of securities with varying maturities, quality and industry
representation. Also, the Fund may use approved portfolio management techniques,
if appropriate, such as limited transactions in financial futures contracts and
related option transactions which are unrated (see "Other Investment Policies
and Risk Factors"). The Fund may write (sell) covered call options to enhance
investment returns. These techniques will be entered into to reduce risk, but
such techniques involve risks themselves and may reduce current income. The
extent to which the portfolio management team is controlling "downside risk" to
the Fund's portfolio is measured by the frequency and amount by which the total
return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Stephen A. Wohler, Lead Portfolio Manager, is responsible for implementing the
Fund's portfolio strategy and timing issue selection. He has been involved with
the Fund since 1979, where he has managed a variety of institutional bond
portfolios including pension, foundation, insurance and mutual fund assets.
Kelly D. Babson, Portfolio Manager, joined the Adviser in 1994 as a portfolio
manager and has 16 years of experience in the fixed income field including 13
years of high-yield management. Robert Cessine, Portfolio Manager, joined Zurich
Kemper in January 1993, and is responsible for the Fund's investment
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strategy; including duration management, asset allocation, security selection
and trading, as well as fund compliance and marketing.
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AARP GROWTH AND INCOME FUNDS
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AARP BALANCED STOCK AND BOND FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than other balanced mutual funds, measured by the frequency and amount
by which total return fluctuates downward. The Fund pursues capital growth and
income by investing primarily in a diversified mix of stocks with above-average
dividend yields, high-quality bonds, and cash reserves. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Balanced Stock and Bond Fund is suitable for investors who are seeking
long-term growth of their assets, but want less risk than an investment solely
in stocks. You should be prepared to invest for the longer term (at least three
to five years or more) and be comfortable with the value of your principal
fluctuating up and down. The Fund is also available for the AARP IRA and the
other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal through a
single investment combining stocks, bonds, and cash reserves. Growth will come
from possible appreciation in the value of common stocks and other equity
investments. Bonds and other fixed-income investments provide current income and
may help reduce risk of loss to the Fund's portfolio. Through a broadly
diversified portfolio consisting primarily of stocks with above average dividend
yields and investment-grade bonds, the Fund seeks to offer less risk of loss to
its portfolio than that of other balanced mutual funds. The Fund should
typically have less risk and a lower return than that of the other AARP Growth
Funds.
The Fund does not take extreme investment positions as part of an effort to
"time the market." Shifts between stocks and fixed-income investments are
expected to occur in generally small increments. On occasion, the Fund will
adjust its investment mix. The Fund Manager will do so after analyzing factors
such as the level and direction of interest rates, capital flows, inflationary
expectations, and the financial climate worldwide.
What does the Fund invest in?
The Fund seeks to manage risk of loss to its portfolio by investing in a broadly
diversified mix of equity securities, bonds, and cash reserves. The Fund may
invest up to 70% of its assets in equity securities (stocks). At least 30% of
the Fund will be in investment-grade fixed-income securities and cash reserves.
For temporary defensive purposes, the Fund may invest without limit in money
market and short-term instruments when the Fund Manager deems such a position
advisable in light of economic or market conditions. These instruments include
commercial paper, bankers' acceptances, certificates of deposit issued by
domestic and foreign branches of U.S. banks, and repurchase agreements.
Equity securities consist of common stocks, securities convertible into common
stocks, and preferred stocks. A research-oriented approach to investing is used
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by the Fund, taking advantage of Scudder's large research department. The Fund
emphasizes securities of companies that offer the opportunity for capital growth
and growth of earnings while providing dividends. The Fund will generally invest
in companies domiciled in the U.S., but may invest in foreign securities without
limit.
All of the Fund's debt securities will be investment-grade, i.e., rated at the
time of purchase, Baa or higher by Moody's or BBB or higher by S&P, or deemed of
comparable quality by the Fund's Manager. At least 75% of these will be
securities rated within the three highest quality ratings of Moody's (Aaa, Aa
and A) or S&P (AAA, AA, and A) or those the Fund Manager judges are of
equivalent quality (high-grade). Securities rated BBB by S&P or Baa by Moody's
are neither highly protected nor poorly secured. These securities normally pay
higher yields but involve potentially greater price variability than
higher-quality securities and are regarded as having adequate capacity to repay
principal and pay interest. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. If the rating
agencies downgrade a security, the Fund Manager will determine whether to keep
it or eliminate it based on the best interests of the Fund. The Fund does not
purchase securities rated below investment-grade, commonly known as "junk"
bonds.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, preferred and convertible preferred securities and trust preferred
securities. The Fund may also invest in U.S. Government securities, obligations
of federal agencies, and instruments not backed by the full faith and credit of
the U.S. Government. The latter include obligations of the Federal Home Loan
Banks, Farm Credit Banks, and the Federal Home Loan Mortgage Corporation. The
Fund may invest in obligations of international agencies, U.S. and non-U.S.
dollar denominated foreign debt securities, mortgage-backed and other
asset-backed securities, municipal obligations, zero-coupon securities, and
restricted securities issued in private placements.
The Fund may make limited use of financial futures contracts and related options
and may also invest in forward foreign currency exchange contracts. The Fund may
write (sell) covered call options to enhance investment returns and may purchase
and sell options on stock indices for hedging purposes. It may also invest in
securities on a "when-issued" or forward delivery basis.
What are the risks?
The risk to principal is consistent with an investment primarily in stocks and
bonds. The value of shares will fluctuate up and down with changes in interest
rates and other market conditions. Investors should focus on the longer term and
be comfortable with fluctuation in the value of their principal.
The level of income will be affected by movements up and down in interest rates
and by dividends paid on the stocks held by the Fund. See "Other Investment
Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio through
active portfolio management and diversification of both its equity and bond
components. The Fund seeks to manage risk in the equity portion of the portfolio
by investing in a diverse selection of relatively high dividend-paying stocks.
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Stocks with above-market yields tend to sell at attractive market valuations,
and the higher dividends offered by these stocks often provide a "cushion" to
returns in periods of increased market volatility. In order to manage the risk
associated with investing in bonds, the Fund invests in a broad array of debt
securities with varying maturities, quality and industry representation. The
extent to which the portfolio management team is controlling "downside risk" to
the Fund's portfolio is measured by tracking the frequency and amount by which
total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $500. You can open an AARP IRA or AARP
UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain typically
will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman is responsible for managing the stock
portion of the Fund. Mr. Hoffman, who joined Scudder in 1990, has 12 years of
experience in the investment industry as a _________. Stephen A. Wohler,
Portfolio Manager, is responsible for the bond portion of the Fund. Mr. Wohler
joined Scudder in 1979. Messrs. Wohler and Hoffman have been Portfolio Managers
for the Fund since it commenced operations on February 1, 1994. Lori J.
Ensinger, Portfolio Manager, has worked as a portfolio manager since 1983 and
joined Scudder in 1993. Mr. Ensinger is responsible for stock selection and
equity strategy.
AARP GROWTH AND INCOME FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than other growth and income mutual funds, measured by the frequency
and amount by which total return fluctuates downward. The Fund pursues long-term
capital growth and income by investing primarily in common stocks with
above-average dividend yields and fixed-income securities convertible into
common stocks. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP Growth and Income Fund is suitable for investors who are seeking
long-term growth of their assets to keep ahead of inflation. Investors should
invest for the longer term (at least five years or more) and be comfortable with
fluctuation of their principal, which is associated with investing in stocks.
The Fund is also available for the AARP IRA and the other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal with some
income. This growth will come from possible appreciation in the value of shares,
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as well as quarterly dividend distributions if they are reinvested in additional
shares of the Fund. Dividends can also produce current income for investors.
Through a broadly diversified portfolio consisting primarily of stocks with
above average dividend yields, the Fund seeks to offer less risk of loss to its
portfolio than other growth and income funds. The Fund should offer a greater
opportunity for share price appreciation, with greater share price fluctuation
than the AARP Balanced Stock and Bond Fund.
What does the Fund invest in?
The Fund invests primarily in common stocks and securities convertible into
common stocks. The Fund may also invest in preferred stocks and financial
futures contracts. The Fund emphasizes securities of companies that offer the
opportunity for capital growth and growth of earnings while providing dividends.
A research-oriented approach to investing is used by the Fund, taking advantage
of the Fund Manager's large research department.
The Fund will invest in a variety of industries and companies. Generally, the
Fund will invest in companies domiciled in the U.S., but it may invest in
foreign securities without limit. Also, the Fund may write (sell) covered call
options to enhance investment return, and may purchase and sell options on stock
indices for hedging purposes. See "Other Investment Policies and Risk Factors."
The Fund's policy is to remain substantially invested in stocks and securities
convertible into stocks. However, for temporary defensive purposes, the Fund may
invest without limit in high-quality money market securities when the Fund
Manager deems such a position advisable in light of economic or market
conditions. These securities include U.S. Treasury bills, commercial paper,
certificates of deposit issued by domestic and foreign branches of U.S. banks,
bankers' acceptances, and repurchase agreements.
What are the risks?
The risk to principal is consistent with an investment in stocks. The stock
market doesn't go up every year, and can rise and fall--sometimes quite
dramatically--over a short period of time. Investors should focus on the longer
term (at least five years or more) and be comfortable with fluctuation in the
value of their principal. See "Other Investment Policies and Risk Factors."
The level of income you receive will be affected by dividends paid on the
securities held by the Fund.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce the risk of loss to its portfolio by investing
in a diverse selection of relatively high dividend-paying stocks. Stocks with
above-average dividend yields tend to trade at attractive market valuations
(e.g., price-to-earnings and price-to-book ratios), which can help lessen
"downside risk" to the Fund's portfolio. In addition, the higher dividends
offered by these stocks may provide a "cushion" when the stock market is
volatile. The extent to which the portfolio management team is controlling
"downside risk" to the Fund's portfolio is measured by tracking the frequency
and amount by which total return fluctuates downward compared to similar funds.
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What is the minimum initial investment?
The minimum initial investment is $500. You can open an AARP IRA or an AARP
UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain typically
will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman has had responsibility for setting
investment strategy and overseeing the Fund's day-to-day management since 1991.
Mr. Hoffman, who joined Scudder in 1990, has 12 years of experience in the
investment industry. Benjamin W. Thorndike, Portfolio Manager, is the Fund's
chief analyst and strategist for convertible securities. Mr. Thorndike, who has
more than 16 years of investment experience, joined the Fund Manager and the
Fund in 1986. Kathleen T. Millard, Portfolio Manager, focuses on stock investing
strategy and stock selection. Ms. Millard has worked in the investment industry
since 1983 as a portfolio manager of value portfolios and at Scudder since 1991.
Lori Ensinger, Portfolio Manager, joined the Fund in 1996 and focuses on stock
selection and investment strategy. Ms. Ensinger has worked in the investment
industry since 1983 as a portfolio manager focusing on mid-large cap stocks and
at Scudder since 1993.
AARP U.S. STOCK INDEX FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than an S&P 500 Index mutual fund, measured by the frequency and
amount by which total return fluctuates downward. The Fund pursues this
investment objective by emphasizing common stocks with above-average dividend
yields, while maintaining investment characteristics otherwise similar to the
S&P 500 Index. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP U.S. Stock Index Fund is suitable for investors seeking a "passive"
investment approach to stock market investing. The Fund may be appropriate for
more conservative investors who are seeking higher dividend income and somewhat
lower average volatility than an S&P 500 Index fund. You should be prepared to
invest for the longer term (at least five years or more) and be comfortable with
the value of your principal fluctuating up and down with changing U.S. stock
market conditions. The Fund is also available for the AARP IRA and the other
retirement plans.
What does the Fund offer to investors?
The Fund offers the potential for long-term growth of principal and current
income. Through a broadly-diversified portfolio consisting of common stocks of
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S&P 500 companies, the Fund's performance is expected to track the overall
performance of the U.S. stock market, as characterized by the S&P 500 Composite
Stock Price Index. The Fund, however, is designed to have less risk of loss to
its portfolio due to its focus on companies in the S&P 500 Index that pay higher
dividends.
What does the Fund invest in?
The Fund attempts to remain fully invested in common stocks of S&P 500
companies. Under normal circumstances, the Fund will invest at least 95% of its
assets in common stocks and futures contracts and options, primarily on the S&P
500 Index. The Fund, using a proprietary computer model, selects common stocks
of S&P 500 companies that are expected to, on average, pay higher dividends than
S&P 500 companies in the aggregate. In managing the Fund this way, the Fund
Manager expects performance will be somewhat less volatile than that of the S&P
500 over time, and the total return will generally track the S&P 500 within 1%,
before expenses, on an annualized basis. (A tracking error of 0% would indicate
returns identical to the Index.) After the Fund's start-up phase, the portfolio
will typically consist of common stocks of between 400 and 470 of the S&P 500
companies. The Fund expects to come close to the capitalization weights of the
S&P 500. Nonetheless, to enhance the yield and liquidity characteristics of the
Fund and reduce transaction costs, the Fund will not exactly replicate the
portfolio weights of the S&P 500 and will not hold all 500 stocks within that
Index. The investment approach is "passive" in that after the dividend screening
described above, there is no additional financial analysis regarding the
securities held in the Fund.
Under normal circumstances, the Fund may invest up to 5% of its assets in
certain short-term fixed income securities including high-quality money market
securities such as U.S. Treasury bills, repurchase agreements, commercial paper,
certificates of deposit issued by domestic and foreign branches of U.S. banks
and bankers' acceptances, although cash or cash equivalents are normally
expected to represent less than 1% of the Fund's assets. The Fund may invest up
to 20% of its assets in stock futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to minimize trading costs. The Fund may also invest in Standard
& Poor's Depository Receipts ("SPDRs"). SPDRs typically trade like a share of
common stock and provide investment results that generally correspond to the
price and yield performance of the component common stocks of the S&P 500 Index.
See "Other Investment Policies and Risk Factors." Like most index funds, the
Fund will not invest in cash reserves, futures contracts or options as part of a
temporary defensive strategy, such as lowering the Fund's investment in common
stocks to protect against potential stock market declines. Thus, the Fund will
not take specific steps to minimize losses that reflect a decline in the S&P
500. In the event that the Fund does not track the Index, before expenses,
within an annualized 1% total return of the S&P 500 for an extended period, the
Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
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What are the risks?
The risk to principal is consistent with the Fund's investment approach, which
should result in a performance pattern similar to the U.S. stock market as
measured by the S&P 500 Index. The stock market doesn't go up every year, and
can rise and fall--sometimes quite dramatically over a short period of time. The
U.S. stock market tends to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline. Investors should focus on the
longer term (at least five years or more) and be comfortable with fluctuation in
the value of their principal. See "Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
The Fund is designed to track the overall U.S. stock market as characterized by
the S&P 500 Index, and therefore will be subject to market risk. However, to a
certain extent the Fund will attempt to manage this risk and provide somewhat
higher dividend income. The Fund's Subadviser uses a proprietary computer model
to select 400 or more stocks in the S&P 500 Index that are expected to, on
average, pay higher dividends than S&P 500 companies overall. This investment
approach may result in performance that is somewhat less volatile than that of
the S&P 500 Index over time. The extent to which the portfolio management team
is controlling "downside risk" to the Fund's portfolio is measured by tracking
the frequency and amount by which total return fluctuates downward compared to
similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain typically
will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Philip S. Fortuna joined Scudder in 1986 as manager of
institutional equity accounts. He became director of quantitative research in
1987 and served as director of investment operations from 1993 to 1994. James M.
Eysenbach, Portfolio Manager, joined Scudder in 1991 as a senior quantitative
analyst and is currently director of quantitative research for Scudder. Mr.
Eysenbach has more than eleven years of investment research and management
experience.
The Fund Manager has retained Bankers Trust Company as Subadviser to the Fund.
The Subadviser will handle day-to-day investment and trading functions. The
Portfolio Managers will be in regular contact with the Subadviser to monitor
returns and relative risk.
Bankers Trust has a long and successful history of equity index management
dating back to 1977, and is currently one of the largest managers of passive
investments in the U.S.
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AARP GROWTH FUNDS
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AARP CAPITAL GROWTH FUND
================================================================================
Fund objective:
To provide long-term capital growth but with less risk of loss to its portfolio
than other growth funds, measured by the frequency and amount by which total
return fluctuates downward. The Fund pursues this investment objective by
investing primarily in a diversified mix of common stocks and fixed-income
securities convertible into common stocks of established medium- and large-sized
companies. The Fund also has an educational objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions.
For whom is the Fund designed?
The AARP Capital Growth Fund is suitable for investors seeking high long-term
growth of their principal. You should be prepared to invest for the longer term
(at least five years or more) and be comfortable with the value of your
principal fluctuating up and down. The Fund is also available for the AARP IRA
and the other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal. This growth
will come primarily from possible appreciation in the value of shares. The Fund
is not expected to provide regular income.
In pursuing long-term growth, the Fund will typically have more share price
fluctuation than the AARP Balanced Stock and Bond Fund, AARP Growth and Income
Fund, AARP U.S. Stock Index Fund and AARP Global Growth Fund, but less share
price fluctuation than AARP International Growth and Income Fund and AARP Small
Company Stock Fund.
By diversifying among securities of high quality, medium- to large-sized
companies with strong competitive positions in their industries, the Fund seeks
to have less risk of loss to its portfolio than other growth funds.
What does the Fund invest in?
The Fund invests primarily in common stocks and securities convertible into
common stocks. The Fund may also invest in preferred stocks and financial
futures contracts. The Fund's policy is to remain substantially invested in
these securities.
In seeking capital growth, the Fund will invest in stocks which will offer
above-average potential for long-term growth of market value as represented by
the Standard & Poor's 500 Composite Stock Price Index. A research-oriented
approach to investing is used by the Fund, taking advantage of Scudder's large
research department. The Fund will invest in a variety of industries and
companies. Generally, the Fund will invest in companies domiciled in the U.S.,
but it may invest in foreign securities without limit. Also, the Fund may write
(sell) covered call options to enhance investment return, and may purchase and
sell options on stock indices for hedging purposes. See "Other Investment
Policies and Risk Factors."
For temporary defensive purposes, the Fund may invest without limit in
high-quality money market securities, including U.S. Treasury bills, repurchase
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agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. Government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term growth. The Fund generally has greater share price fluctuation and
potential for return than the AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, AARP U.S. Stock Index Fund, and AARP Global Growth Fund. The stock
market doesn't go up every year, and can rise and fall--sometimes quite
dramatically--over a short period of time. Some of the securities selected may
have above-average stock market risk. Investors should focus on the longer term
(at least five years or more) and be comfortable with fluctuation to the value
of their principal. See "Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average stock market risk, it does attempt to
manage the risk of loss to its portfolio by focusing on high-quality
medium-to-large sized companies with reasonable stock market valuations. The
Fund Manager invests in established companies with promising characteristics: a
history of consistent earnings growth, competitive strength and the potential
for continued growth. The Fund is broadly diversified among industries and
companies. The extent to which the portfolio management team is controlling
"downside risk" to the Fund's portfolio is measured by tracking the frequency
and amount by which total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager William F. Gadsden has set the Fund's overall investment
strategy since 1994 and has been part of the Fund's day-to-day management since
1989. He has 16 years of investment industry experience and joined Scudder in
1983. Bruce F. Beaty, Portfolio Manager, focuses on securities selection and
assists with the creation and implementation of investment strategy for the
Fund. He has 17 years of investment industry experience and joined Scudder in
1991 as a Portfolio Manager.
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AARP SMALL COMPANY STOCK FUND
================================================================================
Fund objective:
To provide long-term capital growth but with less risk of loss to its portfolio
than other small company stock mutual funds, measured by the frequency and
magnitude with which total return fluctuates downward. The Fund pursues this
investment objective by investing primarily in a broadly diversified portfolio
of common stocks of small U.S. companies. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Small Company Stock Fund is suitable for investors seeking high
long-term growth of their principal. You should be prepared to invest for the
longer term (at least five years or more) and be comfortable with the value of
your principal fluctuating up and down. The Fund is also available for the AARP
IRA and the other retirement plans.
What does the Fund offer to investors?
AARP Small Company Stock Fund combines the long-term capital appreciation
potential of small company stocks with the conservative nature of a
value-oriented, growth and income approach to investing. The Fund focuses
primarily on U.S. small capitalization stocks and seeks to maintain a higher
average dividend yield than the small capitalization stock segment of the market
as a whole. These securities may be out of favor or not closely followed by
investors, yet, in the opinion of the Fund Manager, may reward investors with
substantial returns over time. U.S. small capitalization stocks have
outperformed large capitalization stocks over time, although with greater
volatility in returns. Since the Fund involves both above-average performance
opportunity and risk, it is suitable for those individuals who are investing for
a long-term goal, such as accumulating assets for retirement. The Fund should be
considered as part of a diversified portfolio, since it is not, by itself, a
complete investment program. Nonetheless, it can help round out an investment
portfolio already holding other types of stock and fixed-income investments.
The Fund offers low-cost, convenient access to a part of the U.S. stock market
in which investors might otherwise find it difficult to participate. On their
own, individual investors might find it a challenge to obtain and analyze
complete, up-to-date financial information on numerous small companies, and buy
and sell securities at favorable prices. The Fund's management team assumes
these responsibilities for investors.
What does the Fund invest in?
In pursuing its objective of long-term capital growth, the Fund normally remains
substantially invested in the common stocks of small U.S. companies. Using a
quantitative investment approach developed by the Fund Manager, the Fund focuses
on equity securities of companies with market capitalizations generally below $1
billion that, as a group, have a dividend yield higher than the average of those
in the Russell 2000 Index(R) and that the Fund Manager believes are undervalued
relative to the stocks in the Russell 2000 Index(R). The Russell 2000 Index(R)
is a widely used measure of small stock performance. The Fund
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will sell securities of companies that have grown in market capitalization above
this level as necessary to keep the Fund focused on smaller companies.
The Fund takes a diversified approach to investing in small capitalization
stocks, typically holding more than one hundred small companies, representing a
variety of U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase other
types of equity securities including preferred stocks (either convertible or
non-convertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes or as a temporary investment to accommodate cash
flows. See "Other Investment Policies and Risk Factors."
For temporary defensive purposes, the Fund may invest without limit in
high-quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term capital growth through investing in small company stocks. Investors
should focus on the longer term (at least five years or more) and be comfortable
with fluctuation in the value of their principal which may be considerable at
times. See "Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average stock market risk, the Fund is actively
managed to reduce the risk of loss to its portfolio relative to other small
company stock funds. It does this by using a highly systematic value-oriented
investment style that focuses on small capitalization issues which, grouped
together, normally provide higher-than-average dividend income. These stocks
typically have lower risk. Risk is further managed by diversifying among a large
number of stocks, and by using specialized portfolio management techniques to
monitor the Fund's risk exposure. The extent to which the portfolio management
team is controlling "downside risk" to the Fund's portfolio is measured by
tracking the frequency and amount by which total return fluctuates downward
compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
PROSPECTUS
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When are distributions paid?
Any dividends typically will be distributed in December. Any net realized gain
typically will be distributed annually after September 30.
Who at Scudder manages my investment?
James M. Eysenbach, Co-lead Portfolio Manager, has responsibility for setting
the Fund's investment strategy and for overseeing the Fund's day-to-day
management. Mr. Eysenbach joined Scudder in 1991 as a senior quantitative
analyst and is currently director of quantitative research for Scudder. Mr.
Eysenbach has more than eleven years of investment research and management
experience. Philip S. Fortuna, Co-lead Portfolio Manager, joined Scudder in 1986
as manager of institutional equity accounts. He became director of quantitative
research in 1987 and served as director of investment operations from 1993 to
1994. Calvin S. Young, Portfolio Manager, joined Scudder in 1990 as a
quantitative analyst, and has nine years of industry experience. Mr. Young is
responsible for small company and security research as well as portfolio
management.
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AARP INTERNATIONAL FUNDS
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AARP GLOBAL GROWTH FUND
================================================================================
Fund objective:
To provide long-term capital growth but with less risk of loss to its portfolio
than other global growth mutual funds, measured by the frequency and amount by
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in common stocks of established corporations in
a wide variety of developed countries, including the U.S. The Fund also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
For whom is the Fund designed?
The AARP Global Growth Fund is suitable for investors who want to add both U.S.
and foreign equity opportunities to their portfolio through a single investment.
The Fund is designed for investors seeking long-term growth of their principal.
You should be prepared to invest for the longer term (at least five years or
more) and be comfortable with the value of your principal fluctuating up and
down. The Fund is also available for the AARP IRA and the other retirement
plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal from a
professionally managed portfolio of securities selected from the U.S. and
foreign equity markets. It also offers the opportunity for investors to further
diversify their portfolios which could help to lower their overall risk.
Global investing takes advantage of the investment opportunities created by the
growing integration of economies around the world. The world has become highly
integrated in economic, industrial and financial terms. Companies increasingly
operate globally as they purchase raw materials, produce and sell their products
and raise capital. The Fund affords investors access to opportunities wherever
they arise, without being constrained by the location of a company's
headquarters or the trading market for its shares.
Because the Fund's portfolio invests globally, it provides the potential to
augment returns available from the U.S. stock market. In addition, since U.S.
and foreign markets do not always move in step with each other, a global
portfolio provides more diversification than one invested solely in U.S.
securities.
Investing directly in foreign securities is usually impractical for most
investors because it presents complications and extra costs. Investors often
find it difficult to arrange purchases and sales, to obtain current information,
to hold securities in safekeeping and to convert the value of their investments
from foreign currencies into dollars. The Fund manages these problems for the
investor. With a single investment, the investor has a diversified worldwide
investment portfolio which is managed actively by experienced professionals.
Scudder has had many years of experience investing globally and dealing with
trading, custody and currency transactions around the world. Scudder has the
benefit of information it receives from worldwide research and believes the Fund
affords investors an efficient and cost-effective method of investing worldwide.
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Through a broadly diversified portfolio consisting primarily of stocks of
established companies which are incorporated in the U.S. or in foreign
countries, and applying a strategy of relatively low portfolio turnover, the
Fund seeks to offer less risk of loss to its portfolio than other global growth
funds. However, in pursuing long-term growth, the Fund typically will have more
share price fluctuation than other AARP Mutual Funds, except the AARP Capital
Growth Fund, the AARP International Growth and Income Fund and the AARP Small
Company Stock Fund. See "What are the risks?" below. Growth will come primarily
from possible appreciation in the value of shares. The Fund is not expected to
provide regular income.
What does the Fund invest in?
The Fund will invest in securities of companies that the Fund Manager believes
will benefit from global economic trends, promising technologies or products,
and changing geopolitical, currency or economic relationships. The Fund will
normally invest at least 65% of its total assets in securities of at least three
different countries. Typically it is expected that the Fund will invest in a
wide variety of regions and countries, including both foreign and U.S. issues.
However, the Fund may be invested 100% in non-U.S. issues, and for temporary
defensive purposes may be invested 100% in U.S. issues. For temporary defensive
purposes, the Fund may invest without limit in high-quality money market
securities, including U.S. Treasury bills, repurchase agreements, commercial
paper, certificates of deposit issued by domestic and foreign branches of U.S.
banks, bankers' acceptances and other debt securities, such as U.S. Government
obligations and corporate debt instruments when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund generally invests in equity securities of established companies listed
on U.S. or foreign securities exchanges, but also may invest in securities
traded over-the-counter. It also may invest in debt securities convertible into
common stock, and convertible and non-convertible preferred stocks. Fixed-income
securities of governments, government agencies, supranational agencies and
companies may also be used when the Fund Manager believes the potential for
appreciation for these investments will equal or exceed that available from
investments in equity securities. These debt and fixed-income securities will be
exclusively investment-grade securities, that is, those rated Aaa, Aa, A or Baa
by Moody's or AAA, AA, A or BBB by S&P or those of equivalent quality as
determined by Scudder. Securities rated BBB by S&P or Baa by Moody's are neither
highly protected nor poorly secured. Moody's considers bonds it rates Baa to
have speculative elements as well as investment-grade characteristics.
The Fund may invest in zero coupon securities and closed-end investment
companies holding foreign securities. The Fund may make limited use of financial
futures contracts and related options and may also invest in forward foreign
currency exchange contracts. The Fund may write (sell) covered call options to
enhance investment return, and may purchase and sell options on stock indices
for hedging purposes. See "Other Investment Policies and Risk Factors."
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What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term growth through global investing. Global investing involves economic
and political considerations not typically found in investments restricted
solely to U.S. markets.
Investments in foreign securities involve special considerations, due to more
limited information, higher brokerage costs and different accounting standards.
They may also entail certain risks, such as possible imposition of dividend or
interest withholding or confiscatory taxes, possible currency blockages or
transfer restrictions, expropriation, nationalization or other adverse political
or economic developments and the difficulty of enforcing obligations in other
countries. Foreign securities may be less liquid and more volatile than
comparable domestic securities, and there is generally less government
regulation of stock exchanges, brokers, listed companies and banks than in the
U.S. Purchases of foreign securities are usually made in foreign currencies and,
as a result, the Fund may incur currency conversion costs and may be affected
favorably or unfavorably by changes in the value of foreign currencies against
the U.S. dollar.
The Fund is designed for long-term investors who can accept international
investment risk. Since the Fund normally will be invested in both U.S. and
foreign securities markets, changes in the Fund's share price may have a low
correlation with movements in the U.S. markets. The Fund's share price will
reflect the movements of the different markets in which it is invested and the
currencies in which the investments are denominated. The strength or weakness of
the U.S. dollar against foreign currencies may account for part of the Fund's
investment performance. Investors should focus on the longer term (at least five
years or more) and be comfortable with fluctuation in the value of their
principal. Because of the Fund's global investment policies and the investment
considerations discussed above, investment in shares of the Fund should be
considered as part of a broadly diversified portfolio. See "Other Investment
Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average equity risk, it is designed to actively
reduce risk of loss as compared to other global stock mutual funds. It does this
by diversifying widely among stocks issued in developed markets worldwide. The
extent to which the portfolio management team is controlling "downside risk" to
the Fund's portfolio is measured by tracking the frequency and amount by which
total return fluctuates downward compared to similar funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500, if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30.
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Who at Scudder manages my investment?
William E. Holzer is the Lead Portfolio Manager for the Fund. Mr. Holzer has
day-to-day responsibility for setting the Fund's worldwide strategy and
investment themes. Mr. Holzer has over 21 years' experience in global investing
and joined Scudder as a portfolio manager in 1980. Nicholas Bratt, Portfolio
Manager, directs Scudder's overall global equity investment strategies. Mr.
Bratt joined Scudder in 1976. Diego Espinosa, Portfolio Manager, joined Scudder
in 1996 and is responsible for development of the Fund's strategy and management
of the portfolio on a daily basis. He has six years' industry experience as an
analyst.
AARP INTERNATIONAL GROWTH AND INCOME FUND
================================================================================
Fund objective:
To provide long-term capital growth and income but with less risk of loss to its
portfolio than other international mutual funds, measured by the frequency and
amount the total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in a diversified portfolio of foreign common
stocks with above-average dividend yields and foreign fixed-income securities
convertible into common stocks. The Fund also has an educational objective to
help shareholders, especially individuals planning for and living in retirement,
make informed investment decisions.
The Fund changed its name from AARP International Stock Fund on February 1,
1998.
For whom is the Fund designed?
The AARP International Growth and Income Fund is suitable for investors who want
to add international stock market opportunities to their portfolio in a
convenient, low-cost way. The Fund is designed for investors seeking long-term
growth of their principal. You should be prepared to invest for the longer term
(at least five years or more) and be comfortable with the value of your
principal fluctuating up and down. The Fund is also available for the AARP IRA
and the other retirement plans.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal from a
professionally managed portfolio of securities selected from developed foreign
stock markets. It also offers the opportunity for investors to further diversify
their investment portfolios, which could help to lower their overall risk.
Unlike the AARP Global Growth Fund, which invests in both U.S. and foreign
markets, the AARP International Growth and Income Fund will invest solely in
foreign markets.
One reason that some investors may wish to invest overseas is that certain
foreign economies may grow more rapidly than the U.S. economy and may offer
opportunities for achieving investment returns superior to those available from
investing in a fund which invests primarily in domestic equity securities.
Another reason is that foreign markets do not always move in step with each
other or with
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the U.S. market. A portfolio invested in a number of markets worldwide will be
better diversified than a portfolio that is restricted to a single market.
Another benefit of the Fund is that it eliminates the complications and extra
costs associated with direct investment in individual foreign securities.
Individuals investing directly in foreign stocks may find it difficult to make
purchases and sales, to obtain current information, to hold securities in
safekeeping, and to convert the value of their investments from foreign
currencies into U.S. dollars. The Fund manages these tasks for the investor.
With a single investment, the investor has a diversified international
investment portfolio, which is actively managed by experienced professionals.
The Fund Manager has had long experience in dealing in foreign markets and with
brokers and custodian banks around the world. The Fund Manager also has the
benefit of an established information network and believes the Fund affords a
convenient and cost-effective method of investing internationally.
In pursuing long-term growth, the Fund typically will have more share price
fluctuation than most other AARP Mutual Funds. See "What are the risks?" below.
Growth will come primarily from possible appreciation in the value of shares.
What does the Fund invest in?
The Fund generally invests in equity securities of established dividend-paying
companies listed on foreign exchanges within developed foreign markets. The Fund
does not invest in emerging markets, but instead, focuses its investments on the
developed foreign countries included in the Morgan Stanley Capital International
World ex-US Index. The Fund will normally invest at least 65% of its total
assets in securities of at least three different countries.
When the Fund Manager believes that it is appropriate, the Fund may invest up to
20% of its total assets in investment-grade foreign debt securities. Such debt
securities include debt of foreign governments, supranational organizations and
private issuers, including bonds denominated in the European Currency Unit
(ECU). Debt investments will be selected on the basis of yield, credit quality,
and the outlooks for currency and interest rates in different parts of the
globe, taking into account the ability to hedge a degree of currency or local
bond price risk. The Fund may purchase investment-grade bonds, which are those
rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if unrated,
judged by the Fund Manager to be of equivalent quality. Securities rated Baa by
Moody's or BBB by S&P are neither highly protected nor poorly secured. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics.
For temporary defensive purposes, the Fund may invest without limit in
high-quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as Canadian or U.S. government obligations or currencies, corporate debt
instruments, and securities of companies incorporated in and having their
principal activities in Canada or the U.S. when the Fund Manager deems such a
position advisable in light of economic or market conditions. It is
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impossible to predict accurately how long such alternate strategies may be
utilized.
The Fund may make limited use of financial futures contracts and related options
and may also invest in foreign currency exchange contracts. The Fund may write
(sell) covered call options to enhance investment return, and may purchase and
sell options on stock indices for hedging purposes. See "Other Investment
Policies and Risk Factors."
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term capital growth through international investing. International
investing involves economic and political considerations not typically found in
U.S. financial markets.
Investments in foreign securities involve special considerations, due to more
limited information, higher brokerage costs and different accounting standards.
They may also entail certain risks, such as possible imposition of dividend or
interest withholding or confiscatory taxes, possible currency blockages or
transfer restrictions, expropriation, nationalization or other adverse political
or economic developments and the difficulty of enforcing obligations in other
countries. Foreign securities may be less liquid and more volatile than
comparable domestic securities, and there is generally less government
regulation of stock exchanges, brokers, listed companies and banks than in the
U.S. Purchases of foreign securities are usually made in foreign currencies and,
as a result, the Fund may incur currency conversion costs and may be affected
favorably or unfavorably by changes in the value of foreign currencies against
the U.S. dollar.
The Fund is designed for long-term investors who can accept international
investment risk. Since the Fund normally will be invested in foreign stocks,
changes in the Fund's share value may be quite different than movements in the
U.S. stock markets. The Fund's share price will reflect the movements of the
different markets in which it is invested and the currencies in which the
investments are denominated. The strength or weakness of the U.S. dollar against
foreign currencies may account for part of the Fund's investment performance.
Investors should focus on the longer term (at least five years or more) and be
comfortable with fluctuation in the value of their principal. Because of the
Fund's international approach and its associated risks, investment in shares of
the Fund should be considered as part of a broadly-diversified portfolio. See
"Other Investment Policies and Risk Factors."
How does the Fund seek to manage risk?
While the Fund involves above-average equity risk, it is designed to actively
reduce the risk of loss to the Fund's portfolio relative to other international
stock funds. It normally does this by diversifying widely among relatively high
dividend-paying stocks issued in developed foreign markets. The extent to which
the portfolio management team is controlling "downside risk" to the Fund's
portfolio is measured by tracking the frequency and amount by which total return
fluctuates downward compared to similar funds.
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What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan with a monthly investment
of at least $100 until your account reaches $2,000. You can open an AARP IRA or
an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30.
Who at Scudder manages my investment?
Lead Portfolio Manager Sheridan Reilly joined the Fund Manager in 1995. He has
worked in the Fund Manager's Global Equity Group and has over eleven years of
investment industry experience as an economic, fixed-income and equity analyst.
Portfolio Manager Irene Cheng joined the Fund Manager in 1993. In addition to
her fourteen years of investment experience, Ms. Cheng has worked on Scudder's
institutional international equity accounts. Portfolio Manager Marc Joseph
managed international portfolios prior to joining the Adviser in 1997 and is a
member of the Fund Manager's Global Equity Group where he focuses on managing
international equity portfolios. Mr. Joseph has over ten years of industry
experience. Deborah A. Chaplin, Portfolio Manager, joined the Fund Manager in
1996 and has over five years of experience as a securities analyst and portfolio
manager.
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AARP MANAGED INVESTMENT PORTFOLIOS
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AARP MANAGED INVESTMENT PORTFOLIOS:
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
================================================================================
The AARP Managed Investment Portfolios are two professionally managed,
diversified portfolios of the AARP Managed Investment Portfolios Trust (the
"Trust"). In pursuit of its investment objective, each Portfolio invests in a
select mix of the AARP Mutual Funds ("underlying AARP Mutual Funds"). Each
portfolio is designed to serve as a complete investment program or as a core
part of a larger portfolio, with a goal to seek competitive returns but with
less risk of loss to the Fund's portfolio than a comparable mix of stock and
bond funds, measured by the amount and frequency by which total return
fluctuates downward. Each AARP Mutual Fund is managed to reduce the risk of loss
to its portfolio compared to similar mutual funds. Each Portfolio also has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
Portfolio Objectives:
o The AARP Diversified Income with Growth Portfolio seeks current income
with modest long-term appreciation. This investment objective is pursued
by diversifying among a mix of AARP Bond Mutual Funds, and to a lesser
degree in AARP Stock Mutual Funds. The Fund changed its name from AARP
Diversified Income Portfolio on February 1, 1998.
o The AARP Diversified Growth Portfolio seeks to provide long-term growth of
capital. This investment objective is pursued by diversifying among a mix
of AARP Stock Mutual Funds, and to a lesser degree in AARP Bond Mutual
Funds.
For whom are the Portfolios designed?
The AARP Managed Investment Portfolios are designed for individuals who prefer
to have asset allocation decisions made by professional money managers and who
appreciate the advantages of broad diversification through a single investment.
o The Diversified Income With Growth Portfolio may be appropriate for
conservative investors nearing retirement or investors enjoying
retirement, who are looking for quarterly income with some appreciation
potential. Investors should be prepared to invest for three to five years
or more.
o The Diversified Growth Portfolio may be appropriate for long-term
investors planning for retirement or more aggressive retired investors
with an investment time horizon of at least five years or more.
What do the Portfolios offer to investors?
Both Portfolios offer investors a simple means to allocate their assets to
pursue a certain goal. Each Portfolio can serve as a complete investment
program, or as a core part of a larger portfolio.
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o The Diversified Income With Growth Portfolio offers investors the
opportunity for income and some share price appreciation by investing in a
diversified portfolio consisting primarily of AARP Bond Mutual Funds, and
secondarily, AARP Stock Mutual Funds and AARP Money Market Mutual Funds.
o The Diversified Growth Portfolio offers investors the opportunity for
long-term growth of principal by investing in a diversified portfolio
comprised primarily of AARP Stock Mutual Funds, and secondarily, AARP Bond
Mutual Funds and AARP Money Market Mutual Funds.
o Both portfolios offer shareholders an investment choice that is broadly
diversified.
o Both portfolios are managed by investment professionals at Scudder.
o No additional management fees or expenses are charged for allocation among
the AARP Mutual Funds.
What does each Portfolio invest in?
Each Portfolio may invest in any of the AARP Mutual Funds, except for those
designed to provide tax-free income. Both Portfolios will avoid taking extreme
investment positions in an effort to "time the market." Rather, shifts among
AARP Stock and Bond Mutual Funds are expected to occur only periodically and in
generally small increments.
Under normal market conditions, each of the AARP Managed Investment Portfolios
will invest within the investment ranges described below:
o The Diversified Income With Growth Portfolio will normally invest 60-80%
of total assets in AARP Bond Mutual Funds; and 20-40% of total assets in
AARP Stock Mutual Funds; and 0-20% of total assets in cash or cash
equivalents.
o The Diversified Growth Portfolio will normally invest 60-80% of total
assets in AARP Stock Mutual Funds; 20-40% of total assets in AARP Bond
Mutual Funds; and 0-20% of total assets in cash or cash equivalents.
If, as a result of appreciation or depreciation, the percentage of the
Portfolios' assets invested in the above categories exceeds or is less than the
applicable range, the Fund Manager will consider whether to reallocate the
assets of the Portfolio to comply with the stated ranges.
Each Portfolio will purchase or sell shares of underlying AARP Mutual Funds to:
(a) accommodate purchases and sales of each Portfolio's shares, (b) change the
percentages of each Portfolio's assets invested in each of the underlying AARP
Mutual Funds in response to changing market conditions, and (c) maintain or
modify the allocation of each Portfolio's assets in accordance with the
investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including AARP Money Market Funds, repurchase agreements,
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
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What are the risks?
Each Portfolio's risks are determined by the nature of the securities held by
the underlying AARP Mutual Funds as well as the proportion of investment in each
underlying AARP Mutual Fund which, in turn, reflects the portfolio management
strategies used by the Fund Manager. The following are descriptions of certain
risks related to investments in each Portfolio.
o As the investments in each Portfolio are represented by a group of
underlying AARP Mutual Funds, the performance of a Portfolio is directly
related to the investment performance of these underlying AARP Mutual
Funds. The ability of a Portfolio to meet its investment objective is
directly related to the ability of the underlying AARP Mutual Funds to
meet their objectives as well as the allocation among those underlying
AARP Mutual Funds by the portfolio management team.
o Each Portfolio's share price and yield will fluctuate in response to
various market and economic factors related to both the stock and bond
markets. Certain of the underlying AARP Mutual Funds invest in debt
securities making them subject to credit risk, interest rate risk and
pre-payment risk. Other underlying AARP Mutual Funds invest in equity
securities, which will fluctuate in value with changing stock market
conditions and related factors. Also, each Portfolio can invest in
underlying AARP Mutual Funds, which are, in turn, invested in
international securities and thus are subject to additional risks of these
investments including changes in foreign currency exchange rates and
political risk.
For information about the investment techniques and the risks involved in the
underlying AARP Mutual Funds, please refer to each underlying Fund's description
elsewhere in this Prospectus and "Other Investment Policies and Risk Factors."
How do the Portfolios seek to manage risk?
The Portfolios seek to manage risk through active portfolio management and
diversification. Each Portfolio will invest in at least five underlying AARP
Mutual Funds, all of which are managed to reduce the risk of loss to the Fund's
portfolio compared to similar Funds.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500 if you establish an Automatic Investment Plan involving a monthly
investment of at least $100 until your account reaches $2,000. You can open an
AARP IRA or an AARP UGMA/UTMA with an initial investment of only $250.
When are distributions paid?
Dividends on the Diversified Income With Growth Portfolio will be distributed
quarterly in March, June, September and December to investors. Any dividends on
the Diversified Growth Portfolio will be distributed in December. Any net
realized capital gain for the Portfolios typically will be distributed after
September 30. See "Additional Information about Distribution and Taxes" for more
information.
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Who at Scudder manages my investment?
Lead Portfolio Manager Philip S. Fortuna joined the Adviser in 1986 as manager
of institutional equity accounts. He became director of quantitative research in
1987 and served as director of investment operations from 1993 to 1994.
Portfolio Manager Salvatore J. Bruno joined the Adviser in 1991 and serves as a
quantitative analyst in the Adviser's Quantitative Services Group. Mr. Bruno has
over six years of investment experience as a __________ and is responsible for
the strategic decision making and periodic reallocation of the Funds. Shahram
Tajbakhsh, Portfolio Manager, joined the Adviser in 1996 and is also responsible
for the strategic decision making and allocation of the Funds. Mr. Tajbakhsh has
over six years of industry experience as a project leader and consultant and
this includes work in developing analytical investment tools. Karla D. Grant,
Portfolio Manager, joined the Adviser in 1997 and has seven years of industry
experience as a tactical asset allocation researcher and consultant. Ms. Grant
is responsible for inputs to the asset allocation process.
Description of the Underlying AARP Mutual Funds
Details on the investment objectives and policies of the underlying AARP Mutual
Funds are included in this Prospectus. As with any investment, there is no
guarantee that the AARP Investment Portfolios or the underlying AARP Mutual
Funds will successfully meet their investment objectives.
The Portfolios may invest in the following AARP Money Market Mutual Fund which
is designed to provide stability of principal and income:
AARP High Quality Money Fund
The Portfolios may invest in the following AARP Mutual Funds which are designed
to provide current income:
AARP High Quality Short Term Bond Fund
AARP GNMA and U.S. Treasury Fund
AARP Bond Fund for Income
The Portfolios may invest in the following AARP Mutual Funds designed to provide
long-term growth of capital:
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund
AARP Global Growth Fund
AARP Capital Growth Fund
AARP International Growth and Income Fund
AARP Small Company Stock Fund
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OTHER INVESTMENT POLICIES AND RISK FACTORS
================================================================================
Below are some detailed descriptions of several types of securities and
investment techniques referred to in this Prospectus.
Maintaining $1.00 constant share price in money funds
The AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund
attempt to maintain a constant net asset value per share. To do so, they operate
in accordance with a rule of the Securities and Exchange Commission (SEC) that
requires all assets to be cash, cash items, and high-quality U.S.
dollar-denominated investments having a remaining maturity of generally not more
than 397 calendar days from the date of purchase. The AARP High Quality Money
Fund, however, may invest in U.S. Government securities having maturities of up
to 762 calendar days. The SEC also requires that the average dollar-weighted
maturity of these Funds not exceed 90 days.
When-issued securities
All AARP Mutual Funds, except the AARP Growth and Income Fund, the AARP U.S.
Stock Index Fund, the AARP Global Growth Fund, the AARP Capital Growth Fund, the
AARP International Growth and Income Fund, and the AARP Small Company Stock
Fund, may purchase securities on a when-issued or forward delivery basis. That
means payment and delivery of the security will be at a later date. The price
and yield are generally fixed on the date of commitment to purchase. The Fund
does not earn interest before delivery of the security. At the time of
settlement, the market value of the security may be more or less than the
purchase price.
Repurchase agreements
This is an agreement under which a Fund may buy one or more U.S. Government
obligations which the seller simultaneously agrees to repurchase at a specified
time and price. The Fund can earn income for periods as short as overnight. Such
an agreement may enhance liquidity since it is normally a short-term commitment.
If the seller under a repurchase agreement becomes insolvent, the Fund's right
to sell the securities may be restricted. Also, the value of such securities may
decline before the Fund can sell them. The Fund might also incur transaction
costs by selling the securities.
Each of the AARP Mutual Funds may enter into repurchase agreements only with
Federal Reserve member banks or broker-dealers recognized as reporting
government securities dealers.
Mortgage- and other asset-backed securities
The AARP GNMA and U.S. Treasury Fund, the AARP High Quality Short Term Bond
Fund, the AARP Bond Fund for Income, and the AARP Balanced Stock and Bond Fund
may invest in mortgage-backed securities, which are securities representing
interests in pools of mortgage loans. These securities provide shareholders with
payments consisting of both interest and principal as the mortgages in the
underlying mortgage pools are paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S.
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Government. These guarantees, however, do not apply to the market value or yield
of mortgage-backed securities or to the value of a Fund's shares. When interest
rates rise, mortgage prepayment rates decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares. Also, GNMA and other
mortgage-backed securities may be purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs. In addition, the AARP High Quality Short Term Bond Fund, the
AARP Balanced Stock and Bond Fund and the AARP Bond Fund for Income may invest
in mortgage-backed securities issued by other issuers, such as the Federal
National Mortgage Association (FNMA), which are not guaranteed by the U.S.
Government. Moreover, the Funds may invest in debt securities which are secured
with collateral consisting of mortgage-backed securities and in other types of
mortgage-related securities.
The AARP High Quality Short Term Bond Fund, the AARP Bond Fund for Income, and
the AARP Balanced Stock and Bond Fund may also invest in securities representing
interests in pools of certain other consumer loans, such as automobile loans or
credit card receivables. In some cases, principal and interest payments are
partially guaranteed by a letter of credit from a financial institution.
Dollar roll transactions
Each of the Funds in the AARP Income Trust, namely AARP GNMA and U.S. Treasury
Fund, AARP High Quality Short Term Bond Fund, and AARP Bond Fund for Income, may
enter into dollar roll transactions with selected banks and broker/dealers.
Dollar roll transactions are treated as reverse repurchase agreements for
purposes of the Funds' borrowing restrictions and consist of the sale by the
Funds of mortgage-backed securities, together with a commitment to purchase
similar, but not identical, securities at a future date at the same price. In
addition, the Funds are paid a fee as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed after cash settlement and
initially involve only a firm commitment agreement by the Funds to buy a
security.
If the broker/dealer to whom the Fund sells the securities underlying a dollar
roll transaction becomes insolvent, the Fund's right to purchase or repurchase
the securities may be restricted; the value of the securities may change
adversely over the term of the dollar roll; the securities that the Fund is
required to repurchase may be worth less than the securities that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
Zero coupon securities
The AARP Balanced Stock and Bond Fund, AARP Bond Fund for Income and the AARP
Global Growth Fund may invest in zero coupon securities which pay no cash income
and are issued at substantial discounts from their value at maturity. Zero
coupon securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities that make current
cash distributions of interest.
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High yield/high risk securities
AARP Bond Fund for Income may invest a limited amount of assets in debt
securities which are rated below investment-grade (hereinafter referred to as
"lower rated securities") or which are unrated, but deemed equivalent to those
rated below investment-grade by the Fund Manager. The lower the ratings of such
debt securities, the greater their risks. These debt instruments generally offer
a higher current yield than that available from higher grade issues, but
typically involve greater risk. The yields on high yield/high risk bonds will
fluctuate over time. In general, prices of all bonds rise when interest rates
fall and fall when interest rates rise. While less sensitive to changing
interest rates than investment-grade debt, lower rated securities are especially
subject to adverse changes in general economic conditions and to changes in the
financial condition of their issuers. During periods of economic downturn or
rising interest rates, issuers of these instruments may experience financial
stress that could adversely affect their ability to make payments of principal
and interest and increase the possibility of default.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of these securities
especially in a market characterized by only a small amount of trading and with
relatively few participants. These factors can also limit the Fund's ability to
obtain accurate market quotations for these securities, making it more difficult
to determine the Funds' net asset value.
In cases where market quotations are not available, lower rated securities are
valued using guidelines established by the Funds' Board of Trustees. Perceived
credit quality in this market can change suddenly and unexpectedly, and may not
fully reflect the actual risk posed by a particular lower rated or unrated
security.
Foreign securities
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Short Term
Bond Fund and the AARP Bond Fund for Income may invest without limit in foreign
securities.
Investments in foreign securities may benefit a Fund by providing access to
different markets and opportunities. It may also help to reduce risk by
increasing diversification. However, foreign securities involve special
considerations. Brokerage costs are higher. Information about foreign securities
is more limited. Foreign companies or securities often have different and less
stringent government regulations, different accounting standards, slower
settlement of transactions, and more limited and volatile trading markets.
Investments in foreign securities may also involve other risks. These include
possible imposition of withholding, confiscatory and other taxes; possible
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; and the difficulty of
enforcing obligations in other countries. A Fund may incur currency conversion
costs of purchases made in foreign currencies. There may also be favorable or
unfavorable consequences from the changes in the value of foreign currencies
against the U.S. dollar.
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Illiquid securities
The Fund may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Fund may not be able to dispose of them at an advantageous time or
price.
Real estate investment trusts
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Short Term
Bond Fund and the AARP Bond Fund for Income may purchase real estate investment
trusts (REITs), which pool investors' funds for investment primarily in
income-producing real estate or real estate-related loans or interests. REITs
can generally be classified as equity REITs, mortgage REITs or hybrid REITs.
Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments on real estate
mortgages in which they are invested. Hybrid REITs combine the characteristics
of both equity REITs and mortgage REITs.
Derivatives
The following descriptions of Forward Foreign Currency Exchange Contracts,
Options Transactions, Futures Contracts and Related Options discuss the types of
derivatives in which certain of the AARP Mutual Funds may invest.
Forward foreign currency exchange contracts
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Short Term
Bond Fund and the AARP Bond Fund for Income may enter into forward foreign
currency exchange contracts. These contracts, which involve costs, permit the
Funds to purchase or sell a specific amount of a particular currency at a
specified price on a specified future date. They may be used by a Fund only to
hedge against possible variations in exchange rates of currencies in countries
in which it may invest.
A Fund will realize a benefit only to the extent that the relevant currencies
move as anticipated. If the currencies do not move as anticipated, the use of
these contracts may result in losses greater than if they had not been used.
Options transactions
In an attempt to enhance investment returns, Funds in the AARP Growth Trust and
the AARP Income Trust may each write covered call options. These are agreements
to sell a particular security in the Fund's portfolio at a specified price on or
before the expiration date of the option. Covered call options may be written on
portfolio securities worth up to 25% of the Fund's net assets.
There are risks associated with writing covered options. These risks include the
possible inability to make closing transactions at favorable prices or because
an exercise notice has been received. The Funds also risk giving up appreciation
on the underlying security in excess of the exercise price.
Each of the Funds in the AARP Growth Trust may purchase and sell exchange-traded
options on stock indices. In addition, these Funds may engage in
over-the-counter options transactions with broker-dealers who make
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markets in these options. Over-the-counter options may be more difficult to
terminate than exchange-traded options. They are frequently illiquid, and
involve counterparty credit risk. The AARP International Growth and Income Fund
may purchase and sell options on currencies which can result in the Fund
incurring losses as a result of a number of factor's including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The Fund Manager will engage in option
transactions to hedge against unfavorable price movements which can adversely
affect the value of the Fund's securities or securities the Fund intends to buy.
These transactions involve risk, including the risk that market prices may move
in unanticipated directions or will not correlate well with a Fund's portfolio,
causing a Fund to lose the value of the option premium and to fail to realize
any benefit from the transaction. Further, a closing transaction may not be
available when a Fund wishes to close out an option.
Futures contracts and related options
To a limited extent, the Funds in the AARP Income Trust, the AARP Insured Tax
Free General Bond Fund, and the Funds in the AARP Growth Trust may enter into
financial futures contracts including futures contracts on securities indices,
may purchase and write related put and call options, and may engage in related
closing transactions. These techniques may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to manage the effective maturity or duration of
fixed-income securities in a Fund's portfolio, or to establish a position in the
derivatives market as a temporary substitute for purchasing or selling
particular securities. The Funds will not use these techniques for speculative
purposes.
The margin deposits for futures contracts and premiums paid for related options
may not be more than 5% of a Fund's total assets. These transactions require a
Fund to segregate assets (such as liquid securities and cash) to cover contracts
that would require it to purchase securities. These transactions also result in
brokerage costs.
These techniques involve some risk. A Fund may be precluded from realizing a
benefit from favorable price movements in the related portfolio position of the
Fund and could lose the expected benefit of the transactions if securities
markets, interest rates or currency changes move in an unanticipated manner. To
the extent that the Fund Manager's view of market movements is incorrect, the
use of such instruments may result in losses greater than if they had not been
used. Further, while a Fund buys a futures contract only if there appears to be
a liquid secondary market for such contracts, there can be no assurance that a
Fund will be able to close out any particular futures contract. In addition, if
the AARP Insured Tax Free General Bond Fund purchases futures contracts on
taxable securities or indices of such securities, their value may not fluctuate
in proportion to the value of the Fund's securities. This would limit that
Fund's ability to hedge effectively against interest rate risk.
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Segregated accounts
Each Fund may be required to segregate assets (such as cash and other liquid
securities) or otherwise provide coverage consistent with applicable regulatory
policies. This would be in respect of the Fund's permissible obligations under
the call and put options it writes, the forward foreign currency exchange
contracts it enters into and the futures contracts it enters into.
Convertible securities
Each Fund in the AARP Growth Trust, AARP High Quality Short Term Bond Fund, and
AARP Bond Fund for Income may invest in convertible securities. Convertible
securities include convertible bonds, notes and debentures, convertible
preferred stocks, and other securities that give the holder the right to
exchange the security for a specific number of shares of common stock.
Convertible securities entail less credit risk than the issuer's common stock
because they are considered to be "senior" to common stock. Convertible
securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar quality. They may also reflect
changes in value of the underlying common stock.
Demand obligations
Each of the AARP Mutual Funds may purchase demand obligations. Demand
obligations permit the holder to demand payment of a specified amount prior to
maturity. The holder's right to payment depends upon the issuer's ability to pay
principal and interest on demand. A Fund will purchase demand notes only to
enhance liquidity. The Fund Manager will continuously monitor the
creditworthiness of issuers of such obligations.
Stand-by commitments
The AARP Tax Free Funds may enter into stand-by commitments (also known as puts)
to facilitate liquidity. Stand-by commitments permit a Fund to resell municipal
securities to the original seller at a specified price and generally involve no
cost. Costs, in any event, are limited to 0.5% of a Fund's total assets. To
minimize the risk that the seller may not be able to repurchase the security,
the Fund Manager will monitor the creditworthiness of the seller.
"Put" bonds
The AARP Tax Free Funds may also purchase long-term fixed rate bonds that have
been coupled with an option granted by a third-party financial institution. This
allows the Funds to tender (or "put") bonds to the institution at specified
intervals and receive the face value of them. For the AARP High Quality Tax Free
Money Fund, an interval can not exceed 397 calendar days. These third-party puts
are available in several different forms. They may be custodial receipts or
trust certificates, and may be combined with other features such as interest
rate swaps.
Tax-exempt participation interests
The AARP Tax Free Funds may purchase tax-exempt participation interests from a
bank representing a fully-insured portion of the bank's holdings of municipal
securities. The Fund will obtain an irrevocable letter of credit or guarantee
from the bank and will have, under certain circumstances, the right to resell
the participation to the bank on seven days' notice. To the extent any
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participation interest is illiquid, it is subject to the Fund's limit on
restricted and not readily marketable securities.
Municipal lease obligations
The AARP Tax Free Funds may also invest in municipal lease obligations generally
as a participation interest in a municipal obligation from a bank or other
financial intermediary. Municipal lease obligations are issued by state and
local governments to acquire land, equipment or facilities. Unlike general
obligation or revenue bonds, these contracts are not secured by the issuer's
credit, and if the issuing state or local government does not appropriate
payments, the lease may terminate, leaving the funds with property that may
prove costly to dispose of. In deciding which contracts to invest in, the Fund
Manager evaluates the likelihood of the governmental issuer discontinuing
appropriation for the leased property.
Portfolio turnover
Each of the AARP Mutual Funds may buy and sell securities to take advantage of
investment opportunities. The Fund Manager will do so to improve overall
investment return consistent with that Fund's objectives. These transactions
involve transaction costs in the form of spreads or brokerage commissions.
Recent economic and market conditions have necessitated more active trading,
resulting in a higher portfolio turnover rate for the AARP High Quality Short
Term Bond Fund. A higher rate involves greater transaction costs to the Fund and
may result in the realization of net capital gains, which would be taxable to
shareholders when distributed.
INVESTMENT RESTRICTIONS
================================================================================
To help reduce investment risk, each of the AARP Mutual Funds has adopted
certain fundamental investment policies. Only the shareholders can approve
changes to the following policies:
o A Fund may not make loans. (A purchase of a debt security is not a loan
for this purpose.) However, the Fund may lend its portfolio securities and
enter into repurchase agreements.
o A Fund may not borrow money, except as permitted under the 1940 Act.
A complete description of these and other policies and restrictions is contained
in the Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES
================================================================================
Are taxes withheld?
Generally, taxes are not withheld on purchases, redemptions, or distributions.
However, federal tax law requires the AARP Mutual Funds to withhold 31% of
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taxable dividends, capital gain distributions and redemption or exchange
proceeds for accounts without a correct certified Social Security or tax
identification number, or other certified information. To avoid this
withholding, make sure you complete and sign the Signature and Investor
Information Section of your Enrollment Form. AARP IRA, AARP SEP-IRA and AARP
Keogh Plan accounts are exempt from withholding regulations.
The AARP Mutual Funds reserve the right to reject Enrollment Forms or close
accounts without a correct certified Social Security or tax identification
number. In such cases, Enrollment Forms received without this information will
be returned to the investor with a check for the amount invested.
What else should I know about distributions and taxes?
You can receive your dividend and capital gain distributions in one of three
ways:
1. You can have a check sent to your address or to your bank;
2. You can reinvest them in additional shares of an AARP Mutual Fund; or
3. You can invest them in shares of another AARP Mutual Fund.
If your investment is in the form of an AARP IRA, AARP SEP-IRA or AARP Keogh
Plan account, all distributions are automatically reinvested.
If you reinvest your dividends and capital gains, you will be purchasing shares
at the current share price.
All taxable dividends from net investment income are taxable to you as ordinary
income. This is so whether you receive dividends as cash or additional shares.
Capital gains distributions are also currently taxable, whether received in cash
or reinvested.
Distributions of short-term capital gains by all the AARP Mutual Funds are
taxable as ordinary income.
Distributions of long-term capital gains are taxable for federal income tax
purposes at a maximum 20% or 28% capital gains rate (depending on the Fund's
holding period for the assets giving rise to the gain), regardless of the length
of time you have owned shares. Any capital gain distributed by the AARP Tax Free
Funds are generally taxable in the same manner as distributions by other Funds.
The AARP Tax Free Funds are managed to pay you dividends free from federal
income taxes, including the Alternative Minimum Tax (AMT). However, these
dividends may be subject to state and local income taxes. Also, these dividends
are taken into account in determining whether your income is large enough to
subject a portion of your Social Security benefits and certain Railroad
Retirement benefits, if any, to federal income taxes.
If you are a shareholder in the AARP Global Growth Fund or the AARP
International Growth and Income Fund, you may be able to claim a credit or
deduction on your income tax return for your pro rata portion of qualified taxes
paid by the Fund to foreign countries.
Each AARP Mutual Fund annually sends you detailed tax information about the
amount and type of its distributions.
A redemption involves a sale of shares and may result in a capital gain or loss
for federal income tax purposes. Exchanges are treated as redemptions for
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federal income tax purposes. Exchanges occur when you sell shares in one AARP
Mutual Fund and purchase shares in another AARP Mutual Fund.
The AARP Mutual Funds reserve the right to make extra distributions for tax
purposes.
FUND ORGANIZATION
================================================================================
The AARP investment program trusts
The 15 mutual fund portfolios described in this Prospectus are organized as five
Massachusetts business trusts--AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust and AARP Managed Investment
Portfolios Trust. Each trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940. The AARP Cash
Investment Funds was organized in January 1983, and the AARP Income Trust, the
AARP Tax Free Income Trust and the AARP Growth Trust were organized in June
1984. The AARP Tax Free Income Trust (formerly the AARP Insured Tax Free Income
Trust) was renamed effective August 1, 1991. The AARP Managed Investment
Portfolios Trust was organized in October 1996.
General management
The Trustees have overall responsibility for the management of the Trusts under
Massachusetts law. Under their direction, the Fund Manager--Scudder Kemper
Investments, Inc.--provides general investment management of the AARP Mutual
Funds. The Trustees supervise each Trust's activities. The shareholders elect
the Trustees and may remove them. Shareholders have one vote per share held on
matters on which they are entitled to vote.
The Trusts are not required to hold annual shareholder meetings and have no
current intention to do so. There may be special meetings for purposes such as
electing or removing Trustees, changing fundamental policies or approving an
investment advisory contract. The Fund Manager will help shareholders to
communicate with other shareholders in connection with removing a Trustee as if
Section 16(c) of the Investment Company Act of 1940 applied.
Since the Trusts use a combined Prospectus, it is possible that one Trust or
AARP Mutual Fund might become liable for a misstatement in this Prospectus
regarding another Trust or AARP Mutual Fund. The Trustees of each Trust
considered this risk when approving the use of a combined Prospectus.
The right of the Trusts and AARP Mutual Funds to use the AARP name will end upon
termination of the member services agreement with the Fund Manager unless AARP
otherwise agrees to let the AARP Mutual Funds continue to use the AARP name.
Management fees
Each AARP Mutual Fund, except for the AARP Managed Investment Portfolios, pays
the Fund Manager a fee for management and administrative services. The
management fee consists of two elements: a Base Fee and an Individual Fund
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Fee. The Base Fee is calculated as a percentage of the combined net assets of
all of the AARP Mutual Funds. Each AARP Mutual Fund, except for the AARP Managed
Investment Portfolios, pays, as its portion of the Base Fee, an amount equal to
the ratio of its daily net assets to the daily net assets of all of the AARP
Mutual Funds. The table below shows the annual Base Fee Rate at specified levels
of Program assets:
Annual Base Fee Rate Program Assets
------------------------------------------
00.350% First $2 billion
00.330% Next $2 billion
00.300% Next $2 billion
00.280% Next $2 billion
00.260% Next $3 billion
00.250% Next $3 billion
00.240% Thereafter
In addition to the Base Fee Rate, each AARP Mutual Fund, except for the AARP
U.S. Stock Index Fund and the AARP Managed Investment Portfolios, pays a flat
Individual Fund Fee based on the net assets of that Fund. This fee rate is not
linked to the total assets of the Program. The Individual Fee Rate recognizes
the different characteristics of each AARP Mutual Fund, the varying levels of
complexity of investment research and securities trading required to manage each
Fund, as well as the relative value that can be, and has been, added by the Fund
Manager. The table below shows the Individual Fund Fee Rate for each of the AARP
Mutual Funds:
Fund Individual Fee Rate
------------------------------------------------------------------------
AARP High Quality Money Fund 00.10%
AARP High Quality Tax Free Money 00.10%
Fund AARP GNMA and U.S. Treasury Fund 00.12%
AARP High Quality Short Term Bond 00.19%
Fund AARP Bond Fund for Income 00.28%
AARP Insured Tax Free General Bond 00.19%
Fund AARP Balanced Stock and Bond Fund 00.19%
AARP Growth and Income Fund 00.19%
AARP U.S. Stock Index Fund 00.00%
AARP Global Growth Fund 00.55%
AARP Capital Growth Fund 00.32%
AARP International Growth and 00.60%
Income Fund AARP Small Company Stock Fund 00.55%
Under this fee structure, the combined Base Fee and the Individual Fund
Fee, called the "Effective Management Fee Rate," would be reduced if total
Program assets increase to certain levels, regardless of whether an
individual AARP Mutual Fund's assets increase or decrease. The converse is
also true--if assets decrease to certain levels, the Effective Management
Fee Rate increases, regardless of any increase or decrease in assets of an
individual AARP Fund. For the fiscal year ended September 30, 1997, fees
paid to the Fund Manager totaled ___ of 1% of the average daily net assets
of the AARP High Quality Money Fund, ___ of 1% of the
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AARP High Quality Tax Free Money Fund, ___ of 1% of the AARP GNMA and U.S.
Treasury Fund, ___ of 1% of the AARP Capital Growth Fund, ___ of 1% of the
AARP High Quality Short Term Bond Fund, ___ of 1% of the AARP Insured Tax
Free General Bond Fund and AARP Growth and Income Fund, ___ of 1% of the
AARP Balanced Stock and Bond Fund, ___ of 1% of the AARP Global Growth
Fund, ___ of 1% of the AARP Bond Fund for Income, ___of 1% of the AARP
U.S. Stock Index Fund, ___ of 1% of the AARP International Growth and
Income Fund, and ___ of 1% of the AARP Small Company Stock Fund.
The Fund Manager pays a portion of the management fee to AARP Financial
Services Corporation (AFSC). AFSC provides the Fund Manager with advice
and other services relating to AARP Fund investment by AARP members.
The fee paid to AFSC is calculated on a daily basis and depends on the
level of total assets of the AARP Investment Program. The fee rate
decreases as the level of total assets increases. The fee rate for each
level of assets is .07 of 1% for the first $6 billion, .06 of 1% for the
next $10 billion and .05 of 1% thereafter.
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 the next $100 million,
and .01% of such assets in excess of $200 million, with a minimum annual
fee of $75,000. For the first 12 months of management, the Subadviser has
agreed to waive a portion of its fee. After the first year, the full fee
will be charged.
Under the Investment Management Agreements with the Fund Manager, the
Funds are responsible for all of their expenses, including fees and
expenses incurred in connection with membership in investment company
organizations; brokers' commissions; legal, auditing and accounting
expenses; taxes and governmental fees; the fees and expenses of the
transfer agent; the expenses of and the fees for registering or qualifying
securities for sale; the fees and expenses of Trustees, officers and
executive employees of the Trusts who are not affiliated with the Fund
Manager; the cost of printing and distributing reports and notices to
shareholders; and the fees and disbursements of custodians.
Special servicing agreement for the AARP managed
investment portfolios
All the expenses of the AARP Managed Investment Portfolios will be paid for in
accordance with a Special Servicing Agreement (Agreement) entered into by the
Fund Manager, the underlying AARP Mutual Funds, Scudder Service Corporation,
Scudder Fund Accounting Corporation, Scudder Investor Services, Inc. and each
Portfolio. Under each Agreement, the Fund Manager will arrange for all services
pertaining to each operation of each Portfolio including the services of Scudder
Service Corporation and Scudder Fund Accounting Corporation as the Shareholder
Servicing Agent and the Accounting Agent, respectively, for the Portfolio. If
the Trustees determine that the aggregate expenses of a Portfolio are less than
the estimated savings to the underlying AARP Mutual Fund from the operation of
the Portfolio, the underlying AARP Mutual Fund will bear those expenses in
proportion to the average daily value of its shares owned by the Portfolio.
Consequently, no underlying AARP Fund will be expected to carry expenses that
are in excess of the estimate of savings to it. The estimated savings are
expected to result from the reduction of shareholder servicing costs due to the
elimination of separate shareholder accounts which either currently are or have
potential to be invested in the underlying AARP Mutual Funds. The estimated
savings produced by the operation of a Portfolio will most likely suffice to
offset most, if not all, of the expenses incurred by the Portfolio.
In the event that the aggregate financial benefits to the underlying AARP Mutual
Funds do not exceed the costs of a Portfolio, the Fund Manager will pay, on
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behalf of the Portfolio, that portion of costs determined to be greater than the
benefits.
All expenses of each Portfolio, excluding certain non-recurring and
extraordinary expenses, will be paid for in accordance with the Agreement,
including fees and expenses incurred in connection with membership in investment
company organizations; fees and expenses of the Portfolio's accounting agent;
brokers' commissions; legal, auditing and accounting expenses; taxes and
governmental fees; the fees and expenses of the transfer agent; the expenses of
and the fees for registering or qualifying securities for sale; the fees and
expenses of Trustees, officers and employees of the Portfolio who are not
affiliated with the Fund Manager; the cost of printing and distributing reports
and notices to shareholders; and the fees and disbursements of custodians.
UNDERSTANDING FUND PERFORMANCE
================================================================================
You are likely to see performance figures for AARP Mutual Funds in
advertisements, sales literature or shareholder reports. The important factors
you want to look at are Yield, Total Return and Cumulative Total Return. These
measurements are based on historical earnings, are not an indication of future
performance, and will vary based on changes in market conditions, interest rates
and the level of the individual fund's expenses. You can also use these
measurements to compare the performance of similar types of mutual funds using
standard industry formulas.
What is yield?
Yield refers to the net investment income generated over a specific period of
time. Since yield is always calculated using a standard industry formula, it is
a useful way for you to compare the income produced by different mutual funds.
For the AARP High Quality Money Fund, the AARP Income Funds and AARP Tax Free
Funds, yield is a measure of income.
For non-money market funds, the "SEC yield" is an annualized expression of net
investment income generated by the investments in the fund over a specified
30-day period. This income is then annualized and then expressed as a
percentage. This yield is calculated according to methods required by the SEC,
and may not equate to the level of income paid to shareholders.
For money market funds, yield refers to the net investment income generated by
the fund over a specified seven-day period. This income is then annualized and
expressed as a percentage. For the money market funds, effective yield is
expressed similarly but, when annualized, the income earned by an investment in
the fund is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
For GNMA securities, net investment income includes realized gains or losses
based on historic cost for principal repayments received. For other securities,
net investment income includes the amortization of market premium or market
discount.
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What is a dividend?
A dividend represents a distribution of a portion of net income and short-term
capital gains from a mutual fund, and is distributed on a regular basis as
declared by the Trustees of a mutual fund. For example, many bond funds
distribute dividends on a monthly basis, while stock funds tend to distribute
any net income and short-term capital gains (dividends) at the end of the year -
at the same time the fund distributes any long-term capital gains. Other funds
may distribute dividends on a semi-annual or quarterly basis, depending on the
objectives of the specific fund.
What is a capital gain?
A capital gain, as it applies to a mutual fund shareholder, is a payment
representing a portion of the net realized gains when securities in the fund's
portfolio are sold. A "net realized gain" is determined by subtracting any
losses from the profits made on the sale of securities.
The term "capital gain" is also used to describe the gain or loss calculated
when a shareholder sells mutual fund shares. This gain or loss is the difference
between the purchase price of a mutual fund's shares and the price at which the
shares are sold. When the difference is positive, meaning that the shares have
gained value, the investor has realized a capital gain.
What is total return?
Total return measures dividends, capital gains distributions and changes up and
down in the share price of a particular fund. Total Return assumes that shares
were bought on the first day of the period shown, and redeemed (sold) on the
last day. It also assumes that all earnings were reinvested back into the fund.
It follows that if you bought or redeemed shares on different days or took some
of your earnings as cash, your actual return would be different from the figures
that are shown.
What is cumulative total return?
Cumulative total return of a mutual fund represents the cumulative change in
value of an investment in a fund for various periods. It assumes that all
dividends and capital gain distributions during the period were reinvested in
shares of the fund.
What is tax-equivalent yield?
To determine if tax-free investing is right for you, a good indicator is to
convert a yield from a tax-exempt mutual fund to its equivalent taxable yield.
The tax-equivalent yields of the AARP Tax Free Funds let you determine the yield
you would have to receive from a fully taxable investment to produce an aftertax
yield equivalent to that of a tax-free fund. The calculation is as follows:
Tax-Free Yield / 100% - your tax rate = Tax-Equivalent Yield
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Example: If a tax-free mutual fund has a 30-day average annualized yield of
5.30% and you are in the 31% tax bracket, the calculation would be:
5.30% / 100% - 31% = 7.68%
You would need to earn 7.68% with a taxable investment to equal the 5.30% yield
of a tax-free fund. The tax-equivalent yield will vary depending upon your
income tax bracket.
UNDERSTANDING SHARE PRICE
================================================================================
How is a fund's share price determined?
A share is a unit of ownership in a mutual fund. The share price is based on a
fund's net assets. It is calculated by dividing the current market value
(amortized cost in the case of the AARP High Quality Tax Free Money Fund) of
total fund assets, less all liabilities, by the total number of shares
outstanding. Scudder Fund Accounting Corporation, a subsidiary of the Fund
Manager, determines net asset value per share of each Fund as of the close of
regular trading on the New York Stock Exchange (Exchange), normally 4:00 p.m.
eastern time on each day the Exchange is open for trading. For AARP High Quality
Money Fund and AARP High Quality Tax Free Money Fund, Scudder Fund Accounting
Corporation also determines net asset value per share as of noon eastern time on
each day the Exchange is open for trading. The Trusts reserve the right to
suspend the sale of Fund shares after appropriate notice to shareholders if the
Trustees determine that it is in the best interest of shareholders.
OPENING AN AARP MUTUAL FUND ACCOUNT
================================================================================
The minimum initial investment for the AARP GNMA and U.S. Treasury, Balanced
Stock and Bond Fund, and Growth and Income Fund is $500. All other AARP Mutual
Funds have a minimum initial investment of $2,000. (The minimum initial
investment for a retirement account is just $250.)
1. Before you invest or send money, please read the Prospectus carefully.
2. Detach and complete the enclosed application.
3. Return your completed application along with a check in the postage-paid
envelope provided.
4. To open an AARP IRA or Keogh account, please call 1-800-253-2277 for a
special information kit containing the appropriate application.
5. If you have questions or need assistance, call an AARP Mutual Fund
Representative at 1-800-253-2277. (TDD Service: 1-800-634-9454)
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What will happen next?
Your application and check will be processed and an account number will be
assigned to you. You will also receive a confirmation that your application and
check have been received--along with instructions on how to add to your AARP
Mutual Fund investment.
WIRE TRANSFERS
================================================================================
To open an account, mail your completed Enrollment Form and then call an AARP
Mutual Fund Representative to obtain your account number. (Please note, AARP IRA
and AARP Keogh Plan accounts cannot be opened by wire.)
To add to your account, simply contact your bank with the following information:
o the name(s) on your account;
o your AARP Fund account number;
o the name of the AARP Fund(s) you want to invest in;
o the following name and address: State Street Bank and Trust Company,
Boston, MA 02101;
o the routing numbers ABA Number 011000028 and AC-99035420.
ADDING TO YOUR INVESTMENT
================================================================================
There are five ways you can make additions to your existing AARP Mutual Fund
investment:
o Call toll-free--1-800-631-4636--24 hours a day, seven days a week to
exchange from an existing fund
o Mail in your instructions--Send your check with personalized investment
slip, or a short instructional note that includes your account number and
the name of your AARP Fund(s). AARP Investment Program from Scudder, P.O.
Box 2540, Boston, MA 02208-2540.
o Wire your purchase--(Please see the "Wire Transfers" instructions above.)
o Exchanging from one AARP Fund to another--(Please see "Exchanges and
Redemptions" instructions below.)
o Invest automatically--Please see "Systematic Plans" for complete
information.
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EXCHANGES AND REDEMPTIONS
================================================================================
You may exchange all or part of your shares in one AARP Mutual Fund for shares
in another--by mail, by fax, or by phone. You can also redeem (sell) fund shares
the same way. (AARP IRA redemptions can be done by phone; Keogh shares can only
be redeemed in writing.)
o By mail--Send your instructions to P.O. Box 2540, Boston, MA, 02208-2540
o By fax--Send your instructions to: 1-800-821-6234
o By phone--Call 1-800-631-4636--24 hours a day, seven days a week
o Sell automatically--(Please see page ___ for complete information.)
SIGNATURE GUARANTEES
================================================================================
A signature guarantee is simply a certification of your signature, which is
required for your protection and to guard against fraudulent redemptions. It
guarantees that you, and you alone, are authorized to make certain requests
regarding your AARP Mutual Fund investment. A signature guarantee is required
for redemptions of more than $100,000 to the address of record.
Or when redemption proceeds are to be paid to someone other than yourself, or
when they are to be sent to an address other than yours, or if your account
address has changed during the last 15 days. If bank information is provided on
the Enrollment Form, any amount can be sent to the bank without a signature
guarantee.
STATEMENTS AND REPORTS
================================================================================
You will always receive a prompt confirmation statement for every transaction.
You will also receive a consolidated monthly statement that details your current
account status and notes any and all transactions. (AARP IRA and Keogh customers
receive consolidated statements on a quarterly basis.) You will also receive a
mid-year report and an annual report.
To reduce the volume of mail, we will only send one copy of most reports to a
household (same surname, same address). Please contact us if you wish to receive
additional reports.
OTHER MAILINGS
================================================================================
Each year you will receive a current Prospectus.
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INVESTOR SERVICES
There are three important toll-free phone numbers to remember:
1-800-631-4636--the number to call if
o you want to make an exchange between AARP Mutual Funds
o you want to open a new AARP Mutual Fund by exchange from an existing
fund
o you want to redeem money to your registered address
o you want to get current performance information
o you want to get current account balance information
o you want to confirm your last transaction.
1-800-253-2277--the number to call if
o you want to add to an AARP Mutual Fund by transfer from your bank
checking or NOW account.
o you want to redeem and send proceeds to your checking or NOW
account.
1-800-821-6234--the number to call if
o you want to process transactions by fax, exchanges or redemptions.
Free Checkwriting
Free checkwriting privileges are available to shareholders in the AARP High
Quality Money and High Quality Tax Free Money Funds.
Distributions Direct
You may elect to have dividend and capital gains distributions automatically
deposited into your bank checking or NOW account. For information on this
service, please call 1-800-253-2277.
Systematic Plans
o Automatic Investment Plan will make regular investments into your
AARP Mutual Fund through scheduled, automatic deductions from your
bank checking account.
o Payroll Deduction or Direct Deposit allows you to have all or a
portion of your Social Security, U.S. Government or any regular
income check (pension, dividend, interest or payroll) deposited
automatically into your AARP Mutual Fund account.
o Automatic Withdrawal Plan will automatically send a monthly
redemption of $50 or more directly to you, provided that you have at
least $10,000 or more in an AARP Mutual Fund.
o Direct $10,000 balance in your AARP Mutual Fund account).
o Systematic Retirement Withdrawal Plan lets you receive periodic
distributions from your AARP IRA or Keogh plan account.
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SOME COMMONLY ASKED QUESTIONS
================================================================================
What if my investment falls below the minimum balance?
If you do not increase your account balance within 60 days of notification, the
Fund reserves the right to redeem and return the proceeds to you. However, if
your account falls below the minimum balance due to market activity, your
account will not be closed.
When purchasing shares, what is the normal check processing time?
Checks received in the mail (and wire transfers) are normally processed on the
same business day as they are received.
How soon will I start earning income on my purchase?
For AARP Mutual Funds paying daily dividends, income begins to accrue on the
business day following the actual execution of the order. For AARP Money Funds,
purchases made by wire and received before noon on any business day are executed
at noon and begin earning income the same day.
What about third-party transactions?
Purchases and redemptions made through a member of the National Association of
Securities Dealers, Inc. at the investor's request may incur a fee for services
rendered.
Can I add another AARP Mutual Fund to my existing account?
Yes, you may open another AARP Mutual Fund at any time. Your new fund will have
the same account number and registration as your existing fund(s).
When are redemptions processed?
Redemption requests received before the regular close of trading on the Exchange
(normally 4:00 p.m. Eastern time) will be processed on the same day at that
night's closing share price.
When can I expect to receive my money?
If you purchase shares by check or by phone and then redeem them by letter
within seven business days of the purchase, the redemption proceeds may be held
until the purchase check has cleared, but then your redemption proceeds will be
mailed to you promptly.
Are there any purchase restrictions?
AARP Mutual Funds do not permit a pattern of frequent purchases and sales in
response to short-term changes in share price. (This restriction does not apply
to AARP Money Funds. AARP Mutual Funds and Scudder Investor Services, Inc.
reserve the right to reject purchases or exchanges for any reason.)
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SERVICE PROVIDERS OF THE AARP MUTUAL FUNDS
================================================================================
Legal Counsel
Dechert Price & Rhoads,
Washington, D.C.
Independent Accountants
Price Waterhouse LLP, Boston, MA
Underwriter
Scudder Investor Services, Inc., Two International Place, Boston, MA (a
subsidiary of the Fund Manager) is principal underwriter of the AARP Mutual
Funds.
Scudder Investor Services, Inc. offers for sale and confirms as agent all
purchases of shares of the AARP Mutual Funds.
Custodians
Brown Brothers Harriman & Co., Boston, MA
State Street Bank and Trust Company, Boston, MA
Fund Accounting Agent
Scudder Fund Accounting Corporation, Two International Place, Boston, MA (a
subsidiary of the Fund Manager) is responsible for determining the daily net
asset value per share and maintaining the general accounting records of the AARP
Mutual Funds.
Transfer and Dividend-Disbursing Agent
Scudder Service Corporation, P.O. Box 2540, Boston, MA 02208-2540 (a subsidiary
of the Fund Manager)
Investment Adviser
Scudder Kemper Investments, Inc., Two International Place, Boston, MA is
investment adviser for the AARP Mutual Funds.
Subadviser
Bankers Trust Company, One Bankers Trust Plaza, New York, NY, is Subadviser for
the AARP U.S. Stock Index Fund.
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TRUSTEES AND OFFICERS
================================================================================
CAROLE LEWIS ANDERSON, Trustee; President, MASDUN Capital Advisors; Principal,
Suburban Capital Markets, Inc.; Director, VICORP Restaurants, Inc.; Trustee,
Hasbro Children's Foundation and Mary Baldwin College; Member of the Board,
Association for Corporate Growth of Washington, D.C. (1993-1996).
ADELAIDE ATTARD, Trustee; Consultant, Gerontology Commissioner, County of
Nassau, New York, Department of Senior Citizen Affairs (1971-1991), Member, NYC
Department of Aging Advisory Council; Chairperson, Federal Council on Aging
(1981-1986).
ROBERT N. BUTLER, M.D., Trustee; Director, International Longevity Center and
Professor of Geriatrics and Adult Development; Chairman, Henry L. Schwartz
Department of Geriatrics and Adult Development, Mount Sinai Medical Center;
Formerly Director, National Institute on Aging, National Institute of Health.
ESTHER CANJA, Trustee; Vice President, American Association of Retired Persons;
Trustee and Chair, AARP Group Health Insurance Plan; Board Liaison, National
Volunteer Leadership Network Advisory Committee; Chair, Board Operations
Committee; AARP State Director of Florida (1990-1992). (AARP Managed Investment
Portfolios Trust and AARP Income Trust only.)
LINDA C. COUGHLIN*, Chairman and Trustee; Managing Director, Scudder Kemper
Investments, Inc., Director and Senior Vice President, Scudder Investor
Services, Inc.
HORACE B. DEETS, Vice Chairman of each Trust and Trustee or AARP Cash Investment
Funds and AARP Tax Free Income Trust only; Executive Director, American
Association of Retired Persons; Member, Board of Councilors, Andrus Gerontology
Center; Member of the Board, HelpAge International.
EDGAR R. FIEDLER, Trustee; Vice President and Economic Counselor, The Conference
Board, Inc.
EUGENE P. FORRESTER, Trustee; Lt. General (Retired) U.S. Army; International
Trade Counselor; Consultant.
GEORGE L. MADDOX, JR., Trustee; Professor Emeritus and Director, Long Term Care
Resources Program, Duke University Medical Center; Professor Emeritus of
Sociology, Departments of Sociology and Psychiatry, Duke University.
ROBERT J. MYERS, Trustee; Actuarial Consultant; Formerly Executive Director,
National Commission on Social Security Reform; Formerly Chairman, Commission on
Railroad Retirement Reform.
JAMES H. SCHULZ, Trustee; Professor of Economics and Kirstein Professor of Aging
Policy, Policy Center on Aging, Florence Heller School, Brandeis University.
GORDON SHILLINGLAW, Trustee; Professor Emeritus of Accounting, Columbia
University Graduate School of Business.
JEAN GLEASON STROMBERG, Trustee; Consultant; Director, Financial Institutions
Issues, U.S. General Accounting Office (11/96 - 9/97); Partner, Fulbright &
Jaworski - law firm (1978 - 1996).
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WILLIAM GLAVIN*, Vice President
JOHN HEBBLE*, Assistant Treasurer
THOMAS W. JOSEPH*, Vice President
THOMAS F. McDONOUGH*, Vice President and Assistant Secretary
JAMES W. PASMAN*, Vice President
KATHRYN L. QUIRK*, Vice President, Treasurer and Secretary
HOWARD SCHNEIDER*, Vice President
CORNELIA M. SMALL*, President
*Scudder Kemper Investments, Inc.
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<PAGE>
NOTES
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<PAGE>
NOTES
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<PAGE>
NOTES
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NOTES
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<PAGE>
NOTES
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<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
AARP Cash Investment Funds:
AARP HIGH QUALITY MONEY FUND
AARP Income Trust:
AARP HIGH QUALITY SHORT TERM BOND FUND
AARP GNMA and U.S. TREASURY FUND
AARP BOND FUND FOR INCOME
AARP Tax Free Income Trust:
AARP HIGH QUALITY TAX FREE MONEY FUND
AARP INSURED TAX FREE GENERAL BOND FUND
AARP Growth Trust:
AARP BALANCED STOCK AND BOND FUND
AARP GROWTH AND INCOME FUND
AARP U.S. STOCK INDEX FUND
AARP GLOBAL GROWTH FUND
AARP CAPITAL GROWTH FUND
AARP INTERNATIONAL GROWTH AND INCOME FUND
AARP SMALL COMPANY STOCK FUND
AARP Managed Investment Portfolios Trust:
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1998
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the combined Prospectus for all fifteen of the above
Funds, dated February 1, 1998, as amended from time to time, copies of which may
be obtained without charge by writing to the AARP INVESTMENT PROGRAM FROM
SCUDDER, P.O. Box 2540, Boston, Massachusetts 02208-2540 or by calling
1-800-253-2277.
<PAGE>
TABLE OF CONTENTS
Page
AARP INVESTMENT PROGRAM FROM SCUDDER...........................................1
Summary of Advantages and Benefits.......................................1
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES..................................3
AARP Money Fund..........................................................3
AARP Income Funds........................................................5
AARP Tax Free Income Funds...............................................8
AARP Growth Funds.......................................................13
AARP Managed Investment Portfolios......................................18
Special Investment Policies of the AARP Funds...........................19
General Investment Policies of the AARP Funds...........................35
Investment Restrictions.................................................35
PURCHASES.....................................................................41
General Information.....................................................41
Checks..................................................................41
Share Price.............................................................41
Share Certificates......................................................42
Direct Deposit Program..................................................42
Wire Transfers..........................................................42
Holidays................................................................42
Other Information.......................................................42
REDEMPTIONS...................................................................43
General Information.....................................................43
Redemption by Telephone.................................................43
Redemption by Mail or Fax...............................................44
Redemption by Checkwriting..............................................45
Redemption-in-Kind......................................................45
Other Information.......................................................45
EXCHANGES.....................................................................45
TRANSACT BY PHONE.............................................................46
Purchasing Shares by Transact by Phone..................................47
Redeeming Shares by Transact by Phone...................................47
FEATURES AND SERVICES OFFERED BY THE FUNDS....................................47
Automatic Dividend Reinvestment.........................................47
Distributions Direct....................................................47
Reports to Shareholders.................................................47
Consolidated Statements.................................................48
RETIREMENT PLANS..............................................................48
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")...........48
AARP Keogh Plan.........................................................49
OTHER PLANS...................................................................50
Automatic Investment....................................................50
Automatic Withdrawal Plan...............................................50
Direct Payment of Regular Fixed Bills...................................50
DIVIDENDS AND YIELD...........................................................51
Performance Information: Computation of Yields and Total Return.........52
Taking a Global Approach................................................59
TRUST ORGANIZATION............................................................59
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TABLE OF CONTENTS (continued)
Page
MANAGEMENT OF THE FUNDS.......................................................61
Personal Investments by Employees of Scudder............................67
TRUSTEES AND OFFICERS.........................................................67
REMUNERATION..................................................................72
DISTRIBUTOR...................................................................74
TAXES.........................................................................75
BROKERAGE AND PORTFOLIO TURNOVER..............................................79
Brokerage Commissions...................................................79
Portfolio Turnover......................................................81
NET ASSET VALUE...............................................................82
AARP Money Funds........................................................82
AARP Non-Money Market Funds.............................................82
ADDITIONAL INFORMATION........................................................83
Experts.................................................................83
Shareholder Indemnification.............................................83
Ratings of Corporate Bonds..............................................84
Ratings of Commercial Paper.............................................84
Ratings of Municipal Bonds..............................................84
Other Information.......................................................85
Tax-Exempt Income vs. Taxable Income....................................88
FINANCIAL STATEMENTS..........................................................89
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AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Investment Program from Scudder (the "Program") was developed by
the American Association of Retired Persons ("AARP") to provide an array of
conservatively managed investment options for its members. Today's financial
markets present an enormous, ever-changing selection of investments suited for
investors with varying needs. AARP, a non-profit organization dedicated to
improving the quality of life, independence and dignity of older people, has
undertaken to help its members by designing an investment program which attempts
to satisfy the investment and retirement planning needs of most of its members,
whether they are experienced investors or savers who have never invested at all.
As with any program with the "AARP" name, the Program includes special benefits
as described in the combined prospectus for five trusts -- AARP Cash Investment
Funds, AARP Income Trust, AARP Tax Free Income Trust, AARP Growth Trust, and
AARP Managed Investment Portfolios Trust (the "Trusts"), dated February 1, 1998
(the "Prospectus"). AARP endorses this program which was developed with the
assistance of Scudder, Stevens & Clark, Inc., now Scudder Kemper Investments,
Inc., ("the Fund Manager" or "Scudder"), a firm with over 75 years of investment
counseling and management experience. Scudder was selected after an extensive
search among qualified candidates, and provides the Program with continuous and
conservative professional investment management. (See "MANAGEMENT OF THE
FUNDS.")
Each of the Trusts is an open-end, diversified management investment
company authorized to issue its shares of beneficial interest in separate series
("the Funds"). A total of 15 Funds are currently offered by the five Trusts. The
differing investment objectives of the 15 Funds in the Program provide AARP
members with a variety of sensible investment alternatives, and by matching
their own objectives with those of the different AARP Funds, AARP members may
design an investment program to meet their personal needs. Not all your money is
the same. There is short-term money, for example money needed for your regular
budgeting and for emergencies, and there is money which can be invested for the
longer term. It is generally thought that three months of income/expenses should
be set aside in a savings account or money market fund to cover short-term
needs. The Program is designed to offer alternatives to keeping all of your
money in short-term fixed price investments like money market funds, insured
short-term savings accounts and insured six-month certificates of deposit. The
AARP Money Funds provide a taxable and a tax free alternative for short-term
monies and the AARP Income Funds, the AARP Insured Tax Free General Bond Fund
and the AARP Growth Funds provide a range of choices for longer term investment
dollars and the AARP Managed Investment Portfolios provide diversification of
investment by investing in a select mix of AARP Funds.
Master/feeder structure. Each Trust's Board of Trustees approved a
proposal which gives the respective Board of Trustees the discretion to retain
the current distribution arrangement for the Funds while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Summary of Advantages and Benefits
o Experienced Professional Management: Scudder Kemper Investments, Inc.,
provides investment advice to the Funds.
o AARP's Commitment: the Program was designed with AARP's active
participation to provide strong, ongoing representation of the members'
interests and to help ensure a high level of service.
o Wide Selection of Investment Objectives: you can emphasize money market
returns and liquidity, income, tax-free income, growth, or any
combination.
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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 With Growth Portfolio
all pay dividends monthly, the AARP Balanced Stock and Bond Fund, the AARP
Growth and Income Fund and the AARP U.S. Stock Index Fund are expected to
pay dividends quarterly and the AARP Global Growth Fund, the AARP Capital
Growth Fund, the AARP International Growth and Income 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.
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o Shareholder Handbook: the Shareholder Handbook was created to help answer
many of the questions you may have about investing in the Program.
o IRA Shareholder Handbook: The IRA Shareholder Handbook was created to help
answer many of the questions you may have about investing in the no-fee
AARP IRA.
o A Glossary of Investment Terms: the Glossary defines commonly used
financial and investment terms.
o Newsletter: every month, shareholders receive our newsletter, Financial
Focus (retirement plan shareholders receive a special edition of Financial
Focus on a quarterly basis) which is designed to help keep you up to date
on economic and investment developments, and any new financial services
and features of the Program.
This Statement of Additional Information supplements the Prospectus, and
provides more detailed information about the Trusts and the Funds.
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
AARP Money Fund
(See "AARP High Quality Money Fund," "INVESTMENT OBJECTIVES AND POLICIES,"
and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.)
The AARP Funds offer a choice of a taxable and a tax free money fund for
small savers, big savers and people looking for a way to invest. People who earn
a relatively low interest rate in an insured bank savings account, who have to
make withdrawals or deposits in person or whose money isn't easily accessible
may find that the AARP Money Funds can help.
AARP High Quality Money Fund. The Fund is designed to provide current
income. In doing so, the Fund seeks to maintain stability and safety of
principal and a constant net asset value of $1.00 per share while offering
liquidity. There may be circumstances under which this goal cannot be achieved.
The Fund also has an education objective to help shareholders, especially
individuals planning for and living in retirement, make informed investment
decisions. The AARP High Quality Money Fund is a separate series of AARP Cash
Investment Funds and is the only Fund currently offered by that Trust.
Additional series of the Trust may be offered in the future. From investments in
high quality securities, the Fund is designed to provide current income. The
Fund invests in securities with remaining maturities of 397 calendar days or
less, except in the case of U.S. Government securities, which may have
maturities of up to 762 calendar days. The average dollar-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 Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P") or Fitch Investors Service ("Fitch"). In addition, the Fund
Manager seeks through its own credit analysis to limit investments to
high-quality instruments presenting minimal credit risks. If a security ceases
to be rated or is downgraded below the second highest quality rating indicated
above, the Fund will promptly dispose of the security, unless the Trustees
determine that continuing to hold such security is in the best interests of the
Fund. Generally, the Fund will invest in securities rated in the highest quality
rating by at least two of these rating agencies. Amendments have been 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
3
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investments, as a matter of non-fundamental policy the Fund will not invest more
than 5% of its total assets in the securities of a single issuer, other than the
U.S. Government. The Fund may, however, invest more than 5% of its total assets
in the first tier securities of a single issuer for a period of up to three
business days after purchase, although the Fund may not make more than one such
investment at any time. The Fund may not invest more than 5% of its total assets
in securities which were second tier securities when acquired by the Fund.
Further, the Fund may not invest more than the greater of (1) 1% of its total
assets, or (2) one million dollars, in the securities of a single issuer which
were second tier securities when acquired by the Fund.
The Fund purchases high quality short-term securities consisting of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of supranational organizations such as the
International Bank for Reconstruction and Development (the World Bank);
obligations of domestic banks and their foreign branches, including bankers'
acceptances, certificates of deposit, deposit notes and time deposits;
obligations of savings and loan institutions; instruments whose credit has been
enhanced by: banks (letters of credit), insurance companies (surety bonds), or
other corporate entities (corporate guarantees); corporate obligations,
including commercial paper, notes, bonds, loans and loan participations;
securities with variable or floating interest rates; asset-backed securities,
including certificates, participations and notes; municipal securities including
notes, bonds and participation interests, either taxable or tax-free, as
described in more detail for the AARP High Quality Tax Free Money Fund;
securities with put features; and repurchase agreements. The Fund may hold cash,
which does not earn interest, to facilitate stabilizing its net asset value per
share and for liquidity purposes.
Commercial paper at the time of purchase will be rated, or judged by the
Fund Manager under the supervision of the Trustees, to be the equivalent of
securities rated, A-1 or higher by S&P, Prime-1 or higher by Moody's or F-1 or
higher by Fitch. Investments in other corporate obligations, such as bonds or
notes, will be limited to securities rated, or judged by the Fund Manager to be
the equivalent of securities rated, AA or higher by S&P or Fitch or Aa or higher
by Moody's. Obligations which are the subject of repurchase agreements will be
limited to those of the type described above. Shares of this Fund are not
insured or guaranteed by the U.S. Government.
The Fund may invest in certificates of deposit and bankers' acceptances of
large domestic banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of $1 billion) and their
foreign branches and of smaller banks as described below. These as well as all
other investments of the Fund must be U.S. dollar denominated. The Fund will not
invest in certificates of deposit or bankers' acceptances of foreign banks
without additional consideration by and the approval of the Trustees of the
Trust. Although the Fund recognizes that the size of a bank is important, this
fact alone is not necessarily indicative of its creditworthiness.
Investment in certificates of deposit and bankers' acceptances issued by
foreign branches of domestic banks involves investment risks that are different
in some respects from those associated with investment in obligations issued by
domestic banks. Such investment risks include the possible imposition of
withholding taxes on interest income, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations, or other adverse political or economic
developments. In addition, it might be more difficult to obtain and enforce a
judgment against a foreign branch of a domestic bank.
The Fund may also invest in certificates of deposit issued by banks which
had, at the time of their most recent annual financial statements, total assets
of less than $1 billion, provided that (i) the principal amounts of such
certificates of deposit are insured by an agency of the U.S. Government, (ii) at
no time will the Fund hold more than $100,000 principal amount of certificates
of deposit of any one such bank, and (iii) at the time of acquisition, no more
than 10% of the Fund's net assets (taken at current value) are invested in
certificates of deposit and bankers' acceptances of banks having total assets
not in excess of $1 billion.
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System whose creditworthiness has been determined by the Fund
Manager to be equal to that of issuers of commercial paper rated within the two
highest grades. See "Repurchase Agreements" under "Special Investment Policies
of the AARP Funds."
AARP Income Funds
("AARP High Quality Short Term Bond Fund," See "AARP GNMA and U.S.
Treasury Fund," "AARP Bond Fund for Income," "INVESTMENT OBJECTIVES AND
POLICIES," and "OTHER INVESTMENT POLICIES AND
4
<PAGE>
RISK FACTORS" in the Prospectus.) Each of the Funds seeks to earn a high level
of income consistent with its investment policies.
AARP High Quality Short Term Bond Fund. The Fund is designed to produce a
high level of current income but with less risk of loss to the Fund's portfolio
than other short-term bond mutual funds, measured by the frequency and amount by
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in high-quality, short-term U.S. Government,
corporate and other fixed-come securities. The Fund also has an education
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions. Consistent with investments
primarily in high quality securities, the Fund seeks to provide a high level of
income and to keep the value of its shares more stable than that of a long-term
bond. By including short- and medium-term bonds in its portfolio, the Fund seeks
to offer less share price volatility than long-term bonds or many long-term bond
funds, although its yield may be lower. Due to the greater market price risk of
its securities, the Fund may have a more variable share price than the AARP GNMA
and U.S. Treasury Fund. It is also possible that the Fund may provide a higher
level of income than the AARP GNMA and U.S. Treasury Fund.
Under normal circumstances the Fund will invest substantially all, and no
less than 65%, of its assets invested in high quality U.S. government, corporate
and other fixed-income securities. It may purchase any investments eligible for
the AARP GNMA and U.S. Treasury Fund corporate notes and bonds, as obligations
of federal agencies that are not backed by the full faith and credit of the U.S.
Government, such as obligations of Federal Home Loan Bank, Farm Credit Banks and
the Federal Home Loan Mortgage Corporation. In addition, it may purchase
obligations of international agencies such as the International Bank for
Reconstruction and Development, the Inter-American Development Bank and the
Asian Development Bank. Other eligible investments include U.S.
dollar-denominated foreign debt securities (such as U.S. dollar denominated debt
securities issued by the Dominion of Canada and its provinces), foreign
government bonds denominated in foreign currencies, trust preferred securities,
mortgage-backed and other asset-backed securities, and money market instruments
such as commercial paper, bankers' acceptances and certificates of deposit
issued by domestic and foreign branches of U.S. banks.
Except for limitations in the Fund's investment restrictions, there is 20%
limit on foreign currency-denominated investments, 5% foreign currency as to the
proportions of the Fund which may be invested in any of the eligible
investments. However, it is a policy of the Fund that its non-governmental
investments will be spread among a variety of companies and will not be
concentrated in any industry. (See "Investment Restrictions," herein.)
Portfolio Quality. The policies of AARP High Quality Short Term Bond Fund
are designed to provide a portfolio that combines primarily high quality
securities with investments that attempt to reduce its market price risk. In
fact, according to information provided by Morningstar, Inc.*, (but under former
fund name) 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
- --------
* [TO BE UPDATED] 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.
5
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and are regarded as having adequate capacity to repay principal and pay interest
but involve potentially greater price variability than higher-quality
securities. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. The Fund does not purchase securities
rated below investment-grade, commonly known as "junk" bonds. (See "ADDITIONAL
INFORMATION--Ratings of Corporate Bonds.")
Variations of Maturity. In an attempt to capitalize on the differences in
total return from securities of differing maturities, maturities may be varied
according to the structure and level of interest rates, and the Fund Manager's
expectations of changes therein.
Foreign Securities. The AARP High Quality Short Term Bond Fund may invest,
without limit, in U.S. dollar-denominated foreign debt securities (including
U.S. dollar-denominated debt securities issued by the Dominion of Canada and its
provinces and other debt securities which meet the Fund's criteria applicable to
its domestic investments), and in certificates of deposit issued by foreign
branches of United States banks, to any extent deemed appropriate by the Fund
Manager. The Fund may invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar, but no more
than 5% of the Fund's total assets will be represented by a given foreign
currency.
AARP GNMA and U.S. Treasury Fund. The Fund is designed to produce a high level
of current income but with less risk of loss to the Fund's portfolio than other
GNMA mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing in
high-quality Government National Mortgage Association (GNMA) securities and U.S.
Treasury bills, notes and bonds issued or backed by the full faith and credit of
the U.S. Government. The Fund also has an education objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions. AARP GNMA and U.S. Treasury Fund is designed for
investors who are seeking high current income from high quality securities and
who wish to receive a degree of protection from bond market price risk. The
Fund's investment objective is to produce a high level of current income and to
keep the price of its shares more stable than that of a long-term bond. The Fund
pursues this objective by investing principally in U.S. Government-guaranteed
GNMA securities and U.S. Treasury obligations. The Fund has been designed with
the conservative, safety-conscious investor in mind. Of the three funds in the
AARP Income Trust, the AARP GNMA and U.S. Treasury Fund is the most conservative
choice. Although past performance is no guarantee of future performance,
historically, this Fund offers higher yields than such short-term investments as
insured savings accounts, insured six month certificates of deposit and
fixed-price money market funds.
The Fund invests in U.S. Treasury bills, notes and bonds; other securities
issued or backed by the full faith and credit of the U.S. Government, including,
but not limited to, Government National Mortgage Association ("GNMA")
mortgage-backed securities, Merchant Marine Bonds guaranteed by the Maritime
Administration and obligations of the Export-Import Bank; financial futures
contracts with respect to such securities; options on either such securities or
such financial futures contracts; and bank repurchase agreements. At least 65%
of the Fund's net assets will be directly invested in U.S. Treasury obligations,
including GNMAs. The Fund will make long-term investments but will also attempt
to dampen its price variability in comparison to that of a long-term bond by
including short-term U.S. Treasury securities in its portfolio. The Fund may
also utilize hedging techniques involving limited use of financial futures
contracts and the purchase and writing (selling) of put and call options on such
contracts. Under certain market conditions, these strategies may reduce current
income. At any time the Fund may have a substantial portion of its assets in
securities of a particular type or maturity. The Fund may also write covered
call options on portfolio securities and purchase "when-issued" securities.
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.
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<PAGE>
As mortgage-backed securities, GNMAs differ from bonds in that principal
is paid back by the borrower over the length of the loan rather than returned in
a lump sum at maturity. GNMAs are called "pass-through" securities because both
interest and principal payments including prepayments are passed through to the
holder of the security (in this case, the Fund).
The payment of principal on the underlying mortgages may exceed the
minimum required by the schedule of payments for the mortgages. Such prepayments
are made at the option of the mortgagors for a wide variety of reasons
reflecting their individual circumstances and may involve capital losses if the
mortgages were purchased at a premium. For example, mortgagors may speed up the
rate at which they prepay their mortgages when interest rates decline
sufficiently to encourage refinancing. The Fund, when such prepayments are
passed through to it, may be able to reinvest them only at a lower rate of
interest. The Fund Manager, in determining the attractiveness of GNMAs relative
to alternative fixed-income securities, and in choosing specific GNMA issues,
will have made assumptions as to the likely speed of prepayment. Actual
experience may vary from this assumption resulting in a higher or lower
investment return than anticipated. When interest rates rise, mortgage
prepayment rates tend to decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares.
Some investors may view the Fund as an alternative to a bank certificate
of deposit (CD). While an investment in the Fund is not federally insured, and
there is no guarantee of price stability, an investment in the Fund--unlike a
CD--is not locked away for any period, may be redeemed at any time without
incurring early withdrawal penalties, and may provide a higher yield.
AARP Bond Fund for Income. The Fund is designed to produce a high level of
current income but with less risk of loss to its portfolio than other long-term
bond mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing
primarily in short-, medium- and long-term investment-grade debt securities. The
Fund also has an education objective to help shareholders, especially
individuals planning for and living in retirement, make informed investment
decisions.
In pursuit of its investment objectives, under normal market conditions,
the Fund invests at least 65% of its assets in investment-grade debt securities.
Investment-grade securities are rated Aaa, Aa, A, or Baa by Moody's or AAA, AA,
A, or BBB by S&P, or, if unrated, are of equivalent quality as determined by the
Fund Manager. The Fund may invest up to 35% of its assets in securities rated Ba
or B by Moody's or BB or B by S&P, but no more than 10% of the Fund's assets may
be invested in securities rated B by Moody's or S&P. These two grades of
securities are considered to be below investment grade. Below investment-grade
securities are considered predominantly speculative with respect to their
capacity to pay interest and repay principal. They generally involve a greater
risk of default and have more price volatility than securities in higher rating
categories.
The Fund may invest in U.S. Treasury and Agency securities, corporate
bonds and notes, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies or
investment-grade foreign institutions, and money market instruments such as
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks. The Fund may invest up to 20% of
total assets in foreign debt securities denominated in currencies other than the
U.S. dollar, but no more than 5% of the fund's total assets will be represented
by a given foreign currency. The Fund may also purchase "when-issued" securities
and invest in repurchase agreements.
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.
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AARP Tax Free Income Funds
(See "AARP High Quality Tax Free Money Fund," "AARP Insured Tax Free
General Bond Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT
POLICIES AND RISK FACTORS" in the Prospectus.)
AARP High Quality Tax Free Money Fund. The Fund is designed to provide
current income free from federal income taxes. In doing so, the Fund seeks to
maintain stability and safety of principal and a constant net asset value of
$1.00 per share while offering liquidity. The Fund also has an education
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions. The AARP High Quality Tax
Free Money Fund is a separate series of AARP Tax Free Income Trust. From
investments in high quality municipal securities, the Fund is designed to
provide current income free from federal income taxes. The Fund also seeks to
maintain stability and safety of principal, while offering liquidity. The Fund
seeks to maintain a constant net asset value of $1.00 per share. There may be
circumstances under which this goal cannot be achieved. Such securities may
mature no more than 397 calendar days or less from the date the purchase is
expected to be settled by the Fund, with a weighted average maturity of 90 days
or less.
The Fund will invest in municipal securities which are rated at the time
of purchase within the two highest quality ratings of rating agencies such as:
Fitch -- AAA and AA, F1 and F2, or Moody's -- Aaa and Aa, or within Moody's
short-term municipal obligations top ratings of MIG 1 and MIG 2 and P1, or S&P
- -- AAA/AA and SP1+/SP1, A1+ and A1 -- all in such proportions as management will
determine. Securities must be so rated by at least two agencies or by at least
one, if only one has rated the security. Generally, the Fund will invest in
securities rated in the highest quality rating by at least two of these rating
agencies. In some cases, short-term municipal obligations are rated using the
same categories as are used for corporate obligations. In addition, unrated
municipal securities will be considered as being within the foregoing quality
ratings if other equal or junior municipal securities of the same issuer are
rated and their ratings are within the foregoing ratings of Fitch, Moody's or
S&P. The Fund may also invest in municipal securities which are unrated if, in
the opinion of the Fund Manager, such securities possess creditworthiness
comparable to those rated securities in which the Fund may invest. For a
description of ratings, please see "Additional Information." Shares of this Fund
are not insured or guaranteed by the U.S. Government.
Subsequent to its purchase by the AARP High Quality Tax Free Money Fund,
an issue of municipal securities may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. The Fund will
dispose of any such security unless the Board of Trustees of the Fund determines
that such disposal would not be in the best interests of the Fund.
As a fundamental policy, under normal circumstances, at least 80% of the
net assets of AARP High Quality Tax Free Money Fund will be invested in
tax-exempt securities. Although the Fund normally intends to ensure that all
income to shareholders will be exempt from federal income tax, there can be no
assurance that this goal will be achieved or that income to shareholders which
is federally tax exempt will be exempt from state and local taxes.
From time to time on a temporary basis or for defensive purposes, the Fund
may, subject to its investment restrictions, hold cash and invest in taxable
investments consisting of: (1) other obligations issued by or on behalf of
municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances; and (5)
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.
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Maintenance of Constant Net Asset Value Per Share. The Trustees of AARP
High Quality Money Fund and AARP High Quality Tax Free Money Fund have
determined that it is in the best interests of the Funds and their shareholders
to maintain the net asset value of the Funds' shares at a constant $1.00 per
share. In order to facilitate the maintenance of a constant $1.00 net asset
value per share, the AARP High Quality Money Fund and the AARP High Quality Tax
Free Money Fund operate in accordance with a rule of the Securities and Exchange
Commission (the "SEC"). In accordance with that rule, the assets of the Funds
consist entirely of cash, cash items, and high quality U.S. dollar-denominated
investments which have minimal credit risks and which have a remaining maturity
date of not more than 397 days from date of purchase (except that the AARP High
Quality Money Fund may invest in U.S. Government securities having maturities of
up to 762 days). The average dollar-weighted maturity of each Fund is varied
according to money market conditions, but may not exceed 90 days. The maturity
of a portfolio security shall be the period remaining until the date stated in
the security for payment of principal or such earlier date as it is called for
redemption, except that a shorter period shall be used for Variable and Floating
Rate Instruments in accordance with and subject to the conditions contained in
the Rule.
The Trustees have established procedures reasonably designed to stabilize
the price per share of the Funds at $1.00, as computed for the purposes of
sales, repurchases and redemptions, taking into account current market
conditions and each Fund's investment objectives. Such procedures, which the
Trustees review annually, include specific requirements designed to assure that
issuers of the Funds' securities continue to meet high standards of
creditworthiness. The procedures also establish certain requirements concerning
the quality and maturity of the Fund's investments. Finally, the procedures
require the determination, at such intervals as the Trustees deem appropriate
and reasonable, of the extent, if any, to which a Fund's net asset value
calculated by using available market quotations deviates from $1.00 per share.
Market quotations and market equivalents used in making such determinations may
be obtained from an independent pricing service approved by the Trustees. Such
determinations will be reviewed periodically by the Trustees.
If at any time it is determined that a deviation exists which may result
in material dilution or other unfair results to investors or existing
shareholders of a Fund, certain corrective actions may be taken, including
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding part or all of
dividends or payment of distributions from capital or capital gains; redeeming
shares in kind; or establishing a net asset value per share by using available
market quotations or equivalents. In addition, in order to stabilize the net
asset value per share at $1.00 the Trustees have the authority (1) to reduce the
number of outstanding shares of a Fund on a pro rata basis, and (2) to offset
each shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
future dividends. The Funds may hold cash for the purpose of stabilizing their
net asset value per share. Holdings of cash, on which no return is earned, would
tend to lower the yield on the shares of the Funds.
The net income of the Funds is declared as dividends to shareholders daily
and distributed monthly in shares of the Funds unless payment is requested in
cash.
AARP Insured Tax Free General Bond Fund. The Fund is designed to produce a
high level of current income free from federal income taxes but with less risk
of loss to its portfolio than other insured tax-free bond mutual funds, measured
by the frequency and amount by which total return fluctuates downward. The Fund
pursues this investment objective by investing primarily in quality, federally
tax-exempt municipal securities that are insured to protect against default by
the municipality. The Fund also has an education objective to help shareholders,
especially individuals planning for and living in retirement, make informed
investment decisions. The AARP Insured Tax Free General Bond Fund is a separate
series of AARP Tax Free Income Trust. Securities comprising at least 65% of the
total assets held by the Fund are fully insured as to face value and interest by
private insurers. While longer-term securities such as those in which the Fund
may invest have in recent years had higher yields, they also experience greater
price fluctuation than shorter-term securities. By including short- and
medium-term bonds in its portfolio, the Fund seeks to offer less share price
volatility than long-term municipal bonds or many long-term municipal bond
funds, although its yield may be lower. Because the Fund may trade its
securities, it is also free to attempt to take advantage of opportunities in the
market to achieve higher current income. This opportunity is not available to
unit investment trusts, which hold fixed portfolios of municipal securities.
Under normal circumstances, at least 80% of the Fund's net assets are
invested in tax-exempt securities. For this purpose, private activity bonds, the
interest on which is treated as a preference item for purposes of calculating
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alternative minimum tax liability, will not be treated as tax exempt securities.
The Fund does not intend to purchase any such private activity bonds. (See
"TAXES" herein.)
There can be no assurance that the objectives of the Fund will be achieved
or that all income to shareholders which is exempt from federal income taxes
will be exempt from state or local taxes. Shareholders may also be subject to
tax on long-term and short-term capital gains (see "TAXES" herein).
In addition, the market prices of municipal securities, like those of
taxable debt securities, go up and down when interest rates change. Thus, the
net asset value per share can be expected to fluctuate and shareholders may
receive more or less than their purchase price for shares they redeem. In
addition to investments in municipal obligations, as described below, the Fund
may invest in short-term taxable U.S. Government securities and repurchase
agreements backed by U.S. Government securities. The Fund also may invest in
demand notes and tax-exempt commercial paper, financial futures contracts, and
may invest in and write (sell) options related to such futures contracts. These
investments are not insured or guaranteed or backed by the U.S. Government.
Except for futures and options, which are not rated, the AARP Insured Tax Free
General Bond Fund will only purchase securities rated within the top three
ratings by Moody's and S&P, or the equivalent as determined by the Fund Manager,
or repurchase agreements on such securities. To qualify as "within the top three
ratings," a security must have such a rating due to the credit of the issuer or
due to specific insurance on the security, whether acquired at issuance or by
the Fund at the time of purchase. A security would not so qualify if its rating
was solely the result of coverage under the Fund's portfolio insurance.
Securities in which the Fund may invest may include: (a) a security that
carries at the time of issuance, whether because of the credit of the issuer or
because it is insured at issuance by an insurance company, a rating within the
top three ratings; and (b) a security not rated within the top three ratings at
the time of issuance but insured to maturity by the Fund at the time of purchase
if, upon issuance of such insurance, the Fund Manager is able to determine that
the security is now the equivalent of a security rated within the top three
ratings by a nationally recognized rating agent.
When, in the opinion of the Fund Manager, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term investments such
as U.S. Treasury notes, bills and bonds and repurchase agreements collateralized
by U.S. Government securities, the interest income from which may be subject to
federal income tax. Notwithstanding the foregoing, the Fund may invest more than
20% of its net assets in such taxable U.S. Treasury securities and repurchase
agreements for temporary defensive purposes.
Insurance. Insurance on at least 65% of the AARP Insured Tax Free General
Bond Fund's total assets will be obtained from nationally recognized private
insurers, including the following: Financial Guaranty Insurance Company ("FGIC")
is owned by FGIC Corporation, which in turn is owned by General Electric Credit
Corporation; AMBAC Indemnity Corporation; and Municipal Bond Investors Assurance
Corporation, a wholly-owned subsidiary of MBIA Incorporated, the principal
shareholders of which are: The Aetna Life & Casualty Company, Fireman's Fund
Insurance Company, subsidiaries of the CIGNA Corporation and affiliates of the
Continental Insurance Company.
The Fund currently has portfolio insurance provided by FGIC pursuant to
which it may insure securities mutually agreed to between the Fund and FGIC so
long as the security remains in the Fund's portfolio. Pursuant to an irrevocable
commitment, FGIC also provides the Fund with the option to obtain insurance for
any security covered by the FGIC portfolio insurance, which insurance can
continue if the security were to be sold by the Fund. The Fund may procure
portfolio insurance from other insurers.
At least 65% of the Fund's assets are fully insured by private insurers as
to payment of face value and interest to the Fund, when due. If uninsured
securities or securities not directly or indirectly backed or guaranteed by the
U.S. Government are purchased and expected to be held for 60 days or more,
insurance will be obtained within 30 days to ensure that 65% of the Fund's
assets are insured by the issuer or arranged for by the Fund. If at least 65% of
its assets are not insured securities, the Fund will obtain insurance for a
portion of its U.S. Government guaranteed or backed securities so that the 65%
standard is achieved.
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The Fund requires that insurance with respect to its securities provide
for the unconditional payment of scheduled principal and interest when due. In
the event of a default by the issuer, the insurer will, within 30 days of notice
of such default, provide to its agent or Trustee funds needed to make any such
payments. Such agent or Trustee will bear the responsibility of seeing that such
funds are used to make such payments to the appropriate parties. Such insurance
will not guarantee the market value of a security. Insurance on the Fund's
securities will in some cases continue in the event the securities are sold by
the Fund, while in other cases it may not.
To the extent the Fund's insured municipal securities do not equal 65% of
its total assets, the Fund will obtain insurance on such amount of its U.S.
Government guaranteed or backed securities as is necessary to have 65% of the
Fund's total assets insured at all times. This type of insurance will terminate
when the security is sold and will involve an added cost to the Fund while not
increasing the quality rating of the security.
Insurance on individual securities, whether obtained by the issuer or the
Fund, is non-cancelable and runs for the life of the security. Securities
covered under the Fund's portfolio insurance are insured only so long as they
are held by the Fund, though the Fund has the option to procure individual
secondary market insurance which would continue to cover any such security after
its sale by the Fund. Such guaranteed renewable insurance continues so long as
premiums are paid by the Fund and, in the judgment of the Fund Manager, coverage
should be continued. Non-payment of premiums on the portfolio insurance will,
under certain circumstances result in the cancellation of such insurance and
will also permit FGIC to take action against the Fund to recover premiums due
it. In the case of securities which are individually insured, default by the
issuer is not expected to affect the market value of the security relative to
other insured securities of the same maturity value and coupon and covered by
the same insurer. In the case of a security covered by the Fund's portfolio
insurance, the market value of such a security in the event of such default
might be less unless the Fund elected to purchase secondary market insurance for
it. It is the intention of the Fund Manager either to procure individual
secondary market insurance for, or retain in the Fund's portfolio, securities
which are insured by the Fund under portfolio insurance and which are in default
or significant risk of default in the payment of principal or interest. Any such
securities retained by the Fund would be held until the default has been cured
or the principal and interest have been paid by the issuer or the insurer.
Premiums for individual insurance may be payable in advance or may be paid
periodically over the term of the security by the party then owning the
security, and the costs will be reflected in the price of the security. The cost
of insurance for longer-term securities, expressed in terms of income on the
security, is likely to reduce such income by from 10 to 60 basis points. Thus, a
security yielding 10% might have a net insured yield of 9.9% to 9.4%. The impact
of the cost of the Fund's portfolio insurance on the Fund's net yield is
somewhat less. The cost of insurance for shorter-term securities, which are
generally lower-yielding, is expected to be less. It should be noted that
insurance raises the rating of a municipal security. Lower rated securities
generally pay a higher rate of interest than higher rated securities. Thus,
while there is no assurance that this will always be the case, the Fund may
purchase lower rated securities which, when insured, will bear a higher rating,
and may pay a higher net rate of interest than other equivalently rated
securities which are not insured.
Insurers have certain eligibility standards as to municipal securities
they will insure. Such standards may be more or less strict than standards which
would be applied for purchase of a security for the Fund. To the extent the
insurers apply stricter standards, the Fund will be restricted by such standards
in the purchase and retention of municipal securities.
The Internal Revenue Service has issued revenue rulings indicating that
(a) the fact that municipal obligations are insured will not affect their
tax-exempt status and (b) insurance proceeds representing maturing interest on
defaulted municipal obligations paid to certain municipal bond funds will be
excludable from federal gross income under Section 103(a) of the Internal
Revenue Code. While operation of the Fund and the terms of the insurance
policies on the Fund's securities may differ somewhat from those addressed by
the revenue rulings, the Fund does not anticipate that any differences will be
material or change the result with respect to the Fund.
Insurers of the Fund's municipal securities are subject to regulation by
the department of insurance in each state in which they are qualified to do
business. Such regulation, however, is no guarantee that an insurer will be able
to perform on its contract of insurance in the event a claim should be made
thereunder at some time in the future. The Fund Manager reviews the financial
condition of each insurer of their securities at least annually, and in the
event of
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any material development, with respect to its continuing ability to meet its
commitments to any contract of bond or portfolio insurance.
Management Strategies. In pursuit of its investment objectives the Fund
purchases securities that it believes are attractive and competitive values in
terms of quality, and relationship of current price to market value. However,
recognizing the dynamics of municipal bond prices in response to changes in
general economic conditions, fiscal and monetary policies, interest levels and
market forces such as supply and demand for various bond issues, the Fund
Manager manages the Fund continuously, attempting to achieve a high level of
tax-free income. The primary strategies employed in the management of the Fund
are:
Variations of Maturity. In an attempt to capitalize on the differences in
total return from municipal securities of differing maturities, maturities may
be varied according to the structure and level of interest rates, and the Fund
Manager's expectations of changes therein.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal securities of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
temporary disparities in normal yield relationships may afford opportunities to
invest in more attractive market sectors or specific issues by trading
securities currently held by the Fund.
Market Trading Opportunities. In addition to the above, the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than 3 months) if the Fund believes that such transactions, net of
costs, would further the attainment of that Fund's objectives. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
Fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Funds will be able to take advantage of
them. The Fund will limit its voluntary short-term trading to the extent
necessary to qualify as a "regulated investment company" under the Internal
Revenue Code.
Special Considerations: Income Level and Credit Risk. To the extent that
AARP Insured Tax Free General Bond Fund holds insured municipal obligations, the
income earned on its shares will tend to be less than for an uninsured portfolio
of the same securities. The Fund will amortize as income, over the life of the
respective security issues, any original issue discount on debt obligations
(even where these are acquired in the after-market), and market discount on
short-term U.S. Government securities. The Fund will elect to amortize the
premium paid on acquisition of any premium coupon obligations. Since such
discounts and premiums will be recognized in the Fund's accounts over the life
of the respective security issues and included in the regular monthly income
distributions to shareholders, they will not give rise to taxable capital gains
or losses. However, a capital gain or taxable ordinary income may be realized
upon the sale or maturity and payment of certain obligations purchased at a
market discount.
AARP Growth Funds
(See "AARP Balanced Stock and Bond Fund," "AARP Growth and Income Fund,"
"AARP U.S. Stock Index Fund," "AARP Global Growth Fund," "AARP Capital Growth
Fund," "AARP International Growth and Income Fund," "AARP Small Company Stock
Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND
RISK FACTORS" in the Prospectus.)
AARP Balanced Stock and Bond Fund. The Fund is designed to provide
long-term capital growth and income but with less risk of loss to its portfolio
than other balanced mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing primarily in a diversified mix of stocks with above-average dividend
yields, high-quality bonds, and cash reserves. The Fund also has an education
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
The Fund is intended to provide--through a single investment--access to a
wide variety of income-oriented stocks and investment-grade bond investments.
Common stocks and other equity investments provide long-term growth
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potential to help offset the effect of inflation on an investor's purchasing
power. Bonds and other fixed-income investments provide current income and may,
over time, help reduce fluctuations in the Fund's share price.
In seeking a balance of growth and income, as well as long-term
preservation of capital, the Fund invests in a diversified portfolio of equity
and fixed-income securities. At least 30% of the Fund's assets will be in
fixed-income securities, with the remainder of its net assets in common stocks
and securities convertible into common stocks. For temporary defensive purposes,
the Fund may invest without limit in cash and in other money market and
short-term instruments when the Fund Manager deems such a position advisable in
light of economic or market conditions.
The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Fund
Manager weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Fund Manager analyzes, on a global basis,
the level and direction of interest rates, capital flows, inflation
expectations, anticipated growth of corporate profits, monetary and fiscal
policies around the world, and other related factors.
The Fund does not take extreme investment positions as part of an effort
to "time the market." Shifts between stocks and fixed-income investments are
expected to occur in generally small increments within the guidelines adopted in
the prospectus and this Statement of Additional Information. The Fund is
designed as a conservative long-term investment.
While the Fund emphasizes U.S. equity and debt securities, it may invest
without limit in foreign securities, including depositary receipts. The Fund's
foreign holdings will meet the criteria applicable to its domestic investments.
Foreign securities are intended to increase diversification, thus reducing risk,
while providing the opportunity for higher returns.
In addition, the Fund may invest in securities on a when-issued or forward
delivery basis and may write (sell) covered call options on the equity
securities it holds to enhance investment return and may purchase and sell
options on stock indices for hedging purposes. Subject to applicable regulatory
guidelines and solely to protect against adverse effects of changes in interest
rates, the Fund may make limited use of financial futures contracts.
Equity investments. The Fund can invest up to 70% of its net assets in
equity securities. The Fund's equity investments consist of common stocks,
preferred stocks and securities convertible into common stocks, of companies
that, in the Fund Manager's judgment, will offer the opportunity for capital
growth and growth of earnings while providing dividends. The Fund pursues these
objectives by investing primarily in common stocks and securities convertible
into common stocks. Over time, a stock which produces continued earnings growth
tends to produce higher dividends and stock values.
The Fund invests in a variety of industries and companies. Changes in the
Fund's portfolio securities are made on the basis of investment considerations
and not for trading purposes.
Fixed-income investments. To enhance income and stability, the Fund will
have at least 30% of its net assets invested in fixed-income securities. The
Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and preferred and convertible preferred securities. It may also purchase
U.S. Government securities and obligations of federal agencies and
instrumentalities that are not backed by the full faith and credit of the U.S.
Government, such as obligations of the Federal Home Loan Banks, Farm Credit
Banks, and the Federal Home Loan Mortgage Corporation. The Fund may also invest
in obligations of international agencies, foreign debt securities (both U.S. and
non-U.S. dollar denominated), trust preferred securities, mortgage-backed and
other asset-backed securities, municipal obligations, zero coupon securities,
and restricted securities issued in private placements.
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
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by the Fund Manager at the time of purchase. Securities must also meet credit
standards applied by the Fund Manager. Moreover, the Fund does not purchase debt
securities rated below Baa by Moody's or BBB by S&P. Should the rating of a
portfolio security be downgraded the Fund Manager will determine whether it is
in the best interest of the Fund to retain or dispose of the security.
AARP Growth and Income Fund. The Fund is designed to provide long-term
capital growth and income but with less risk of loss to its portfolio than other
growth and income mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing primarily in common stocks with above-average dividend yields and
fixed-income securities convertible into common stocks. The Fund also has an
education objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
The Fund invests primarily in common stocks and securities convertible
into common stocks. It also may invest in rights to purchase common stocks of
companies offering the prospect for capital growth and growth of earnings while
paying current dividends. The Fund may also invest in preferred stocks
consistent with the Fund's objective. Over time, continued growth of earnings
tends to produce higher dividends and to enhance capital value. In addition,
since 1945, the overall performance of common stocks has exceeded the rate of
inflation. For temporary defensive purposes, the Fund may also purchase
high-quality money market securities (such as U.S. Treasury bills, commercial
paper, certificates of deposit and bankers' acceptances) and repurchase
agreements when the Fund Manager deems such a position advisable in light of
economic or market conditions.
AARP U.S. Stock Index Fund. The Fund is designed to provide long-term
capital growth and income but with less risk of loss to its portfolio than an
S&P 500 Index mutual fund, measured by the frequency and amount by which total
return fluctuates downward. The Fund pursues this investment objective by
emphasizing common stocks with above-average dividend yields, while maintaining
investment characteristics otherwise similar to the S&P 500 Index. The Fund also
has an education objective to help shareholders, especially individuals planning
for and living in retirement, make informed investment decisions.
The Fund attempts to remain fully invested in common stocks of S&P 500
companies. Under normal circumstances, the Fund will invest at least 95% of its
assets in common stocks, futures contracts and options, primarily on the S&P 500
Index. The Fund, using a proprietary computer model, selects common stocks of
S&P 500 companies that are expected to, on average, pay higher dividends than
S&P 500 companies in the aggregate. In managing the Fund this way, the Fund
Manager expects performance will be somewhat less volatile than that of the S&P
500 over time, and the total return will generally track the S&P 500 within 1%
on an annualized basis. A tracking error of 0% would indicate perfect
correlation to the Index. After the Fund's start-up phase, the portfolio will
typically consist of the common stocks of between 400 to 470 of the S&P 500
companies. The Fund expects to come close to the capitalization weights of the
S&P 500. Nonetheless, to enhance the yield and liquidity characteristics of the
Fund and reduce transaction costs, the Fund will not exactly replicate the
portfolio weights of the S&P 500 and will not hold all 500 stocks within that
Index. The investment approach is "passive" in that after the dividend screening
described above, there is no additional financial analysis regarding the
securities held in the Fund. Under normal circumstances, the Fund may invest up
to 5% of its assets in certain short-term fixed income securities including high
quality money market securities such as U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks and bankers' acceptances, although cash or cash
equivalents are normally expected to represent less than 1% of the Fund's
assets. The Fund may invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading costs. The Fund may also
invest in Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs typically trade
like a share of common stock and provide investment results that generally
correspond to the price and yield performance of the component common stocks of
the S&P 500 Index. There can be no assurance that this can be accomplished as it
may not be possible for the trust to replicate and maintain exactly the
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
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specific steps to minimize losses that reflect a decline in the S&P 500. In the
event that the Fund does not track within an annualized 1% total return of the
S&P 500 for an extended period, the Fund Manager will consider alternative
approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's
Corporation.
AARP Global Growth Fund. The Fund is designed to provide long-term capital
growth but with less risk of loss to its portfolio than other global growth
mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing
primarily in common stocks of established corporations in a wide variety of
developed countries, including the U.S. The Fund also has an education objective
to help shareholders, especially individuals planning for and living in
retirement, make informed investment decisions.
The management of the Fund believes that there is substantial opportunity
for long-term capital growth from a professionally managed portfolio of
securities selected from the U.S. and foreign equity markets. Global investing
takes advantage of the investment opportunities created by the growing
integration of economies around the world. The world has become highly
integrated in economic, industrial and financial terms. Companies increasingly
operate globally as they purchase raw materials, produce and sell their
products, and raise capital. As a result, international trends such as movements
in currency and trading relationships are becoming more important to many
industries than purely domestic influences. To understand a company's business,
it is frequently more important to understand how it is linked to the world
economy than whether or not it is, for example, a U.S., French or Swiss company.
Just as a company takes a global perspective in deciding where to operate, so
too may an investor benefit from looking globally in deciding which industries
are growing, which producers are efficient and which companies' shares are
undervalued. The Fund affords the investor access to opportunities wherever they
arise, without being constrained by the location of a company's headquarters or
the trading market for its shares.
The Fund invests in companies that the Fund Manager believes will benefit
from global economic trends, promising technologies or products and specific
country opportunities resulting from changing geopolitical, currency, or
economic relationships. The Fund will normally invest at least 65% of its total
assets in securities of at least three different countries. Typically, it is
expected that the Fund will invest in a wide variety of regions and countries,
including both foreign and U.S. issues. The Fund may be invested 100% in
non-U.S. issues, and for temporary defensive purposes may be invested 100% in
U.S. issues, although under normal circumstances it is expected that both
foreign and U.S. investments will be represented in the Fund's portfolio. It is
expected that investments will include companies of varying size as measured by
assets, sales, or capitalization.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
AARP Capital Growth Fund. The Fund is designed to provide long-term
capital growth but with less risk of loss to its portfolio than other growth
funds, measured by the frequency and amount by which total return fluctuates
downward. The Fund pursues this investment objective by investing primarily in a
diversified mix of common stocks and fixed-income securities convertible into
common stocks of established medium- and large-sized companies. The Fund also
has an education objective to help shareholders, especially individuals planning
for and living in retirement, make informed investment decisions. Through a
broadly diversified portfolio consisting primarily of high quality, medium- to
large-sized companies with strong competitive positions in their industries the
Fund seeks to offer less share price volatility than many growth funds. It may
also invest in rights to purchase common stocks, the growth prospects of which
are greater than most stocks but which may also have above-average market risk.
The Fund may also invest in preferred stocks consistent with the Fund's
objective. The securities in which the Fund may invest are described under "AARP
Capital Growth Fund" in the Prospectus.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the
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Fund's outstanding shares (see "Investment Restrictions", herein, for majority
voting requirements), that the Fund will not concentrate its investments in any
particular industry. However, the Fund reserves the right to invest up to 25% of
its total assets (taken at market value) in any one industry.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
AARP International Growth and Income Fund. The Fund is designed to provide
long-term capital growth and income but with less risk of loss to its portfolio
than other international mutual funds, measured by the frequency and amount by
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in a diversified portfolio of foreign common
stocks with above-average dividend yields and foreign fixed-income securities
convertible into common stocks. The Fund also has an education objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions. The Fund seeks to offer long-term capital growth
from a diversified portfolio of foreign equity securities, and to keep the value
of its shares more stable than other international equity funds.
The Fund generally invests in equity securities of established
dividend-paying companies listed on foreign exchanges within developed foreign
markets. The Fund does not invest in emerging markets, but instead focuses its
investments on the 21 developed foreign countries included in the Morgan Stanley
Capital International World ex USA Index. The Fund will normally invest at least
65% of its total assets in securities of at least three different countries.
When the Fund Manager believes that it is appropriate, the Fund may invest
up to 20% of its total assets in investment-grade foreign debt securities. Such
debt securities include debt securities of foreign governments, supranational
organizations and private issuers, including bonds denominated in the European
Currency Unit (ECU). Debt investments will be selected on yield, credit quality,
and the outlooks for currency and interest rates trends in different parts of
the globe, taking into account the ability to hedge a degree of currency or
local bond price risk. The Fund may purchase "investment-grade" bonds, which are
those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if
unrated, judged by the Fund Manager to be of equivalent quality. Securities
rated Baa by Moody's or BBB by S&P are neither highly protected nor poorly
secured. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as Canadian or U.S. government obligations or currencies, corporate debt
instruments, and securities of companies incorporated in and having their
principal activities in Canada or the U.S. when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund may make limited use of financial futures contracts and related
options and may also invest in foreign currency exchange contracts. The Fund may
write (sell) covered call options to enhance investment return, and may purchase
and sell options on stock indices for hedging purposes.
AARP Small Company Stock Fund. The Fund is designed to provide long-term
capital growth but with less risk of loss to its portfolio compared to other
small company stock mutual funds, measured by the frequency and magnitude with
which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in a broadly diversified portfolio of common
stocks of small U.S. companies. The Fund also has an education objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions.
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 believes are undervalued
relative to the stocks in Russell 2000 Index(R). The Russell 2000 Index(R) is a
widely used measure of small
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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
The AARP Managed Investment Portfolios are two professionally managed,
diversified portfolios of the AARP Managed Investment Portfolios Trust (the
"Trust"). In pursuit of its investment objective, each Portfolio invests in a
select mix of the AARP Mutual Funds ("Underlying AARP Mutual Funds"). Each
portfolio is designed to serve as a complete investment program or as a core
part of a larger portfolio, with a goal to seek competitive returns but with
less risk of loss to the Fund's portfolio than a comparable mix of stock and
bond funds, measured by the amount and frequency by which total return
fluctuates downward.
AARP Diversified Income With Growth Portfolio. The Diversified Income with
Growth Portfolio seeks to provide quarterly income with modest long-term
appreciation. This objective is pursued by diversifying among a mix of AARP bond
mutual, and to a lesser degree in AARP stock mutual funds. The AARP Mutual Funds
are managed to reduce the risk of loss compared to similar mutual funds.
AARP Diversified Growth Portfolio. The Diversified Growth Portfolio seeks
to provide long-term growth of capital. This objective is pursued by
diversifying among a mix of AARP stock mutual funds, and to a lesser degree in
AARP bond mutual funds. The AARP Mutual Funds are managed to reduce the risk of
loss compared to similar 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 With Growth Portfolio will normally invest 60-80%
of total assets in AARP bond mutual funds; and 20-40% of total assets in
AARP stock mutual funds; and 0-20% of total assets in cash or cash
equivalents.
o The Diversified Growth Portfolio will normally invest 60-80% of total
assets in AARP stock mutual funds; and 20-40% of total assets in AARP bond
mutual funds and 0-20% of total assets in cash or cash equivalents.
If, as a result of appreciation or depreciation, the percentage of each
Portfolio's assets invested in the above categories exceeds or is less than the
applicable range, the Fund Manager will consider, in its discretion, whether to
reallocate the assets of each Portfolio to comply with the stated ranges.
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Each Portfolio will purchase or sell shares of underlying AARP mutual
funds to: (a) accommodate purchases and sales of each Portfolio's shares, (b)
change the percentages of each Portfolio's assets invested in each of the
underlying AARP mutual funds in response to changing market conditions, and (c)
maintain or modify the allocation of each Portfolio's assets in accordance with
the investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including AARP money market funds, repurchase agreements,
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
For information about the investment objectives of each of the underlying
AARP mutual funds, please refer to the description of each underlying AARP
mutual fund contained in the sections preceding this section.
Special Investment Policies of the AARP Funds
(See "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.)
Dollar Roll Transactions. Each of the Funds in the AARP Income Trust, namely
AARP GNMA and U.S. Treasury Fund, AARP High Quality Short Term Bond Fund and
AARP Bond Fund for Income, may enter into "dollar roll" transactions, which
consist of the sale by the Funds to a bank or broker/dealers (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Funds receive a fee from the counterparty
as consideration for entering into the commitment to purchase. Dollar rolls may
be renewed over a period of several months with a different purchase and
repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Funds agree to buy a security on
a future date.
The Funds will not use such transactions for leveraging purposes and,
accordingly, will segregate cash, U.S. Government securities or other high grade
debt obligations in an amount sufficient to meet their purchase obligations
under the transactions. Each Fund will also maintain asset coverage of at least
300% for all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of the
Funds because they involve the sale of a security coupled with an agreement to
repurchase. Like all borrowings, a dollar roll involves costs to the Funds. For
example, while the Funds receive a fee as consideration for agreeing to
repurchase the security, the Funds forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Funds, thereby effectively
charging the Funds interest on their borrowing. Further, although the Funds can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of each Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Funds' right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Funds are able to purchase them.
Similarly, the Funds may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Funds, the security that the Funds
are required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Funds' use of the cash
that they receive from a dollar roll will provide a return that exceeds
borrowing costs.
The Trustees of the Funds have adopted guidelines to ensure that those
securities received are substantially identical to those sold. To reduce the
risk of default, the Funds will engage in such transactions only with
counterparties selected pursuant to such guidelines.
U.S. Government Securities. U.S. Treasury securities, backed by the full
faith and credit of the U.S. Government, include a variety of securities which
differ in their interest rates, maturities and times of issuance.
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Treasury bills have original maturities of one year or less. Treasury notes have
original maturities of one to ten years and Treasury bonds generally have
original maturities of greater than ten years.
U.S. Government agencies and instrumentalities which issue or guarantee
securities include, for example, the Export-Import Bank of the United States,
the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, the Small Business Administration and the
Federal Farm Credit Bank. Obligations of some of these agencies and
instrumentalities, such as the Export-Import Bank, are supported by the full
faith and credit of the United States; others, such as the securities of the
Federal Home Loan Bank, by the ability of the issuer to borrow from the
Treasury; while still others, such as the securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. No assurance can be given
that the U.S. Government would provide financial support to the latter group of
U.S. Government instrumentalities, as it is not obligated to do so.
Interest rates on U.S. Government obligations which the AARP Funds may
purchase may be fixed or variable. Interest rates on variable rate obligations
are adjusted at regular intervals, at least annually, according to a formula
reflecting then current specified standard rates, such as 91-day U.S. Treasury
bill rates. These adjustments tend to reduce fluctuations in the market value of
the securities.
Municipal Obligations. Municipal obligations held by AARP High Quality Tax
Free Money Fund and AARP Insured Tax Free General Bond Fund are issued by or on
behalf of states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on these
obligations is generally exempt from federal income tax in the hands of most
investors. The two principal classifications of municipal obligations are
"notes" and "bonds." Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenue such as income, sales, use and business taxes. Bond
Anticipation Notes are sold to provide interim financing and Construction Loan
Notes are sold to provide construction financing. These notes are generally
issued in anticipation of long-term financing in the market. In most cases,
these monies provide for the repayment of the notes. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the FHA under "Fannie Mae" (the Federal National Mortgage Association)
or GNMA. There are, of course, a number of other types of notes issued for
different purposes and secured differently than those described above.
Municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully-insured, rent-subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund some authorities provide further security in the form of a state's
ability (without obligation) to make up
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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 Short Term Bond Fund and AARP Bond Fund for Income may invest in Trust
Preferred Securities, which are hybrid instruments issued by a special purpose
trust (the "Special Trust"), the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Funds of Trust Preferred
Securities are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by the
Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Funds, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
(regardless of whether the Funds receive any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities
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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.
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
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interest from such participations is exempt from regular federal income tax and
state income tax for each state specific fund.
Stand-by Commitments. Pursuant to an exemptive order from the SEC, each
AARP Tax Free Fund may acquire "stand-by commitments," which will enable the
Fund to improve its portfolio liquidity by making available same-day settlements
on sales of its securities. A stand-by commitment is a right acquired by a Fund,
when it purchases a municipal obligation from a broker, dealer or other
financial institution ("seller"), to sell up to the same principal amount of
such securities back to the seller, at the Fund's option, at a specified price.
Stand-by commitments are also known as "puts." Each Fund's investment policies
permit the acquisition of stand-by commitments solely to facilitate portfolio
liquidity and not to protect against changes in the market price of the Fund's
portfolio securities. The exercise by a Fund of a stand-by commitment is subject
to the ability of the other party to fulfill its contractual commitment.
Stand-by commitments acquired by a Fund will have the following features:
(1) they will be in writing and will be physically held by the Fund's custodian;
(2) a Fund's right to exercise them will be unconditional and unqualified; (3)
they will be entered into only with sellers which in the Fund Manager's opinion
present a minimal risk of default; (4) although stand-by commitments will not be
transferable, municipal obligations purchased subject to such commitments may be
sold to a third party at any time, even though the commitment is outstanding;
and (5) their exercise price will be (i) the Fund's acquisition cost (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date.
Each Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding stand-by commitments will not
exceed 1/2 of 1% of the value of its total assets calculated immediately after
any stand-by commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential benefit
of a stand-by commitment. Therefore, it is expected that the Trustees will
determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a stand-by commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
There is no assurance that stand-by commitments will be available to a
Fund nor does either Fund assume that such commitments would continue to be
available under all market conditions.
Third Party Puts. The AARP Tax Free Funds may also purchase long-term
fixed rate bonds that have been coupled with an option granted by a third party
financial institution allowing a Fund at specified intervals (not exceeding 397
calendar days in the case of AARP High Quality Tax Free Money Fund) to tender
(or "put") the bonds to the institution and receive the face value thereof (plus
accrued interest). These third party puts are available in several different
forms, may be represented by custodial receipts or Trust certificates and may be
combined with other features such as interest rate swaps. The Fund receives a
short-term rate of interest (which is periodically reset), and the interest rate
differential between that rate and the fixed rate on the bond is retained by the
financial institution. The financial institution granting the option does not
provide credit enhancement, and in the event that there is a default in the
payment of principal or interest, or downgrading of a bond to below investment
grade, or a loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond and the weighted average maturity of the Fund's portfolio would be
adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-By
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the
Internal Revenue Service will agree with such position in any particular case.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the treatment of tender fees and swap payments, in
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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. Each of the Funds in the AARP Growth Trust,
as well as the AARP High Quality Short Term Bond Fund and the AARP Bond Fund for
Income, may invest in REITs. REITs are sometimes informally characterized as
equity REITs, mortgage REITs and hybrid REITs. Investment in REITs may subject
the Fund to risks associated with the direct ownership of real estate, such as
decreases in real estate values, overbuilding, increased competition and other
risks related to local or general economic conditions, increases in operating
costs and property taxes, changes in zoning laws, casualty or condemnation
losses, possible environmental liabilities, regulatory limitations on rent and
fluctuations in rental income. Equity REITs generally experience these risks
directly through fee or leasehold interests, whereas mortgage REITs generally
experience these risks indirectly through mortgage interests, unless the
mortgage REIT forecloses on the underlying real estate. Changes in interest
rates may also affect the value of the Fund's investment in REITs. For instance,
during periods of declining interest rates, certain mortgage REITs may hold
mortgages that the mortgagors elect to prepay, which prepayment may diminish the
yield on securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended and to maintain exemption from the 1940 Act. By investing in REITs
indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs. In addition, REITs depend generally on their ability to
generate cash flow to make distributions to shareholders.
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Mortgage-Backed Securities and Mortgage Pass-Through Securities. The AARP
High Quality Short Term Bond Fund, the AARP Bond Fund for Income, the AARP
Balanced Stock and Bond Fund and the AARP Growth and Income Fund may invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. The AARP GNMA and U.S. Treasury Fund
invests in mortgage-backed securities guaranteed primarily by the Government
National Mortgage Association. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations as further described below. The AARP High Quality Short
Term Bond Fund, the AARP Bond Fund for Income, and the AARP Balanced Stock and
Bond Fund may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities.
When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of a mortgage-related security and increasing the price
volatility of that security, affecting the price volatility of the Fund's
shares.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying property, refinancing or foreclosure, net of fees or
costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market value or yield
of mortgage-backed securities or to the value of Fund shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
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Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Fund Manager determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMO"s). The AARP High Quality Short Term
Bond Fund, the AARP Bond Fund for Income, and the AARP Balanced Stock and Bond
Fund may invest in CMOs which are hybrids between mortgage-backed bonds and
mortgage pass-through securities. Similar to a bond, interest and prepaid
principal are paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their
income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with the AARP High Quality Short Term Bond Fund's, the
AARP Bond Fund for Income's, and the AARP Balanced Stock and Bond Fund's
investment objectives and policies, the Funds may invest in these and other
types of asset-backed securities that may be developed in the future. In
general, the collateral supporting these securities is of shorter maturity than
mortgage loans and is less likely to experience substantial prepayments with
interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile Receivables(SM) ("CARS(SM)").
CARS(SM) represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARS(SM) may be affected by
early
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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
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
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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 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
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Fund's investment adviser considers all relevant factors and circumstances
including the creditworthiness of the borrower. The AARP Funds have no current
intention of lending their portfolio securities.
Securities Purchased on a "Forward Delivery" or "When-Issued" Basis. Debt
securities, including municipal obligations when originally issued, are
frequently offered on a "forward delivery" or "when-issued" basis and may be
purchased on this basis by the AARP Money, Income and Tax Free Funds, and the
AARP Balanced Stock and Bond Fund. When so offered, the price, which may be
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase of securities. During the period between purchase and settlement, no
payment is made on behalf of the Fund and no interest accrues to the Fund. To
the extent that assets of the Fund are not invested prior to the settlement of a
purchase of securities, the Fund will earn no income; however, it is the
intention of each Fund to be fully invested to the extent practicable, subject
to the policies stated above. While securities purchased on a forward delivery
or when-issued basis may be sold prior to the settlement date, each of the above
Funds intends to purchase such securities with the purpose of actually acquiring
them for its portfolio unless a sale appears desirable for investment reasons.
At the time the commitment to purchase a debt security on a forward delivery or
when-issued basis is made, the transaction will be recorded and the value of the
security will be reflected in determining its net asset value. The market value
of the when-issued or forward delivery securities may be more or less than the
purchase price payable at settlement date. The Funds do not believe that their
net asset value or income will be adversely affected by their purchase of debt
securities on a when-issued or forward delivery basis. Each Fund will establish
with its custodian a segregated account in which it will maintain cash, U.S.
Government securities and other high-quality debt obligations equal in value to
commitments for when-issued or forward delivery securities. Such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date.
Futures Contracts. The AARP Income Funds, the AARP Insured Tax Free
General Bond Fund, the AARP Balanced Stock and Bond Fund, the AARP Global Growth
Fund, the AARP International Growth and Income Fund, the AARP U.S. Stock Index
Fund and the AARP Small Company Stock Fund may each enter into financial futures
contracts. Such contracts may be either based on indices of particular groups or
varieties of securities ("Index Futures Contracts") or be for the purchase or
sale of debt obligations ("Debt Futures Contracts"). Such futures contracts are
traded on exchanges licensed and regulated by the Commodity Futures Trading
Commission. Each Fund enters into futures contracts to gain a degree of
protection against anticipated changes in interest rates that would otherwise
have an adverse effect upon the economic interests of the Fund. However, the
costs of and possible losses from futures transactions reduce the Funds' yield
from interest on its holdings of debt securities. Income from futures
transactions constitutes taxable gain.
For each Fund, the custodian places cash, U.S. government securities and
other high grade debt obligations into a segregated account in an amount equal
to the value of the total assets committed to the consummation of futures
positions. If the value of the securities placed in the segregated account
declines, additional cash or securities are required to be placed in the account
on a daily basis so that the value of the account equals the amount of a Fund's
commitments with respect to such contracts. Alternatively, a Fund may cover such
positions by purchasing offsetting positions, or covering such positions partly
with cash, U.S. government securities and other high grade debt obligations, and
partly with offsetting positions.
An Index Futures Contract is a contract to buy or sell units of a
particular index of securities at a specified future date at a price agreed upon
when the contract is made. Index Futures Contracts typically specify that no
delivery of the actual securities making up the index takes place. Instead, upon
termination of the contract, final settlement is made in cash based on the
difference between the contract price and the actual price on the termination
date of the units of the index.
A Debt Futures Contract is a binding contractual commitment which, if held
to maturity, requires a Fund to make or accept delivery, during a particular
month, of obligations having a standardized face value and rate of return. By
purchasing a Debt Futures Contract, a Fund legally obligates itself to accept
delivery of the underlying security and to pay the agreed price; by selling a
Debt Futures Contract it legally obligates itself to make delivery of the
security against payment of the agreed price. However, positions taken in the
futures markets are not normally held to maturity. Instead they are liquidated
through offsetting transactions which may result in a profit or loss. While Debt
Futures Contract positions taken by a Fund are usually liquidated in this
manner, a Fund may instead make or take delivery of the underlying securities
whenever it appears economically advantageous.
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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 Growth and Income
Fund, and the AARP Small Company Stock Fund may purchase and write (sell) put
and call options on futures contracts that are traded on a U.S. exchange or
board of trade and enter into related closing transactions. There can be no
assurance that such closing transactions will be available at all times. In
return for the premium paid, such an option gives the purchaser the right to
assume a position in a futures contract at any time during the option period for
a specified exercise price. The AARP U.S. Stock Index Fund invests its assets in
futures contracts in order to invest uncommitted cash balances, to maintain
liquidity or to minimize trading costs.
A Fund may purchase put options on futures contracts in lieu of, and for
the same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract.
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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 over
which the Fund has no control, the Fund must sell the underlying security to the
option holder at the exercise price. By
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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
exchange listed options, which generally have standardized terms and performance
mechanics, all the terms of an OTC
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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 Short Term Bond Fund and AARP Bond Fund for Income may invest in
convertible securities. Convertible securities include convertible bonds, notes
and debentures, convertible preferred stocks, and other securities that give the
holder the right to exchange the security for a specific number of shares of
common stock. Convertible securities entail less credit risk than the issuer's
common stock because they are considered to be "senior" to common stock.
Convertible securities generally
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offer lower interest or dividend yields than non-convertible debt securities of
similar quality. They may also reflect changes in value of the underlying common
stock.
Foreign Securities. All the Funds in the AARP Growth Trust may invest
without limit in foreign securities. The AARP High Quality Short Term Bond Fund
may invest without limit in U.S. dollar denominated foreign securities and may
invest up to 20% of its assets in foreign bonds denominated in foreign
currencies although no more than 5% of the Fund's total assets will be
represented by a given foreign currency. The AARP Bond Fund for Income may
invest without limit in U.S. dollar denominated investment-grade foreign
securities and may invest up to 20% of its assets in foreign bonds denominated
in foreign currencies. The AARP Money Funds may currently invest in U.S.
dollar-denominated certificates of deposit and bankers' acceptances of foreign
branches of large U.S. banks.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in United States securities and which may
favorably or unfavorably affect the Funds' performance. As foreign companies are
not generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the United States and, at times,
volatility of price can be greater than in the United States. Fixed commissions
on some foreign securities exchanges and bid to asked spreads in foreign bond
markets are generally higher than commissions on bid to asked spreads on U.S.
markets, although the Funds will endeavor to achieve the most favorable net
results on their portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Funds' agents to keep
currently informed about corporate actions which may affect the prices of
portfolio securities. Communications between the United States and foreign
countries may be less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Payment for securities without delivery
may be required in certain foreign markets. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Investments in
foreign securities may also entail certain risks such as possible currency
blockages or transfer restrictions, and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Further, to the extent
investments in foreign securities involve currencies of foreign countries, the
Funds may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations and may incur costs in connection with
conversion between currencies.
Investments in companies domiciled in developing countries may be subject
to potentially greater risks than investments in developed countries. The
possibility of revolution and the dependence on foreign economic assistance may
be greater in these countries than in developed countries. The management of
each Fund seeks to mitigate the risks associated with these considerations
through diversification and active professional management.
Forward Foreign Currency Exchange Contracts. Each of the AARP Growth Funds
and the AARP High Quality Short Term Bond Fund and the AARP Bond Fund for Income
may enter into forward foreign currency exchange contracts in connection with
its investments in foreign securities. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
The maturity date of a forward contract may be any fixed number of days
from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month, and forward contracts may be in any amount
agreed upon by the parties rather than predetermined amounts. Also, forward
contracts are traded directly between banks or currency dealers so that no
intermediary is required. A forward contract generally requires no margin or
other
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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.
Each Fund has elected to be classified as a diversified series of an
open-end investment company.
In addition, the AARP High Quality Money Fund, AARP Balanced Stock and
Bond Fund, AARP Capital Growth Fund, AARP U.S. Stock Index Fund, AARP Global
Growth Fund, AARP Growth and Income Fund, AARP International Stock Fund, AARP
Small Company Stock Fund, AARP Bond Fund for Income, AARP GNMA and U.S. Treasury
Fund, AARP High Quality Bond Fund, AARP High Quality Tax Free Money Fund, AARP
Insured Tax Free General Bond Fund, AARP Diversified Income with Growth
Portfolio and AARP Diversified Growth Portfolio may not:
(A)
(1) borrow money, except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(3) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
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(4) concentrate its investments in investment companies, as the term
"concentrate" is used in the Investment Company Act of 1940, as
amended and interpreted by regulatory authority having jurisdiction
from time to time; except that the Fund may concentrate in an
underlying fund. However, each underlying fund in which each
Portfolio will invest may concentrate its investments in a
particular industry;
(5) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired
as a result of the Fund's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans to other persons, except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with the Fund's investment objective and
policies may be deemed to be loans.
(B) In addition, as a matter of fundamental policy, each of AARP High Quality
Tax Free Money Fund and AARP Insured Tax Free General Bond Fund will:
(1) have at least 80% of its net assets invested in securities that are
exempt from Federal income tax during periods of normal market
conditions.
The following restrictions are not fundamental and may be changed by a Fund
without shareholder approval, in compliance with applicable law, regulation or
regulatory policy.
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 High Quality Short Term Bond
Fund, the AARP GNMA and U.S. Treasury 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 High Quality
Short
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Term Bond Fund, the AARP GNMA and U.S. Treasury 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
(i) purchase or sell commodities, commodities contracts (except, in the
case of the AARP High Quality Short Term Bond Fund, the AARP GNMA
and U.S. Treasury 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 High Quality Short Term Bond Fund nor the AARP GNMA and U.S.
Treasury Fund may:
(m) purchase warrants of any issuer, except that AARP High Quality Short
Term 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;
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(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 Short Term 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
(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,
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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;
(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.
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PURCHASES
(See "OPENING AN ACCOUNT" and "ADDING TO YOUR INVESTMENT" in the Prospectus.)
General Information
Confirmations of each transaction will be sent following the transaction
by Scudder Investor Services, Inc., as the AARP Funds' agent. By retaining
year-to-date confirmations, an investor will have an historical record of the
account activity.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in United States Funds and must be drawn on a
United States financial institution.
If shares are purchased by a check which proves to be uncollectible, the
Trusts reserve the right to cancel the purchase immediately and the purchaser
will be responsible for any loss incurred by the Fund or the principal
underwriter by reason of such cancellation. Each Trust has the authority, as
agent of the shareholder, to redeem shares in the account to reimburse the Fund
or the principal underwriter for any loss incurred. Investors whose orders have
been canceled may be prohibited from or restricted in placing future orders in
any of the Funds in the Program or in other Funds advised by the AARP Funds'
investment adviser or an affiliate.
Share Price
Accepted purchases for shares in all the AARP Funds will be filled at the
net asset value next computed after receipt of payment by check or other means.
Each Fund's net asset value per share is currently determined once daily, as of
the close of regular trading on the New York Stock Exchange (the "Exchange")
(usually 4:00 p.m. Eastern time), on each day the Exchange is open for trading.
For AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund,
Scudder Fund Accounting Corporation also determines net asset value per share as
of noon Eastern time on each day the Exchange is open for trading. (See "NET
ASSET VALUE," herein for additional information on how the Fund's net asset
value is calculated.) Orders received after the close of regular trading will be
filled at the next day's net asset value per share for the relevant Fund.
There is no sales charge in connection with purchase of shares of any of
the AARP Funds.
Share Certificates
In order to afford ease of redemption, ownership in the AARP Funds is on a
non-certificated basis. Share certificates now in a shareholder's possession may
be sent to the AARP Funds' transfer agent for cancellation and credit to such
shareholder's account. Shareholders who prefer may hold the certificates now in
their possession until they wish to exchange or redeem such shares. See
"EXCHANGING" and "ACCESS TO YOUR INVESTMENT" in the Funds' Prospectus.
Direct Deposit Program
Investors can have Social Security or other checks from the U.S.
Government or any other regular income checks such as pension, dividends, and
even payroll checks automatically deposited directly to their accounts.
Investors may allocate a minimum of 25% of their income checks into any AARP
Fund. Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
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
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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.
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.
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Redemption by Telephone
Redemption by telephone is not available for shares for which share
certificates have been issued. Redemptions of such shares must be requested by
mail as explained in the section entitled "Redemption by Mail" below.
For other investors, the following procedures are available.
TO ADDRESS OF RECORD: New investors automatically receive the option,
without having to elect it, to redeem by telephone to their address of record
for any amount up to $100,000 per Fund. Telephone Redemption to Address of
Record may be used as long as the account registration address has not changed
within the last 15 days. In order to decline this feature, the shareholder must
notify the Program in writing. Any shareholder who refuses Telephone Redemption
to Address of Record can later establish the feature with a signature guaranteed
written request. This request must be done prior to utilizing this service for
the first time.
TO YOUR BANK--BY MAIL OR BY WIRE: In order to request redemptions by
telephone to their bank, shareholders must have completed the telephone
redemption authorization included in the enrollment form and have sent the
authorization to the Program. This authorization requires designation of a bank
account to which the redemption payment is to be sent. The proceeds will be
mailed or wired only to the designated bank account.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate section on
the enrollment form, and send it to the Program.
(b) EXISTING SHAREHOLDERS who wish to establish telephone redemption to
a predesignated bank account or who want to change the bank account
previously designated to receive redemption payments should either
enter the new information on the "Telephone Option Form" which may
be obtained by calling the Program, or send a signature guaranteed
letter identifying the account and specifying the exact information
to be changed. In each case, the letter must be signed exactly as
the shareholder's name(s) appears on the account. All requests for
telephone redemption should be accompanied by a voided check from
the designated bank account. All signatures will require a
guarantee, which can be obtained from most banks, credit unions or
savings associations, or from broker/dealers, government securities
broker/dealers, national securities exchanges, registered securities
associations, or clearing agencies deemed eligible by the SEC. An
original signature and an original signature guarantee are required
for each person in whose name the account is registered. Signature
guarantees by notaries public are not acceptable.
In addition, if shares to be redeemed were purchased by check, mailing of
the redemption proceeds may be delayed long enough to assure that the purchase
check has cleared.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve wire to the bank account
designated on the application form unless a request is made that the redemption
be mailed to the designated bank account. For each wire redemption, the program
charges a $5.00 fee which is deducted from the proceeds of the redemption.
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
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procedures, it may be liable for acting upon instructions communicated by
telephone that it reasonably believes to be genuine.
Redemption by Mail or Fax
Any shareholder may redeem his or her shares by writing to the Program.
All written requests must be signed by at least one person on the account's
registration exactly as registered. In addition, for the protection of the
shareholder and to prevent fraudulent redemptions, a signature guarantee is
required on all written redemption requests for over $100,000. A signature
guarantee is also required on written redemption requests for any amount if the
check is made payable to someone other than the registered shareholder, if the
proceeds are to be forwarded to an address other than the address of record, or
if the address of record has changed in the last 15 days. In order to ensure
proper authorization before redeeming shares, the Program may request additional
documents such as, but not restricted to, stock powers, Trust instruments,
certificates of death, appointments as executor, certificates of corporate
authority and waivers of tax required in some states when settling estates.
Redemption to Address of Record for up to $100,000 without a signature
guarantee is an automatic feature of any AARP Fund account unless it has been
declined by the shareholder in writing. Any shareholder who refuses this feature
can later establish it with a written request containing a signature guarantee.
This request must be made prior to utilizing the feature for the first time.
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with the signature(s) guaranteed as explained
above. It is suggested that the shareholders holding certificated shares or
shares registered in other than individual names contact the Program prior to
requesting a redemption to ensure that all necessary documents accompany the
request. When shares are held in the name of a corporation, trust, fiduciary or
partnership, the transfer agent requires, in addition to the stock power,
certified evidence of authority to sign. These procedures are for the protection
of shareholders and should be followed to help ensure prompt payment. Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption will be sent within seven (7) days after receipt of a request
for redemption that complies with the above requirements. Delays of more than
seven (7) days for payment for shares tendered for repurchase or redemption may
result but only until the purchase check has cleared.
Redemption by Checkwriting
All new investors in the AARP Money Funds and existing shareholders of
these Funds who apply to State Street Bank and Trust Company for checks may use
them to pay any person, provided that each check is for at least $100 and not
more than $1,000,000. By using one of these checks, the shareholder will receive
daily dividend credit on his or her shares in either Fund until the check has
cleared the banking system. Investors who purchased shares by check may write
checks against those shares only after they have been on the Fund's books for 7
days. Shareholders who use this service may also use other redemption
procedures. Both Funds pay the bank charges for this service. However, each Fund
will review the cost of operation periodically and it reserves the right to
determine if direct charges to the persons who avail themselves of this service
would be appropriate. An account cannot be closed using the "free Checkwriting"
privilege. The Trusts, the transfer agent and the custodian each reserve the
right at any time to suspend or terminate the "free Checkwriting" procedure.
Redemption-in-Kind
The AARP Growth Trust and AARP Managed Investment Portfolios Trust reserve
the right to permit the AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, the AARP Global Growth Fund, AARP Capital Growth Fund, AARP
International Growth and Income Fund, AARP Small Company Fund, AARP U.S. Stock
Index Fund, AARP Diversified Income With Growth Portfolio and AARP Diversified
Growth Portfolio, if conditions exist which make cash payments undesirable, to
honor any request for redemption or repurchase order by making payment in whole
or in part in readily marketable securities chosen by the Fund and valued as
they are for purposes of computing the Fund's net asset value (a
redemption-in-kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities into cash. The AARP Growth
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which each Fund of the Trust is obligated to redeem shares,
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with respect to any one shareholder during any 90 day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of such Fund at the
beginning of the period.
Other Information
The value of shares redeemed or repurchased may be more or less than the
shareholder's cost depending on the net asset value at the time of redemption or
repurchase. The Funds do not impose a redemption or repurchase charge.
Redemptions of shares, including redemptions undertaken to effect an exchange
for shares of another Fund in the Program, may result in tax consequences (gain
or loss) to the shareholder and the proceeds of such redemptions may be subject
to backup withholding (see "TAXES").
Shareholders who wish to redeem shares from Retirement Plans (see
"RETIREMENT PLANS," below) should contact the Trustee or custodian of the Plan
for information on proper procedures.
The Trustees have established certain amount size requirements. For AARP
Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP GNMA and U.S.
Treasury Fund, the minimum investment is $500. For all other AARP Mutual Funds,
the minimum is $2,000. An account may be opened in any AARP Mutual Fund for $500
if an Automatic Investment Plan of $100 per month is established. Each Trust
reserves the right to adopt a policy that if transactions at any time reduce a
shareholder's account in a Fund to below the applicable minimum, the shareholder
will be notified that, unless the account is brought up to at least the
applicable minimum the Fund will redeem all shares and close the account by
making payment to the shareholder. The shareholder has sixty days to bring the
account up to the applicable minimum before any action will be taken by the
Fund. Reductions in value that result solely from market activity will not
trigger an involuntary redemption. No transfer from an existing to a new account
may be for less than the minimums set forth above; otherwise the new account may
be redeemed as described above. (This policy applies to accounts of new
shareholders in a particular Fund, but does not apply to Retirement Plan
Accounts.) The Trustees have the authority to increase the minimum account size.
EXCHANGES
The procedure for exchanging shares from one AARP Fund to another AARP
Fund in the Program, when the account in the new AARP Fund is established with
the same registration, telephone option, dividend option and address as the
present account, is set forth under "EXCHANGING" in the Prospectus. If the
registration data for the account receiving the proceeds of the exchange is to
be different in any respect from the account from which shares are to be
exchanged, the exchange request must be in writing and must contain a signature
guarantee as described under "SIGNATURE GUARANTEES" in the Prospectus. If an
exchange involves an initial investment in the Fund being acquired, the amount
to be exchanged must be at least $2000 for non-retirement plan accounts ($500
for AARP Balanced Stock & Bond Fund, AARP Growth and Income Fund and AARP GNMA
and U.S. Treasury Fund). For IRA, Keogh Plan and UGMA/UTMA accounts the amount
must be $250. If the exchange is made into an existing account, there is no
minimum requirement.
Only exchange orders received between 8:00 a.m. and 4:00 p.m. Eastern time
on any business day will ordinarily be accomplished at respective net asset
values determined on that day. Exchange orders received after 4:00 p.m. are
processed on the next business day.
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.
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Investors currently receive the exchange privilege automatically without
having to elect it. The Trusts and the AARP Funds' distributor, Scudder Investor
Services, Inc., reserve the right to suspend or terminate the exchange privilege
at any time. Telephone exchange may be initiated by anyone able to identify the
registration of an account, but the proceeds will only be invested in another
AARP Fund with the same registration. The AARP Funds employ procedures to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of such transactions. If an AARP Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions.
All the AARP Funds in the Program into which investors may make an
exchange are described in the combined Prospectus and in this Statement of
Additional Information. Before making an exchange, shareholders should read the
information in the Prospectus regarding the Fund into which the exchange is
being contemplated.
TRANSACT BY PHONE
(See "INVESTOR SERVICES--TRANSACT BY PHONE" in the Prospectus.)
Shareholders, whose bank of record is a member of the Automated Clearing
House Network (ACH) and who have enrolled in the "Transact by Phone" option, may
purchase or redeem shares by telephone. Shareholders may purchase shares valued
at up to $250,000 but not less than $250. Shareholders may redeem shares in an
amount not less than $250.
In order to utilize the Transact by Phone service, shareholders must have
completed the Transact by Phone authorization. This authorization requires
designation of a bank account from which the purchase payment will be debited or
to which the redemption payment will be credited. New investors wishing to
establish the Transact by Phone service can do so by completing the appropriate
section on the enrollment form. Existing shareholders who wish to establish
Transact by Phone will need to complete a Transact by Phone Enrollment Form. If
a shareholder has previously elected the "Telephone Redemption to Bank of
Record" and/or the "Automatic Investment Plan" services, the banking information
must be identical for all of these services for each of the shareholder's Funds.
After sending in their enrollment forms, shareholders should allow 15 days for
the service to be activated. The Trusts and their agents each reserve the right
to modify, interrupt, suspend or terminate the Transact by Phone service at any
time, without notice.
Purchasing Shares by Transact by Phone
To purchase shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time. Shares will be purchased at that
night's closing share price. The shareholder's bank account will be debited on
the first business day following the purchase request. Requests received after
4:00 p.m. will be purchased at the next business day's closing price.
Redeeming Shares by Transact by Phone
To redeem shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time to receive that night's closing
share price. Requests received after 4:00 p.m. will be sold at the next business
day's closing price. The shareholder's bank account will be credited with
redemption proceeds on the second or third business day following the redemption
request.
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.
44
<PAGE>
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "STATEMENTS AND REPORTS," "EXCHANGING"
and "INVESTOR SERVICES" in the Prospectus.)
Automatic Dividend Reinvestment
Investors may elect on their enrollment form whether they wish to receive
any dividends from net investment income or any distributions from realized
capital gains in cash or to reinvest such dividends and distributions in
additional shares of the Fund paying the dividend or distribution. They may also
elect to have these payments invested in shares of any other AARP Fund in the
Program in which they have an account. If no election is made, dividends and
distributions will be reinvested in additional shares. A change of instructions
for the method of payment may be given to the Program at any time prior to a
record date.
Each distribution, whether by check or reinvested in a Fund, will include
a brief explanation of the source of the distribution.
Distributions Direct
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the AARP Funds'
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-253-2277. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Reports to Shareholders
The AARP Funds send to shareholders at least semiannually financial
statements, which are examined at least annually by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets, and financial highlights.
Investors receive a brochure entitled Your Guide to Simplified Investment
Decisions when they order an investment kit for the 15 AARP Funds which also
contains a prospectus. The Shareholder's Handbook is sent to all new
shareholders to help answer any questions they may have about investing. An IRA
Handbook is sent to all new IRA shareholders. Every month, shareholders will be
sent the newsletter, Financial Focus. Retirement plan shareholders will be sent
a special edition of Financial Focus on a quarterly basis. The newsletters are
designed to help you keep up to date on economic and investment developments,
and any new financial services and features of the Program.
Consolidated Statements
Shareholders with investments in two or more AARP Funds will receive,
without charge, a convenient monthly Consolidated Statement. IRA and Keogh Plan
accounts receive Consolidated Statements quarterly. This statement contains the
market value of all holdings, a complete listing of transactions for the
statement period and a summary of the shareholder's investment program for the
statement period and for the year to date. Information may be obtained by
contacting the AARP Investment Program from Scudder, P.O. Box 2540, Boston,
Massachusetts 02208-2540, or by calling toll free, 1-800-253-2277.
RETIREMENT PLANS
Shares of AARP High Quality Money Fund, AARP High Quality Short Term Bond
Fund, AARP GNMA and U.S. Treasury Fund, AARP Bond Fund for Income, AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP Global Growth Fund, AARP
Capital Growth Fund, AARP U.S. Stock Index Fund, AARP International Growth and
Income Fund and AARP Small Company Stock Fund ("Eligible Funds") may be
purchased in connection
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<PAGE>
with several types of tax-deferred retirement plans. These plans were created
for members of AARP. Each plan is briefly described below. The plans provide
convenient ways for AARP members to make investments which may be tax-deductible
for their retirement and have taxes on any income from their investment deferred
until their retirement, when they may be in a lower tax bracket. Additional
information on each plan may be obtained by contacting the AARP Investment
Program from Scudder, P.O. Box 2540, Boston, Massachusetts, 02208-2540, or by
calling toll free, 1-800-253-2277. Investment professionals and
retirement-benefits experts estimate that prospective retirees will need 70% to
80% of their current salaries during each year of their retirement, with
adjustment for changes in prices during retirement, to maintain their current
life-style. Investment professionals recommend diversifying investments among
stock, bonds and cash-equivalents when building retirement reserves. It is
advisable for an investor considering any of the plans described below to
consult with an attorney or tax advisor with respect to the terms, suitability
requirements and tax aspects of the plan.
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")
Shares of the Eligible Funds may be purchased as the underlying investment
for an AARP No-Fee IRA which meets the requirements of Section 408(a) of the
Internal Revenue Code. Any AARP member with earned income or wages is eligible
to make annual contributions to the AARP No-Fee IRA before the year the member
attains age 70 1/2. An individual may establish an AARP No-Fee IRA whether or
not he or she is an active participant in another tax-qualified retirement plan,
including a tax-sheltered annuity or government plan.
AARP No-Fee IRA participants may generally contribute to an AARP No-Fee
IRA up to the lesser of $2,000 or 100% of their compensation or earned income.
If both a husband and wife work, each may set up an AARP No-Fee IRA before the
year they attain age 70 1/2, permitting a potential maximum contribution of
$4,000 per year for both persons. Alternatively, if your compensation during the
taxable year exceeds your spouse's and you file a joint income tax return, you
may contribute up to the lesser of $4,000 or 100% of your aggregate income to
separate IRAs for yourself and your spouse, but no more than $2,000 to either
IRA.
An individual will be allowed a full deduction for contributions to an
AARP No-Fee IRA only if (1) neither the individual, nor his or her spouse, if
they file a joint return, is an active participant in an employer-maintained
retirement plan, or (2) the individual (and his or her spouse, if applicable)
has an adjusted gross income below a certain level ($25,050 for a single
individual, with a phase-out of the deduction for adjusted gross income between
$25,050 and $35,000; $40,050 for married individuals filing a joint return, with
a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000). However, an individual not permitted to make a deductible contribution
may nonetheless make a nondeductible contribution to an AARP No-Fee IRA.
Any AARP member who is entitled to receive a qualifying distribution from
a qualified retirement plan (including a tax-sheltered annuity plan) or another
IRA may make a rollover contribution of all or any portion of the distribution
to the AARP No-Fee IRA, either in a direct rollover or within 60 days after
receipt of the distribution, whether or not the member has attained age 70 1/2.
If a qualified rollover contribution is made, the distribution will not be
subject to Federal income tax until distributed from the AARP No-Fee IRA;
however, distributions not directly rolled over might be subject to automatic
20% federal tax withholding.
AARP Mutual Fund Representatives are available to help you transfer your
IRA to the AARP No-Fee IRA. You pay no transfer fees for this service. An AARP
Mutual Fund Representative can help you with the paperwork, contact your present
IRA custodian, help to transfer your funds to the AARP No-Fee IRA, and send you
a confirmation when your transfer is complete.
Earnings on the AARP No-Fee IRA are not subject to current Federal income
tax until distributed; distributions are taxed as ordinary income. Withdrawals
attributable to nondeductible contributions are not taxable (however, early
withdrawals of such amounts are subject to penalty). The assets in an AARP
No-Fee IRA may be withdrawn without penalty after the participant reaches age 59
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.)
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<PAGE>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
AARP Keogh Plan
Shares of the Eligible Funds may be purchased for the AARP Keogh Plan. The
AARP Keogh Plan (the "Plan") is designed as a tax-qualified retirement plan
consisting of a profit sharing plan and a money purchase pension plan which can
be adopted by self-employed persons who are members of AARP and by corporations
whose principal shareholders are members of AARP. Self-employed persons may make
annual tax-deductible contributions to the Plan equal to the lesser of $30,000
or 20% of their earned income. An adopting corporation may contribute for each
employee the lesser of $30,000 or 25% of the employee's taxable compensation. No
more than $150,000 (as adjusted) of earned income or taxable compensation may be
taken into account, however. If the Plan is "top heavy," a minimum contribution
may be required for certain employees. Additional information on contributions
to the Plan is found in Your Guide to the AARP Keogh Plan.
The Plan provides that contributions may continue to be made on behalf of
participants after they have reached the age of 70 1/2 if they are still
working.
Lump sum distributions from the Plan may be eligible to be taxed for
Federal income tax purposes according to a favorable 5-year averaging (or
10-year averaging for individuals who reached age 50 before 1986) method not
available to IRA distributions. Five-year averaging has been eliminated for
taxable years beginning after December 31, 1999. If members eligible to join
this Plan choose to roll over pension and profit-sharing distributions from
other tax-qualified retirement plans, they will retain the right to use the
averaging method for such distributions.
The Plans are prototype plans approved by the Internal Revenue Service.
In general, distributions from tax-qualified plans, such as the AARP Keogh
Plan, must begin by April 1st in the year following the year in which the
participant reaches age 70 1/2, or following the year in which the participant
retires, if later, unless the participant is a 5% owner, whether or not he or
she continues to be employed. Excise taxes will apply to premature
distributions, and to taxpayers who are required, but fail, to receive a
distribution after reaching age 70 1/2. An additional excise tax may apply to
certain excess retirement accumulations. Special favorable tax treatment for
certain distributions is reduced or phased out, except where grandfathering
provisions apply.
Shares of the Eligible Funds may be purchased also as an investment for an
IRA or tax-qualified retirement plan (including a tax-sheltered annuity plan)
other than those described above, if permitted by the provisions of the relevant
plan.
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
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<PAGE>
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.
DIVIDENDS AND YIELD
(See "UNDERSTANDING FUND PERFORMANCE" in the Prospectus.)
AARP Income Funds, AARP Growth Funds, AARP Tax Free General Bond Fund and AARP
Managed Investment Portfolios
Each AARP Fund intends to follow the practice of distributing
substantially all of its investment company taxable income (which includes, for
example, interest, dividends and any excess of net realized short-term capital
gains over net realized long-term capital losses, less deductible expenses), and
its net tax-exempt interest income, if any. Each AARP Fund also intends to
follow the practice of distributing any excess of net realized long-term capital
gains over net realized short-term capital losses after reduction for any
capital loss carryforwards. However, if it appears to be in the best interests
of a Fund and its shareholders, the Fund may retain all or part of such gain for
reinvestment.
AARP U.S. Stock Index Fund, AARP Balanced Stock and Bond Fund and AARP
Growth and Income Fund intend to pay dividends in March, June, September and
December of each year and any net realized capital gains after the September 30
fiscal year end. AARP Small Company Stock Fund, AARP International Growth and
Income Fund, AARP Global Growth Fund and AARP Capital Growth Fund intend to pay
dividends and any realized capital gains over net realized short-term capital
losses after reduction for any capital loss carryforwards in December after the
September 30 fiscal year end. See "TAXES."
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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
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
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<PAGE>
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, 1997 respectively, were 4.64% and 3.16%.
The effective yield is the net annualized yield for a specified 7
calendar-days assuming a reinvestment in Fund shares of all dividends during the
period, i.e., compounding. Effective yield is calculated by using the same
base-period return used in the calculation of current yield except that the
base-period return is compounded by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, according to the
following formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1.
The effective yield of the AARP High Quality Money Fund and the AARP High
Quality Tax Free Money Fund for the seven-day period ended September 30, 1997
respectively, were 4.64% and 3.16%.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and are
not intended to indicate future performance. Current yield and effective yield
will vary based on changes in market conditions and the level of Fund expenses.
In connection with communicating its current yield and effective yield to
current or prospective shareholders, a Fund also may compare these figures to
the performance of other mutual Funds tracked by mutual Fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
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<PAGE>
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.
Total Return
--------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
9/30/97 9/30/97 9/30/97(1)
------- ------- ----------
AARP High Quality Money Fund
AARP High Quality Tax Free Money
Fund*
AARP High Quality Short Term Bond
AARP GNMA and U.S. Treasury
AARP Bond Fund for Income+
AARP Insured Tax Free General Bond 5.88% 6.99% 7.48%
AARP Insured Tax Free General Bond
AARP Balanced Stock and Bond Fund
AARP Growth and Income
AARP U.S. Stock Index Fund+
AARP Global Growth Fund
AARP Capital Growth
AARP International Growth and
Income Fund+
AARP Small Company Stock Fund+
AARP Diversified Income With
Growth Portfolio+
AARP Diversified Growth Portfolio+ n.a. n.a. n.a.
(1) For the ten fiscal years ended September 30, 1997 for each of the above
listed Funds except for the period February 1, 1994 (commencement of
operations) to September 30, 1997 for the AARP Balanced Stock and Bond
Fund and for the period February 1, 1996 (commencement of operations) to
September 30, 1996 for the AARP Global Growth Fund.
* Prior to August 1, 1991, the AARP High Quality Tax Free Money Fund
operated as the AARP Insured Tax Free Short Term Fund. The total return
figures for the five and ten years ended September 30, 1997 for the AARP
High Quality Tax Free Money Fund are representative of the Fund prior to
its conversion date except that the figures have been adjusted to reflect
its conversion to a money market fund.
+ AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Growth and Income Fund, AARP Small Company Stock Fund, AARP Diversified
Income With Growth Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
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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.
Cumulative Total Return
--------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
9/30/97 9/30/97 9/30/97(1)
------- ------- ----------
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund+
AARP Global Growth Fund
AARP Capital Growth Fund
AARP International Growth and
Income Fund+
AARP Small Company Stock Fund+
AARP Diversified Growth Portfolio+
(1) For the period February 1, 1994 (commencement of operations) to September
30, 1997 for the AARP Balanced Stock and Bond Fund and for the period
February 1, 1996 (commencement of operations) to September 30, 1997 for
the AARP Global Growth Fund.
+ AARP U.S. Stock Index Fund, AARP International Growth and Income Fund,
AARP Small Company Stock Fund and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
c) The AARP Income Funds, AARP Insured Tax Free General Bond Fund and AARP
Diversified Income With Growth Portfolio
From time to time, quotations of an AARP Fund's yield may be included in
advertisements, sales literature or shareholder reports. This yield is
calculated in the following manner.
The yield is the net annualized SEC yield based on a specified 30-day (or
one month) period assuming semiannual compounding of income. Yield is calculated
by dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
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YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the period,
including (except for mortgage or receivable-backed
obligations) the amortization of market premium or
accretion of market discount. For mortgage or
receivables-backed obligations, this amount includes
realized gains or losses based on historic cost for
principal repayments received.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
Yield for the 30-day period
Fund ended September 30, 1997
---- ------------------------
AARP High Quality Short Term Bond
AARP GNMA and U.S. Treasury
AARP Bond Fund for Income+
AARP Insured Tax Free General Bond
AARP Diversified Income With
Growth Portfolio+
+ AARP Bond Fund for Income and AARP Diversified Income With Growth
Portfolio commenced operations on February 1, 1997.
d) AARP Insured Tax Free General Bond and AARP High Quality Tax Free Money
Fund
The tax equivalent yield is the net annualized after-tax yield based on a
specified seven day period for money market funds or on a specified 30-day (one
month) period for non-money market funds assuming a reinvestment of all
dividends paid during the period, i.e., compounding. Tax equivalent yield is
calculated by dividing that portion of the Fund's yield (as computed in the
yield description above) which is tax-exempt by one minus a stated income tax
rate and adding the product to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Equivalent Taxable Yields
period ended September 30, 1997
-------------------------------
Fund Tax Bracket: 28% 31%
----
AARP High Quality Tax Free Money
AARP Insured Tax Free General Bond
AARP High Quality Tax Free Money 4.18% 4.36%
(e) General Performance Information
Quotations of an AARP Fund's performance are based on historical earnings
and are not intended to indicate future performance of the Fund. An investor's
shares when redeemed may be worth more or less than their original cost.
Performance of a Fund will vary based on changes in market conditions and the
level of the Fund's expenses. In periods of declining interest rates a Fund's
quoted yield and 30-day current yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates a Fund's quoted
yield and 30-day current yield will tend to be somewhat lower.
Comparison of non-standard performance data of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.
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<PAGE>
From time to time, in marketing and other AARP Fund literature, these AARP
Funds' performances may be compared to the performance of broad groups of mutual
funds with similar investment goals, as tracked by independent organizations,
such as Lipper Analytical Services, Inc. ("Lipper"), Investment Company Data,
Inc. ("ICD"), CDA Investment Technologies, Inc. ("CDA"), Value Line Mutual Fund
Survey, Morningstar, Inc. and other independent organizations. For instance,
AARP Growth Funds will be compared to funds in the growth fund category; and so
on. In similar fashion, the performance of the AARP GNMA and U.S. Treasury Fund
will be compared to that of certificates of deposit. Evaluations of AARP Fund
performance made by independent sources or independent experts may also be used
in advertisements concerning the AARP Funds, including reprints of, or
selections from, editorials or articles about these Funds.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to unmanaged indices which
may assume reinvestment of dividends or interest but generally do not reflect
deductions for administrative and management costs. Indices with which the Fund
may be compared include but are not limited to, the following: Standard & Poor's
500 Stock Index (S&P 500), The Europe/Australia/Far East (EAFE) Index, Morgan
Stanley Capital International World Index, J.P. Morgan Global Traded Bond Index,
and Salomon Brothers World Government Bond Index.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Evaluation of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of, or
selections from, editorials or articles about these Funds. Sources for AARP Fund
performance information and articles about the AARP Funds may include, but are
not limited to, the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by MasterFund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Federal Reserve Bulletin, a monthly publication that reports domestic and
international financial statistics, including short-term certificate of deposit
interest rates.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
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<PAGE>
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter published by Sheldon Jacobs that
includes mutual fund performance data and recommendations for the mutual Fund
investor.
No-Load Fund X, a monthly newsletter published by DAL Investment Company, Inc.
that reports on mutual fund performance, rates funds, and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
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.
55
<PAGE>
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because they
assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity, due
partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S. investments
strike the best balance between risk and reward.
56
<PAGE>
TRUST ORGANIZATION
(See "FUND ORGANIZATION" in the Prospectus.)
Each of the AARP Funds is a separate series of a Massachusetts business
trust. AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund,
and the AARP Bond Fund for Income are series of AARP Income Trust. AARP High
Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund are
series of AARP Tax Free Income Trust which changed its name from AARP Insured
Tax Free Income Trust on August 1, 1991. AARP Balanced Stock and Bond Fund, AARP
Growth and Income Fund, AARP U.S. Stock Index Fund, AARP Global Growth Fund,
AARP Capital Growth Fund, AARP International Growth and Income Fund and AARP
Small Company Stock Fund are series of AARP Growth Trust. Each of the above
Trusts was established under a separate Declaration of Trust dated June 8, 1984.
AARP High Quality Money Fund is a separate series of the AARP Cash Investment
Funds, which was established under a Declaration of Trust dated January 20,
1983. The original name of AARP Cash Investment Funds was Master Investment
Services Fund. That name was changed to AARP Money Fund Trust on February 6,
1985, and to its present name on May 24, 1985. AARP Diversified Income With
Growth Portfolio and AARP Diversified Growth Portfolio are series of AARP
Managed Investment Portfolios Trust which was established under a Declaration of
Trust on October 21, 1996. Each Trust's shares of beneficial interest of $.01
(AARP High Quality Tax Free Money Fund $.001) par value per share are issued in
separate series. AARP Cash Investment Funds has three series in addition to AARP
High Quality Money Fund that are not currently offered. None of the other Trusts
has an existing series which is not currently being offered. Other series may be
established and/or offered by the Trusts in the future. Each share of a series
represents an interest in that series which is equal to each other share of that
series.
The assets received for the issue or sale of the shares of each series and
all income, earnings, profits and proceeds thereof, subject only to the rights
of creditors, are specifically allocated to that series and constitute the
underlying assets of that series. The underlying assets of each series are
segregated on the books of account of the Trust, and are to be charged with the
liabilities of that series. The Trustees have determined that expenses with
respect to all series in a Trust are to be allocated in proportion to the net
asset value, or such other reasonable basis, of the respective series in that
Trust except where allocations of direct expenses can otherwise be more fairly
made. The officers of the Trusts, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to all the
series in a Trust. Each Trust's Declaration of Trust provides that allocations
so made to each series shall be binding on all persons. While each Declaration
of Trust provides that liabilities of a series may be satisfied only out of the
assets of that series, it is possible that if a series were unable to meet its
obligations, a court might find that the assets of other series in the Trust
should satisfy such obligations. In the event of the dissolution or liquidation
of a Trust, the holders of the shares of each series are entitled to receive as
a class the underlying assets of that series available for distribution to
shareholders.
Shareholders are entitled to one vote per share. Separate votes are taken
by each series on all matters except where the 1940 Act requires that a matter
be decided by the vote of shareholders of all series of a Trust voting together
or where a matter affects only one of the series, in which case only
shareholders of that series shall vote thereon. For example, a change in
investment policy for a series would be voted upon only by shareholders of the
series involved. Additionally, approval of each Trust's investment advisory
agreement is a matter to be determined separately by each series in that Trust.
Approval of the agreement by the shareholders of one series in a Trust is
effective as to that series whether or not enough votes are received from the
shareholders of other series in the Trust to approve such agreement as to the
other series.
The Trustees of the Trusts have the authority to establish additional
series and to designate the relative rights and preferences as between the
series. All shares issued and outstanding of each series that is offered by a
Trust will be fully paid and non-assessable by the Trust, and redeemable as
described in this Statement of Additional Information and in the Prospectus.
Each Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against litigation in which they may be involved because of their
offices with the Trust except if it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the
57
<PAGE>
Trust. However, nothing in any of the Declarations of Trust protects or
indemnifies a Trustee or officer against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Scudder, the investment manager for the Fund, has entered into an
agreement with Zurich Insurance Company ("Zurich"), an international insurance
and financial services organization, pursuant to which Scudder will form a new
global investment organization by combining with Zurich's subsidiary, Zurich
Kemper Investments, Inc., and change its name to Scudder Kemper Investments,
Inc. After the transaction is completed, Zurich will own approximately 70% of
the new organization with the balance owned by the new organization's officers
and employees.
MANAGEMENT OF THE FUNDS
(See "FUND ORGANIZATION" in the Prospectus.)
Each Trust has retained Scudder, 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 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 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, 1997 were over $___ billion.
All AARP Funds pay a flat individual Fund fee monthly based on the net
assets of that Fund, except AARP Diversified Investment Income Portfolio and
AARP Diversified Investment Growth Portfolio.
The individual Fund fees are as follows:
AARP High Quality Money Fund, 10/1200 of 1% (or approximately .10 of 1% on
an annual basis);
AARP High Quality Short Term Bond Fund, 19/1200 of 1% (or approximately
.19 of 1% on an annual basis);
AARP GNMA and U.S. Treasury Fund, 12/1200 of 1% (or approximately .12 of
1% on an annual basis);
AARP Bond Fund for Income, 28/1200 of 1% (or approximately .28 of 1% on an
annual basis);
AARP High Quality Tax Free Money Fund, 10/1200 of 1% (or approximately .10
of 1% on an annual basis);
AARP Insured Tax Free General Bond Fund, 19/1200 of 1% (or approximately
.19 of 1% on an annual basis);
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AARP Balanced Stock and Bond Fund, 19/1200 of 1% (or approximately .19 of
1% on an annual basis);
AARP Growth and Income Fund, 19/1200 of 1% (or approximately .19 of 1% on
an annual basis);
AARP U.S. Stock Index Fund, 0/1200 of 1% (0 of 1% on an annual basis);
AARP Global Growth Fund, 55/1200 of 1% (or approximately .55 of 1% on an
annual basis);
AARP Capital Growth Fund, 32/1200 of 1% (or approximately .32 of 1% on an
annual basis);
AARP International Growth and Income Fund, 60/1200 of 1% (or approximately
.60 of 1% on an annual basis);
AARP Small Company Stock Fund, 55/1200 of 1% (or approximately .55 of 1%
on an annual basis);
AARP Diversified Income With Growth Portfolio, n/a;
AARP Diversified Growth Portfolio, n/a.
The advisory fees from the Management Agreement for the three fiscal years
ended September 30, 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund $ 1,492,545 $ 1,522,929
AARP High Quality Money Fund $ 1,244,322 $ 1,492,545 $ 1,522,929
AARP High Quality Short Term Bond Fund 2,600,629 2,550,245
AARP GNMA and U.S. Treasury Fund 22,095,173 21,113,592
AARP GNMA and U.S. Treasury Fund 26,198,841 22,095,173 21,113,592
AARP High Quality Bond Fund 2,952,999 2,600,629 2,550,245
AARP Bond Fund for Income** n.a. n.a.
AARP High Quality Tax Free Money Fund 493,693 453,559
AARP Insured Tax Free General Bond Fund 8,813,051 8,665,253
AARP Insured Tax Free General Bond Fund 9,944,429 8,813,051 8,665,253
AARP Balanced Stock and Bond Fund@ 960,412 1,560,129
AARP Growth and Income Fund 12,406,325 17,423,770
AARP Growth and Income Fund 9,533,476 12,406,325 17,423,770
AARP U.S. Stock Index Fund** n.a. n.a.
AARP Global Growth Fund* n.a. 266,155
AARP Capital Growth Fund 3,988,023 4,626,894
AARP Capital Growth Fund 4,184,437 3,988,023 4,626,894
AARP International Growth and Income Fund** n.a. n.a.
AARP Small Company Stock Fund** n.a. n.a.
AARP Diversified Income With Growth Portfolio** n.a. n.a.
AARP Diversified Growth Portfolio** n.a. n.a.
</TABLE>
@ AARP Balanced Stock and Bond Fund commenced operations on February 1,
1994.
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Growth and Income Fund, AARP Small Company Stock Fund, AARP Diversified
Income With Growth Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
Each Management Agreement provides that the Fund Manager will reimburse
the AARP Funds or the Trust for annual expenses in excess of the lowest expense
limitation imposed by the states in which the Funds of the particular Trust are
at the time offering their shares for sale, although no payments are required to
be made by the Fund Manager pursuant to this reimbursement provision in excess
of the annual fee paid by the funds of a Trust to the Fund Manager. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitation. The Fund Manager has agreed that its
obligation to reimburse the Funds will not be restricted to the amounts of the
management fees. Such agreement may be modified or withdrawn without shareholder
approval.
The expense ratios, net of voluntary and statutory fee waivers and
reimbursements of expenses, for the periods ended September 30, 199 5, 1996 and
1997 were as follows:
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<PAGE>
1995 1996 1997
---- ---- ----
AARP High Quality Money Fund .98% .96%
AARP High Quality Short Term Bond Fund .95 .91
AARP GNMA and U.S. Treasury Fund .67 .64
AARP Bond Fund for Income** n.a. n.a. n.a.
AARP High Quality Tax Free Money Fund .87 .85
AARP Insured Tax Free General Bond Fund .69 .66
AARP Balanced Stock and Bond Fund@ 1.01 .88
AARP Growth and Income Fund .72 .69
AARP U.S. Stock Index Fund** n.a. n.a.
AARP Global Growth Fund* n.a. 1.75+
AARP Capital Growth Fund .95 .90
AARP International Growth and Income Fund** n.a. n.a.
AARP Small Company Stock Fund** n.a. n.a.
AARP Diversified Income With Growth Portfolio** n.a. n.a.
AARP Diversified Growth Portfolio** n.a. n.a.
@ AARP Balanced Stock and Bond Fund commenced operations on February 1,
1994.
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Growth and Income Fund, AARP Small Company Stock Fund, AARP Diversified
Income With Growth Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
For the fiscal year ended September 30, 1994, the reimbursement by the
Fund Manager based on the expense limitation then in effect was $8,083 to AARP
High Quality Tax Free Money Fund. For the fiscal year ended September 30, 1996,
the reimbursement by the Fund Manager based on the expense limitation in effect
was $175,025 to AARP Global Growth Fund. [TO BE UPDATED]
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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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.)
[SECTION TO BE UPDATED]
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 Growth and Income Fund, and AARP Small Company Stock Fund will
remain in effect until _____________ 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
_____________ 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 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 Growth
and Income Fund, and AARP Small Company Stock Fund and the Investment Management
Agreement for the AARP Diversified Income With Growth Portfolio and AARP
Diversified Growth Portfolio will remain in effect until _____________ 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
_____________ and by the shareholders on _____________. 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 Growth and Income 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: 0.07% of the first $100
million of average daily net assets, 0.03% of such assets in excess of $100
million, and 0.01% of such assets in excess of $200 million with a minimum
annual fee of $75,000. For the first twelve months of management, the Subadviser
has agreed to waive a portion of its fee. After the first year, the full fee
will be charged.
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
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<PAGE>
resulting reduction in shareholder servicing costs. In this regard, the
shareholder servicing costs to any Underlying AARP Mutual Fund for servicing one
account registered to the Trust would be significantly less than the cost to
that same Underlying AARP Mutual Fund of servicing the same pool of assets
contributed in the typical fashion by a large group of individual shareholders
owning small accounts in each Underlying AARP Mutual Fund.
Based on actual expense data from the Underlying AARP Mutual Funds and
certain very conservative assumptions with respect to the Trust, the Fund
Manager, the Underlying AARP Mutual Funds, Scudder Service Corporation, Scudder
Investor Services, Inc., Scudder Fund Accounting Corporation, Scudder Trust
Company and the Managed Investment Portfolios anticipate that the aggregate
financial benefits to the Underlying AARP Mutual Funds from these arrangements
will exceed the costs of operating the Portfolios. If such turns out to be the
case, there will be no charge to the Trust for the services under the Service
Agreement. Rather, in accordance with the Service Agreement, such expenses will
be passed through to the Underlying AARP Mutual Funds in proportion to the value
of each Underlying AARP Mutual Fund's shares held by each Portfolio.
In the event that the aggregate financial benefits to the Underlying AARP
Mutual Funds do not exceed the costs of a Portfolio, the Fund Manager will pay,
on behalf of that Portfolio, that portion of costs, as set forth herein,
determined to be greater than the benefits. The determination of whether and the
extent to which the benefits to the Underlying AARP Mutual Funds from the
organization of the Trust will exceed the costs to such funds will be made based
upon the analysis criteria set forth in the Order. This cost-benefit analysis
was initially reviewed by the Trustees of the Underlying AARP Mutual Funds
before participating in the Service Agreement. For future years, there will be
an annual review of the Service Agreement to determine its continued
appropriateness for each Underlying AARP Mutual Fund.
Certain non-recurring and extraordinary expenses will not be paid in
accordance with the Service Agreement including: the fees and costs of actions,
suits or proceedings and any penalties or damages in connection therewith, to
which a Portfolio may incur directly, or may incur as a result of its legal
obligation to provide indemnification to its officers, trustees and agents; the
fees and costs of any governmental investigation and any fines or penalties in
connection therewith; and any federal, state or local tax, or related interest
penalties or additions to tax, incurred, for example, as a result of the
Portfolios' failure to distribute all of its earnings, failure to qualify under
subchapter M of the Internal Revenue Code, or failure to timely file any
required tax returns or other filings. Under unusual circumstances, the parties
to the Service Agreement may agree to exclude certain other expenses.
Scudder is one of the most experienced investment management firms in the
United States. It was established as a partnership in 1919 and pioneered the
practice of providing investment counsel to individual clients on a fee basis.
In 1928 it introduced the first no-load mutual Fund to the public. In 1953,
Scudder introduced Scudder International Fund, the first Fund available in the
U.S. investing internationally in securities of issuers in several foreign
countries. The principal source of the Fund Manager's income is professional
fees received from providing continuous investment advice, and the firm derives
no income from banking, brokerage or underwriting of securities. Today, it
provides investment counsel for many individuals and institutions, including
insurance companies, colleges, industrial corporations, and financial and
banking organizations. In addition, it manages Montgomery Street Income
Securities, Inc., Scudder California Tax Free Trust, Scudder Cash Investment
Trust, Scudder Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder
Global Fund, Inc., Scudder GNMA Fund, Scudder Institutional Fund, Inc., Scudder
International Fund, Inc., Scudder Investment Trust, Scudder Municipal Trust,
Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc., Scudder New Europe
Fund, Inc., Scudder Pathway Series, Scudder Portfolio Trust, Scudder Securities
Trust, Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax
Free Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment
Fund, Scudder World Income Opportunities Fund, Inc., The Argentina Fund, Inc.,
The Brazil Fund, Inc., Scudder Spain and Portugal Fund, Inc., The Korea Fund,
Inc., The Japan Fund, Inc., and The Latin America Dollar Income Fund, Inc. Some
of the foregoing companies or trusts have two or more series.
Pursuant to an Agreement between Scudder and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
Scudder has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by Scudder with respect to assets invested by AMA members in Scudder
funds in connection with the AMA InvestmentLink(SM) Program. Scudder will also
pay AMA Solutions, Inc. a general monthly fee, currently in the amount of $833.
The AMA and AMA Solutions, Inc. are not engaged in the business of providing
investment advice and neither is registered as an investment adviser
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<PAGE>
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of Scudder (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Fund Manager maintains a large research department, which conducts
continuous studies of the factors that affect the condition of various
industries, companies and individual securities. In this work, the Fund Manager
utilizes certain reports and statistics from a wide variety of sources,
including brokers and dealers who may execute portfolio transactions for the
Fund and for clients of the Fund Manager, but conclusions are based primarily on
investigations and critical analyses by its own research specialists.
Certain investments may be appropriate for more than one Fund and also for
other clients advised by the Fund Manager. Investment decisions for each Fund
and for other clients are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment and the size of their investments
generally. Frequently, a particular security may be bought or sold for only one
Fund or client or in different amounts and at different times for more than one
but less than all Funds or other clients. Likewise, a particular security may be
bought for one or more Funds or clients when one or more other Funds or clients
are selling the security. In addition, purchases or sales of the same security
may be made for two or more Funds or clients on the same date. In such event
such transactions will be allocated among the Funds and/or clients in a manner
believed by the Fund Manager to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
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 0.07 of 1%
for the first $6 billion, 0.06 of 1% for the next $10 billion and 0.05 of 1%
thereafter.
The Member Services Agreement will remain in effect until August 31, 1999
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.
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<PAGE>
Officers and employees of the Fund Manager from time to time may have
transactions with various banks, including the AARP Funds' custodian bank. It is
the Fund Manager's opinion that the terms and conditions of those transactions
which have occurred were not influenced by existing or potential custodial or
other Fund relationships.
None of the officers or Trustees of a Trust may have dealings with that
Trust as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Funds.
Personal Investments by Employees of Scudder
Employees of Scudder are permitted to make personal securities transactions,
subject to requirements and restrictions set forth in Scudder's Code of Ethics.
The Code of Ethics contains provisions and requirements designed to identify and
address certain conflicts of interest between personal investment activities and
the interests of investment advisory clients such as the Funds. Among other
things, the Code of Ethics, which generally complies with standards recommended
by the Investment Company Institute's Advisory Group on Personal Investing,
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
monthly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Code of Ethics may be granted in particular circumstances after review by
appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Lin Coughlin##* (45) Chairperson of the Managing Director of Scudder, Director and Senior
Board and Trustee Stevens & Clark, Inc. Vice President
Horace B. Deets+* (59) Vice Chairman and Executive Director, American --
(Trustee of AARP Cash Investment Trustee Association of Retired Persons
Funds, AARP Growth Trust and AARP
Tax Free Income Trust only)
Carole Lewis Anderson (53) Trustee President, MASDUN Capital --
3616 Reservoir Road, N.W. Advisors; Formerly Principal,
Washington, DC Suburban Capital Markets, Inc.;
Director, VICORP Restaurants,
Inc.; Member of the Board,
Association for Corporate Growth
of Washington, D.C.; Trustee,
Hasbro Children's Foundation and
Mary Baldwin College
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Adelaide Attard (67) Trustee Gerontology Consultant; Member, --
270-28N Grand Central Parkway New York City Department of
Floral Park, NY Aging Advisory Council--
Appointed by Mayor (1995); Board
Member, American Association on
International Aging (1981 to
present); Commissioner, County
of Nassau, New York, Dept. of
Senior Citizen Affairs
(1971-1991); Chairperson,
Federal Council on Aging
(1981-1986)
Robert N. Butler, M.D. (71) Trustee Director, International --
211 Central Park West Longevity Center and Professor
Apt. 7F of Geriatrics and Adult
New York, NY Development; Chairman, Henry L.
Schwartz Department of
Geriatrics and Adult
Development, Mount Sinai Medical
Center (1982 to present);
Formerly Director, National
Institute on Aging, National
Institute of Health (1976-1982)
Esther Canja+* (70) Trustee Vice President, American --
(AARP Managed Investment Portfolios Association of Retired Persons;
and AARP Income Trust only) Trustee and Chair, AARP Group
Health Insurance Plan; Board
Liaison, National Volunteer
Leadership Network Advisory
Committee; Chair, Board
Operations Committee; AARP State
Director of Florida (1990-1992)
Edgar R. Fiedler (68) Trustee Senior Fellow and Economic --
845 Third Ave. Counselor
New York, NY
Lt. Gen. Eugene P. Forrester (71) Trustee Lt. General (Retired), U.S. --
1101 S. Arlington Ridge Rd. Army; International Trade
Arlington, VA Counselor (1983 to present);
Consultant
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
George L. Maddox, Jr. (72) Trustee Professor Emeritus and Director, --
P.O. Box 2920 Long Term Care Resources
Duke Univ. Medical Center Program, Duke University Medical
Durham, NC Center; Professor Emeritus of
Sociology, Departments of
Sociology and Psychiatry, Duke
University
Robert J. Myers (85) Trustee Actuarial Consultant (1983- --
9610 Wire Ave. present); Formerly Chairman,
Silver Spring, MD Commission on Railroad
Retirement Reform (1988-90);
Deputy Commissioner, Social
Security Administration
(1981-1982); Member, National
Commission on Social Security
(1978-1981); Formerly Executive
Director, National Commission on
Social Security Reform
(1982-1983); Director:
Manufacturers Investment Trust,
Inc.; Member, Prospective
Payment Assessment Commission
(1993-1997)
James H. Schulz (61) Trustee Professor of Economics and --
158 Scruton Pond Road Kirstein Professor of Aging
Barrington, NH Policy, Policy Center on Aging,
Florence Heller School, Brandeis
University
Gordon Shillinglaw (72) Trustee Professor Emeritus of --
196 Villard Ave. Accounting, Columbia University
Hastings-on-Hudson, NY Graduate School of Business
Jean Gleason Stromberg (54) Trustee Consultant, Director, Financial
Institutions Issues, U.S.
General Accounting Office
(11/96-9/97); Partner, Fulbright
& Jaworski Law Firm (1978-1996)
William Glavin ( ) Vice President
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Thomas W. Joseph## (58) Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer and
Assistant Clerk
David S. Lee## (64) Vice President and Managing Director of Scudder, President, Assistant
Assistant Treasurer Stevens & Clark, Inc. Treasurer and Director
Thomas F. McDonough## (51) Vice President and Principal of Scudder, Stevens & Assistant Clerk
Assistant Secretary Clark, Inc.
James W. Pasman## (45) Vice President Principal of Scudder, Stevens & --
Clark, Inc.
Kathryn L. Quirk# (45) Vice President, Managing Director of Scudder, Senior Vice President
Treasurer and Stevens & Clark, Inc. and Clerk
Secretary
Howard Schneider## (40) Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
John Hebble ( ) Assistant Treasurer -- --
Cornelia M. Small# (53) President Managing Director of Scudder, --
Stevens & Clark, Inc.
</TABLE>
* Mr. Deets, Ms. Canja and Ms.
Coughlin are Trustees of each of the Trusts and are considered by the
Trusts and their counsel to be persons who are "interested persons" of the
Trusts (within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years, but
not necessarily in the same capacity.
# Address: 345 Park Avenue, New York, New York
## Address: Two International Place, Boston, Massachusetts
+ Address: 601 E Street, N.W., Washington, D.C.
As of June 30, 1997, 679,687 shares in the aggregate, 29.11% of the
outstanding shares of AARP Bond Fund for Income were held in the name of State
Street Bank and Trust Company, Custodian for AARP Diversified Income Portfolio,
One Heritage Drive, Quincy, MA 02171, which may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
As of June 30, 1997, 136,374 shares in the aggregate, 5.84% of the
outstanding shares of AARP Bond Fund for Income were held in the name of SS&C
Investment Corporation, 345 Park Avenue, New York, NY 10154, which may be deemed
to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
As of June 30, 1997, 452,687 shares in the aggregate, 19.39% of the
outstanding shares of AARP Bond Fund for Income were held in the name of State
Street Bank and Trust Company, Custodian for AARP Diversified Growth Portfolio,
One Heritage Drive, Quincy, MA 02171, which may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
67
<PAGE>
As of June 30, 1997, 133,333 shares in the aggregate, 9.38% of the
outstanding shares of AARP U.S. Stock Index Fund were held in the name of
American Association of Retired Persons, AARP Membership Division, 601 E Street
NW, Washington, D.C. 20049, which may be deemed to be the beneficial owner of
certain of these shares, but disclaims any beneficial ownership therein.
As of June 30, 1997, 211,042 shares in the aggregate, 14.85% of the
outstanding shares of AARP U.S. Stock Index Fund were held in the name of State
Street Bank and Trust Company, Custodian for AARP Diversified Growth Portfolio,
One Heritage Drive, Quincy, MA 02171, which may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
As of June 30, 1997, 100,292 shares in the aggregate, 7.06% of the
outstanding shares of AARP U.S. Stock Index Fund were held in the name of State
Street Bank and Trust Company, Custodian for AARP Diversified Income Portfolio,
One Heritage Drive, Quincy, MA 02171, which may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
As of June 30, 1997, 201,307 shares in the aggregate, 14.17% of the
outstanding shares of AARP U.S. Stock Index Fund were held in the name of SS&C
Investment Corporation, 345 Park Avenue, New York, NY 10154, which may be deemed
to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
As of June 30, 1997, 153,035 shares in the aggregate, 19.82% of the
outstanding shares of AARP International Stock Fund were held in the name of
State Street Bank and Trust Company, Custodian for AARP Diversified Growth
Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of June 30, 1997, 146,019 shares in the aggregate, 10.04% of the
outstanding shares of AARP Small Company Stock Fund were held in the name of
State Street Bank and Trust Company, Custodian for AARP Diversified Growth
Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the best of each Trust's knowledge, as of June 30, 1997, no person
owned beneficially more than 5% of any Fund's outstanding shares, except as
stated above.
As of December 31, 1997, all Trustees and officers of the Funds as a group
owned beneficially (as that term is defined under Section 13(d) of the
Securities Exchange Act) less than 1% of the outstanding shares of each Fund. To
the best of the Trusts' knowledge as of December 31, 1997 no person owned
beneficially more than 5% of the outstanding shares of any of the Trusts.
REMUNERATION
Several of the officers and Trustees of the Trusts may be officers or
employees of Scudder, Scudder Service Corporation, Scudder Investor Services,
Inc., Scudder Fund Accounting Corp., or Scudder Trust Company and will
participate in the fees received by such entities. No individual affiliated with
AARP will participate directly in any such fees. The Trusts pay no direct
remuneration to any officer of the Trusts. However, each of the Trustees who is
not affiliated with Scudder or AARP will be paid by the Trust(s) for which he or
she serves as Trustee. Until September 30, 1997, each of these unaffiliated
Trustees received an annual retainer of $10,000 from each Fund for which he or
she serves plus $175 for each Trustees' meeting and $150 for each audit
committee meeting or meeting held for the purpose of considering arrangements
between the Fund and the Fund Manager or any of its affiliates attended. Each
unaffiliated Trustee also received $100 per nominating committee meeting, other
than an audit committee meeting, and $125 for each additional committee meeting
attended. If any such meetings are held jointly with meetings of one or more
mutual funds advised by the Fund Manager, a maximum fee of $800 for meetings of
the Board, meetings of the unaffiliated members of the Board for the purpose of
considering arrangements between the Fund and the Fund Manager or any of its
affiliates or the audit committees of such Funds, and $400 for all other
committee meetings or meetings of the unaffiliated members of the Board is paid,
to be divided equally among the Funds. For the year ended September 30, 1997,
the Trustees' fees and expenses for thirteen of the Funds were as follows:
68
<PAGE>
Fund Expense
---- -------
AARP High Quality Money Fund $26,370
AARP High Quality Short Term Bond Fund 27,329
AARP GNMA and U.S. Treasury Fund 27,352
AARP High Quality Tax Free Money Fund 26,792
AARP Insured Tax Free General Bond Fund 26,678
AARP Balanced Stock and Bond Fund 26,346
AARP Growth and Income Fund 26,366
AARP Bond Fund for Income 16,790
AARP U.S. Stock Index Fund 16,790
AARP International Growth and Income Fund 16,790
AARP Small Company Stock Fund 18,680
AARP Global Growth Fund 15,157
AARP Capital Growth Fund 24,009
The following table shows the aggregate compensation received by each
unaffiliated Trustee from each Trust and from all AARP Trusts and Scudder Fund
complex for the year ended December 31, 1997.
AARP All AARP
AARP Managed Trusts
AARP Cash AARP Tax Free AARP Investment and Scudder
Investment Income Income Growth Portfolios Fund
Name Fund+ Trust@ Trust# Trust## Trust+ Complex
- ---- ----- ------ ------ ------- ------ -------
+ AARP Cash Investment Fund consists of one Fund: AARP High Quality Money
Fund.
@ AARP Income Trust consists of three Funds: AARP High Quality Short Term
Bond Fund, AARP GNMA and U.S. Treasury Fund, and AARP Bond Fund for
Income.*
# AARP Tax Free Income Trust consists of two Funds: AARP High Quality Tax
Free Money Fund and AARP Insured Tax Free General Bond Fund.
69
<PAGE>
## AARP Growth Trust consists of seven Funds: AARP Balanced Stock and Bond
Fund, AARP U.S. Stock Index Fund,* AARP Growth and Income Fund, AARP
Global Growth Fund,* AARP Capital Growth Fund, AARP International Growth
and Income Fund,* and AARP Small Company Stock Fund.*
+ AARP Diversified Income With Growth Portfolio and AARP Diversified Growth
Portfolio, series of AARP Managed Investment Portfolios Trust, commenced
operations on February 1, 1997.
* AARP Global Growth Fund commenced operations on February 1, 1996. AARP
Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Growth and Income Fund, and AARP Small Company Stock Fund commenced
operations on February 1, 1997.
** Mr. Fiedler received $______ through a deferred compensation program. As
of December 31, 1997, Mr. Fiedler had a total of $_______ accrued in a
deferred compensation program for serving on the Board of Directors of
Scudder Institutional Fund, Inc. and Scudder Fund, Inc.
DISTRIBUTOR
Each of the Trusts has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), a Massachusetts corporation, which is a
subsidiary of Scudder, a Delaware corporation. The underwriting agreements for
all of the Trusts except AARP Managed Investment Portfolios Trust dated
September 4, 1985 will remain in effect until _____________ 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.
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<PAGE>
TAXES
(See "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" in the Prospectus.)
Each AARP Fund has qualified and intends to elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code (the "Code"), as amended, since its inception and intends to
continue to so qualify. (Such qualification does not involve supervision of
management or investment practices or policies by a government agency.) In any
year in which a Fund so qualifies and distributes at least 90% of its investment
company taxable income, and at least 90% of its net tax-exempt income, if any,
the Fund generally is not subject to Federal income tax to the extent that it
distributes to shareholders its investment company taxable income and net
realized capital gains in the manner required under the Code.
Each AARP Fund must distribute its taxable income according to a
prescribed formula and will be subject to a 4% nondeductible excise tax on
amounts not so distributed. The formula requires a Fund to distribute each
calendar year at least 98% of its ordinary income (excluding tax-exempt income)
for the calendar year, at least 98% of the excess of its capital gains over
capital losses (adjusted for certain ordinary losses) realized during the
one-year period ending October 31 of such year, and any ordinary income and
capital gains for prior years that was not previously distributed.
To qualify under Subchapter M, gains from the sale of stock, securities
and certain options, futures and forward contracts held for less than three
months must be limited to less than 30% of each Fund's annual gross income.
Moreover, short-term gains (i.e., gains from the sale of securities held for one
year or less) are taxed as ordinary income when distributed to shareholders.
Options, futures and forward activities of the AARP Funds may increase the
amount of the short-term gains and gains that are subject to the 30% limitation.
The determination of the nature and amount of investment company taxable
income of a Fund will be based solely on the transactions in, and on the income
received and expenses incurred by or allocated to, the Fund. Each AARP Fund
intends to offset any realized net capital gains against any capital loss
carryforward before making capital gains distributions to shareholders.
Distributions of any investment company taxable income (which includes
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss, less expenses) are taxable to shareholders as ordinary
income. If a portion of a Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible for
the corporate dividends-received deduction.
Generally, each Fund will distribute any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss). If a Fund retains its net capital gains for investment, requiring Federal
income tax to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to its shareholders. As a result,
shareholders (a) will be required to include in income for Federal income tax
purposes, as long-term capital gains, 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
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additional shares will have a cost basis for Federal income tax purposes in each
share received equal to the net asset value of a share of the Fund on the
reinvestment date.
Distributions by a Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a return of capital upon
distribution which will nevertheless be taxable to them.
Shareholders who redeem, sell or exchange shares of a Fund may realize
gain or loss if the proceeds are more or less than the shareholder's purchase
price. Such gain or loss generally will be a capital gain or loss if the Fund
shares were capital assets in the hands of the shareholder, and generally will
be long- or short-term, depending on the length of time the Fund shares were
held. However, if a shareholder realizes a loss on the sale of a share held at
the time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period. A gain realized on a redemption, sale
or exchange will not be affected by a reacquisition of shares. A loss realized
on a redemption, sale or exchange, however, will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by a Fund upon payment of a premium in connection
with the purchase of a put or call option. The character of any gain or loss
recognized (i.e., long-term or short-term) will generally depend in the case of
a lapse or sale of the option on the Fund's holding period for the option and in
the case of an exercise of a put option on the Fund's holding period for the
underlying security. The purchase of a put option may constitute a short sale
for federal income tax purposes, causing an adjustment in the holding period of
the underlying security or a substantially identical security of the Fund. If a
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as a
short-term capital gain or loss. If a call option written by a Fund is
exercised, the character of the gain or loss depends on the holding period of
the underlying security. The exercise of a put option written by a Fund is not a
taxable transaction for the Fund.
Many futures contracts, certain foreign currency forward contracts and all
listed nonequity options (including options on debt securities, options on
futures contracts, options on securities indices and options on broad-based
stock indices) will constitute "section 1256 contracts." Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or losses. Also, section 1256 contracts held by the
Funds at the end of each taxable year (and, for purposes of the 4% excise tax,
on October 31) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60% long-term and 40% short-term capital gain or loss. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options, and
similar financial instruments entered into or acquired by a Fund will be treated
as ordinary income.
Positions of a Fund which consist of at least one 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
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reduce or eliminate the operation of these rules. Each Fund will monitor its
transactions in options and futures and may make certain tax elections in
connection with these investments.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Proposed regulations have been issued which may allow the Fund to make an
election to mark to market its shares of these foreign investment companies in
lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Fund would report as ordinary
income the amount by which the fair market value of the foreign company's stock
exceeds the Fund's adjusted basis in these shares. No mark to market losses may
be recognized. The effect of the election would be to treat excess distributions
and gain on dispositions as ordinary income which is not subject to a Fund level
tax when distributed to shareholders as a dividend. Alternatively, the Fund may
elect to include as income and gain its share of the ordinary earnings and net
capital gain of certain foreign investment companies in lieu of being taxed in
the manner described above.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by those countries.
Certain of the debt securities acquired by the Funds may be treated as
debt securities that were originally issued at a discount. Original issue
discount represents interest for Federal income tax purposes and can generally
be defined as the difference between the price at which a security was issued
and its stated redemption price at maturity. Although no cash income is actually
received by the Funds, original issue discount earned in a given year generally
is treated for Federal income tax purposes as income earned by the Funds, and
therefore is subject to the distribution requirements of the Code. The amount of
income earned by the Funds is determined on the basis of a constant yield to
maturity which takes into account at least semi-annual or annual compounding
(depending on the date of the security) of accrued interest. 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.
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The Funds will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. All such distributions and proceeds may be subject to withholding
of Federal income tax at the rate of 31% in the case of non-exempt shareholders
who fail to furnish the Funds with their taxpayer identification numbers and
with required certifications regarding their status under Federal income tax
laws. Withholding may also be required if a Fund is notified by the IRS or a
broker that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions or proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld. Investors may
wish to consult their tax advisers about the applicability of the backup
withholding provisions.
In addition to Federal taxes, shareholders of the Funds may be subject to
state and local taxes on distributions from the Funds. Under the laws of certain
states, distributions of investment company taxable income are taxable to
shareholders as dividend income even though a substantial portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by the resident of such state, would be exempt from such
state's income tax. Shareholders should consult their own tax advisers with
respect to the tax status of distributions from the Funds in their own state and
localities.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, Trusts and estates). Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and foreign
tax consequences of ownership of shares of the Fund, including the likelihood
that such a shareholder would be subject to a U.S. withholding tax at a rate of
31% (or at a lower rate under a tax treaty) on amounts constituting ordinary
income to him or her.
Special Information Regarding AARP High Quality Tax Free Money Fund and
AARP Insured Tax Free General Bond Fund: Each of the AARP Tax Free Income Funds
intends to qualify to pay "exempt-interest dividends" to its shareholders. Each
Fund will be so qualified if, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of securities of states,
U.S. possessions, their political subdivisions, and the District of Columbia,
the interest on which is exempt from Federal tax. To the extent that the Funds'
dividends distributed to shareholders are derived from earnings on interest
income exempt from Federal tax and are designated as "exempt-interest dividends"
by the Funds, they will be excludable from a shareholder's gross income for
Federal income tax purposes. "Exempt-interest dividends," however, must be taken
into account by shareholders in determining whether their total incomes are
large enough to result in taxation of up to 85% of their Social Security
benefits. In addition, interest on certain municipal obligations (private
activity bonds) will be treated as a preference item for purposes of calculating
the alternative minimum tax for individuals and for corporations. Similarly,
income distributed by the Funds, including exempt-interest dividends, may
constitute an adjustment to alternative minimum taxable income of corporate
shareholders. The Funds do not intend to purchase any private activity bonds.
The Funds will inform shareholders annually as to the portion of the
distributions from the Funds which constituted "exempt-interest dividends."
To the extent that the Funds' dividends are derived from interest on their
temporary taxable investments or from an excess of net short-term capital gain
over net long-term capital loss, they are considered ordinary taxable income for
Federal income tax purposes. Distributions, if any, of net long-term capital
gains from the sale of securities are taxable at long-term capital gain rates
regardless of the length of time the shareholder has owned Fund shares. However,
if a shareholder realizes a loss on the sale of a share held at the time of sale
for six months or less, such loss will be treated as long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
during such six-month period. Furthermore, a loss realized by a shareholder on
the sale of shares of the Funds with respect to which exempt-interest dividends
have been paid will be disallowed if such shares have been held by the
shareholder for six months or less (to the extent of exempt-interest dividends
paid).
Under the Code, a shareholder's interest expense deductions with respect
to indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends, such as either of the AARP
Tax Free Funds, may be limited. In addition, under rules issued by the Internal
Revenue Service for determining when borrowed Funds are considered used for the
purposes of purchasing or carrying particular assets, the purchase of shares may
be considered to have been made with borrowed Funds even though the borrowed
Funds are not directly traceable to the purchase of shares.
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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
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 authorized, when placing portfolio transactions
for the AARP Funds, except for the AARP Growth Funds, to pay a
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brokerage commission in excess of that which another broker might have charged
for executing the same transaction solely on account of the receipt of research,
market or statistical information. The Fund Manager will not place orders with
brokers or dealers on the basis that the broker or dealer has or has not sold
shares of the Funds. Except for implementing the policy stated above, there is
no intention to place portfolio transactions with particular brokers or dealers
or groups thereof. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to the AARP Funds and to the Fund Manager, it is the
opinion of the Fund Manager that such information is only supplementary to its
own research effort since the information must still be analyzed, weighed, and
reviewed by the Fund Manager's staff. Such information may be useful to the Fund
Manager in providing services to clients other than the AARP Funds, and not all
such information is used by the Fund Manager in connection with the AARP Funds.
Conversely, such information provided to the Fund Manager by brokers and dealers
through whom other clients of the Fund Manager effect securities transactions
may be useful to the Fund Manager in providing services to the AARP Funds.
For the fiscal years ended September 30, 1995, 1996 and 1997 the AARP
Growth and Income Fund paid brokerage commissions of $1,690,604, $3,453,660 and
$4,618,820 and the AARP Capital Growth Fund paid brokerage commissions of
$2,636,662, $1,011,500 and $734,958, both respectively. For the fiscal period
ended September 30, 1995, and for the fiscal years ended September 30, 1996 and
1997, the AARP Balanced Stock and Bond Fund paid brokerage commissions of
$149,816, $201,070 and $229,436, respectively. For the fiscal period February 1,
1996 (commencement of operations) until September 30, 1996, the AARP Global
Growth Fund paid brokerage commissions of $209,773 and $180,078 for the fiscal
year ended September 30, 1997. In the fiscal year ended September 30, 1997,
$4,354,345 (94% of the total brokerage commissions paid by AARP Growth and
Income Fund) and $720,089 (98%) by AARP Capital Growth Fund resulted from orders
placed, consistent with the policy of obtaining the most favorable net results,
with brokers and dealers who provided supplementary research information to the
Funds or the Fund Manager. The amount of such transactions aggregated
$567,987,991 for the AARP Capital Growth Fund, (74% of all brokerage
transactions) and $ (722,873,260,718 (80% of all brokerage transactions) for the
AARP Growth and Income Fund. The balance of such brokerage was not allocated to
any particular broker or dealer or with regard to the above-mentioned or other
special factors. For the fiscal year ended September 30,1997, $198,249 (86%) of
the total brokerage commissions paid by AARP Balanced Stock and Bond Fund
resulted from orders placed, consistent with the policy of obtaining the most
favorable net results, with brokers and dealers who provided supplementary
research information to the Funds or the Fund Manager. The amount of such
transactions aggregated $164,436,537 for AARP Balanced Stock and Bond Fund, (48%
of all brokerage transactions). For the fiscal period ended September 30, 1997,
$178,368 (99%) of the total brokerage commissions paid by AARP Global Growth
Fund resulted from orders placed, consistent with the policy of obtaining the
most favorable net results, with brokers and dealers who provided supplementary
research information to the Funds or the Fund Manager. The amount of such
transactions aggregated $45,080,15372,794,359 for AARP Global Growth Fund (75%
of all brokerage transactions). The balance of such brokerage was not allocated
to any particular broker or dealer or with regard to the above-mentioned or
other special factors.
For the fiscal year ended September 30, 1997, AARP U.S. Stock Index Fund
paid brokerage commissions of $0, AARP International Growth and Income Fund paid
brokerage commissions of $74,937, and AARP Small Company Stock Fund paid
brokerage commissions of $37.
The AARP U.S. Stock Index Fund aggregated $0 (0% of all brokerage
transactions), the AARP International Growth and Income Fund aggregated
$23,325,960 (99% of all brokerage transactions), and the AARP Small Company
Stock Fund aggregated $21,952,906 (52% of all brokerage transactions.)
The Trustees review from time to time whether the recapture for the
benefit of the Funds of some portion of the brokerage commissions or similar
fees paid by the Funds on portfolio transactions is legally permissible and
advisable. To date, no recapture has been effected.
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Portfolio Turnover
Fund securities may be sold to take advantage of investment opportunities
arising from changing market levels or yield relationships. Although such
transactions involve additional costs in the form of spreads or commissions,
they will be undertaken in an effort to improve the overall investment return of
a Fund, consistent with that Fund's objectives. The portfolio turnover rate of a
Fund is defined in a Rule of the SEC as the lesser of the value of securities
purchased or securities sold during the year, excluding all securities whose
maturities at the time of acquisition were one year or less, divided by the
average monthly value of such securities owned during the year. The portfolio
turnover rates for the fiscal years ended September 30, 1995, 1996, and 1997 for
five of the non-money market Funds were: AARP High Quality Short Term Bond Fund,
201.07%, 169.96% and 83.26%; AARP GNMA and U.S. Treasury Fund, 70.35%, 83.44%
and 94.24%; AARP Insured Tax Free General Bond Fund, 17.45%, 18.69% and 7.82%;
AARP Growth and Income Fund, 31.26%, 25.02% and 33.4%; AARP Capital Growth Fund,
98.44%, 64.84% and _____%, all respectively. The portfolio turnover rate for the
period ended September 30, 1995 and for the fiscal years ended September 30,
1996 and 1997 for the AARP Balanced Stock and Bond Fund was 63.77%, 35.22% and
26.79%, respectively. The portfolio turnover rate for AARP Global Growth Fund
for the period February 1, 1996 (commencement of operations) to September 30,
1996 was 12.56%; for the fiscal year ended September 30, 1997 the portfolio rate
was 31.34%. The portfolio turnover rate for the fiscal year ended September 30,
1997 for AARP Bond Fund for Income was 13.69%, AARP U.S. Stock Index Fund was
14.52%, AARP International Growth and Income Fund was 50.73%, AARP Small Company
Stock Fund was 6.93%, AARP Diversified Income With Growth Portfolio and AARP
Diversified Growth Portfolio were 5.57% and 7.67%, respectively.
NET ASSET VALUE
AARP Money Funds
The net asset value per share of the Funds are computed twice daily as of
twelve o'clock noon and the close of regular trading on the Exchange, normally 4
p.m. eastern time, on each day when the Exchange is open for trading. The
Exchange is normally closed on the following national holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. Net asset value is determined by dividing the total
assets of the Fund, less all of its liabilities, by the total number of shares
of the Fund outstanding. The AARP High Quality Money Fund uses the
penny-rounding method of security valuation as permitted under Rule 2a-7 under
the 1940 Act. Under this method, portfolio securities for which market
quotations are readily available and which have remaining maturities of more
than 60 days from the date of valuation are valued at the mean between the
over-the-counter bid and asked prices. Securities which have remaining
maturities of 60 days or less are valued by the amortized cost method; if
acquired with remaining maturities of 61 days or more, the cost thereof for
purposes of valuation is deemed to be the value on the 61st day prior to
maturity. Other securities are appraised at fair value as determined in good
faith by or on behalf of the Trustees of the Fund. For example, securities with
remaining maturities of more than 60 days for which market quotations are not
readily available are valued on the basis of market quotations for securities of
comparable maturity, quality and type. Determinations of net asset value per
share for the Fund made other than as of the close of the Exchange may employ
adjustments for changes in interest rates and other market factors.
The valuation of AARP High Quality Tax Free Money Fund's portfolio
securities is based upon their amortized cost which does not take into account
unrealized securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price AARP High Quality Tax Free Money Fund would
receive if it sold the instrument. During periods of declining interest rates,
the quoted yield on shares of AARP High Quality Tax Free Money Fund may tend to
be higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized cost
by AARP High Quality Tax Free Money Fund resulted in a lower aggregate portfolio
value on a particular day, a prospective investor in the Fund would be able to
obtain a somewhat higher yield if he purchased shares of the Fund on that day,
than would result from investment in a fund utilizing solely market values, and
existing investors in the Fund would receive less investment income. The
converse would apply in a period of rising interest rates. Other securities and
assets for which market quotations are not readily available are valued in good
faith at fair value using methods determined by the Trustees and
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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
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
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<PAGE>
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.
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
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<PAGE>
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Prime-2 ratings are assigned by Moody's to commercial paper issuers which
have a strong capacity for meeting their obligations in a timely fashion.
However, their financial, economic and managerial capacities will be less than
that of Prime-1 borrowers. Financial characteristics such as earnings, coverage
ratios and capitalization will be more affected by external economic factors
than Prime-1 borrowers. Liquidity is still believed to be ample.
The two highest ratings of S&P for commercial paper are A-1 and A-2.
Commercial paper rated A-1 or better by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements; long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed; the
issuer has access to at least two additional channels of borrowing; basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; the reliability and quality of
management are unquestioned.
S&P will assign an A-2 rating to the commercial paper of companies which
have the capacity for timely payment on issues. However, the relative degree of
safety is less than for issuers rated A-1.
Ratings of Municipal Bonds
The three highest ratings of Moody's for municipal bonds are Aaa, Aa, and
A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds rated
Aa are judged to be of high quality by all standards. Together with the Aaa
group, they comprise what are generally known as high-grade bonds. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
The three highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High-grade), and A (Good grade). Bonds rated AAA have the highest rating
assigned by S&P to a municipal obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in a
small degree. Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of Funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
S&P's top ratings for municipal notes are SP-1 and SP-2. The designation
SP-1 indicates a very strong capacity to pay principal and interest. A "+" is
added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The ratings F-1+ and F-1 are the two highest ratings assigned by Fitch.
Among the factors considered by Fitch in assigning these rating are: (1) the
issuer's liquidity; (2) its standing in the industry; (3) the size of its debt;
(4) its ability to service its debt; (5) its profitability; (6) its return on
equity; (7) its alternative sources of financing; and (8) its ability to access
the capital markets. Analysis of the relative strength or weakness of these
factors and others determines whether an issuer's commercial paper is within
these two ratings.
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Other Information
Each AARP Fund has a fiscal year ending on September 30.
The CUSIP for AARP High Quality Money Fund is 000036E-10-7
The CUSIP for AARP GNMA & U.S. Treasury Fund is 00036M-10-9.
The CUSIP for AARP High Quality Short Term Bond Fund is 00036M-20-8.
The CUSIP for AARP Bond Fund for Income Fund is 00036M-30-7.
The CUSIP for AARP Tax Free Money Fund is 00036Q-10-0.
The CUSIP for AARP Insured Tax Free General Bond Fund is 00036Q-20-9.
The CUSIP for AARP Balanced Stock & Bond is 00036J-30-4.
The CUSIP for AARP Growth & Income Fund is 00036J-10-6.
The CUSIP for AARP Capital Growth Fund is 00036J-20-5.
The CUSIP for AARP Global Growth Fund is 00036J-40-3.
The CUSIP for AARP U.S. Stock Index Fund is 00036J-50-2
The CUSIP for AARP International Growth and Income Fund is 00036J-60-1.
The CUSIP for AARP Small Company Stock is 00036J-70-0.
The CUSIP for AARP Diversified Income With Growth Portfolio is 00036W-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.
The firm of Dechert Price & Rhoads of Washington, D.C. is counsel for the
Trusts.
These Trusts also have a shareholder servicing agreement with Scudder
Service Corporation ("SSC"), a subsidiary of the Fund Manager. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount for each Fund is shown in the
table below, and is included in Services to shareholders in the Statements of
Operations.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Fund
Manager, is responsible for determining the daily net asset value per share and
maintaining the portfolio and general accounting records of the Funds. The
amount for each Fund is shown in the table below, and is included in Custodian
and accounting fees in the Statements of Operations.
For the period ended September 30 the amounts charged by SSC to the Funds
were as follows:
<TABLE>
<CAPTION>
1997 Amount Total SSC Unpaid 1996 Amount 1995 Amount
Charged to Fund at September 30, Charged to Charged to
Fund by SSC(a) 1997* Fund by SSC Fund by SSC
---- --------- ----- ----------- -----------
<S> <C> <C>
AARP High Quality Money Fund $1,505,677 $121,984
AARP High Quality Tax Free Money Fund 256,965 20,052
AARP GNMA and U.S. Treasury Fund 6,732,169 539,940
AARP High Quality Bond Fund 1,455,652 114,310
AARP Insured Tax Free General Bond Fund 1,741,482 138,720
AARP Bond Fund for Income -- --
AARP Balanced Stock and Bond Fund 1,357,972 132,955
AARP Growth and Income Fund 6,853,761 672,527
AARP U.S. Stock Index Fund -- --
AARP Capital Growth Fund 1,889,072 180,473
AARP Small Company Stock Fund 93,491 93,491
AARP Global Growth Fund 558,504 51,344
AARP International Stock Fund -- --
</TABLE>
81
<PAGE>
* Total unpaid amounts are included in Other payables and accrued expenses
in the Statements of Assets and Liabilities.
(a) SSC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and
AARP International Stock Fund amounting to $40,906, $60,094, $25,298, and
$54,419, respectively.
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 High Quality Short
Term Bond Fund, AARP GNMA and U.S. Treasury Fund and AARP Bond Fund for Income
each pay Scudder Fund Accounting an annual fee equal to 0.025% of the first $150
million of average daily net assets, 0.0075% of such assets in excess of $150
million up to and including $1 billion, and 0.0045% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP U.S. Stock Index Fund,
AARP Capital Growth Fund and AARP Small Company Stock Fund each pay Scudder Fund
Accounting an annual fee equal to 0.025% on the first $150 million of average
daily net assets, 0.0075% of such assets in excess of $150 million up to and
including $1 billion, and 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges. AARP Global Growth Fund and Scudder
International Growth and Income Fund each pay Scudder Fund Accounting
Corporation an annual fee equal to 0.065% on the first $150 million of average
daily net assets, 0.0400% of such assets in excess of $150 million up to and
including $1 billion, and 0.0200% of such assets in excess of $1 billion, plus
holding and transaction charges for this service.
Many of the investment changes in the Funds will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders. These transactions will reflect investment decisions
made by the Fund Manager in light of the objectives and policies of the Funds,
and such factors as its other portfolio holdings and tax considerations, and
should not be construed as recommendations for similar action by other
investors.
Costs of $13,000 incurred by AARP Bond Fund for Income in conjunction with
its organization are amortized over the five year period beginning February 1,
1997.
Costs of $16,000 incurred by AARP U.S. Stock Index Fund in conjunction
with its organization are amortized over the five year period beginning February
1, 1997.
Costs of $13,000 incurred by AARP International Growth and Income Fund in
conjunction with its organization are amortized over the five year period
beginning February 1, 1997.
Costs of $13,000 incurred by AARP Small Company Stock Fund in conjunction
with its organization are amortized over the five year period beginning February
1, 1997.
Costs of $23,000 incurred by AARP Diversified Income With Growth 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.
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<PAGE>
Each Trust is located at Two International Place, Boston, Massachusetts
02110-4103 (telephone: 1-800-253-2277). Each has filed with the Securities and
Exchange Commission, Washington, D.C. 20549, a Registration Statement under the
Securities Act of 1933, as amended, with respect to the shares of the Funds
offered by the Prospectus. The Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statements, certain parts of which are omitted in accordance with Rules and
Regulations of the SEC. The Registration Statements may be inspected at the
principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C. and
copies thereof may be obtained from the SEC at prescribed rates.
The following chart demonstrates that tax-free yields are equivalent to
higher taxable yields due to their tax-exempt status. For example, tax-free
interest of 5% is the equivalent of 6.94% taxable in a 28% tax bracket. Please
refer to the chart for more examples.
Tax-Exempt Income vs. Taxable Income
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the 1997
calendar year.
[TO BE UPDATED]
<TABLE>
<CAPTION>
1997 Taxable Income To Equal Hypothetical Tax-Free Yields of 5%, 7%
Brackets and 9%, a Taxable Investment Would Have To Earn**
Individual Federal
Return Tax Rates 5% 7% 9%
<S> <C> <C> <C> <C>
$0 - $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%
<CAPTION>
Joint Federal
Return Tax Rates 5% 7% 9%
<S> <C> <C> <C> <C>
$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%.
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<PAGE>
There is no guarantee that a Fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
* Net amount subject to federal income tax after deductions and exemptions,
exclusive of the alternative minimum tax.
FINANCIAL STATEMENTS
The financial statements and notes, including the investment portfolio, of
each AARP Fund, together with the Report of Independent Accountants and
Supplementary Information are incorporated by reference herein.
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<PAGE>
AARP Investment Program
from SCUDDER
--------
REACHING
YOUR
GOALS
--------
ANNUAL REPORT
-------------
TO SHAREHOLDERS
---------------
September 1997
<PAGE>
TABLE OF CONTENTS
Annual Review 1
Special Section 6
Message from the Portfolio Managers 11
Money Market Funds
AARP High Quality Money Fund 12
AARP High Quality Tax Free Money Fund 13
Income Funds
AARP GNMA and U.S. Treasury Fund 14
AARP High Quality Bond Fund 16
AARP Insured Tax Free General Bond Fund 18
AARP Bond Fund for Income 20
Growth and Income Funds
AARP Balanced Stock and Bond Fund 22
AARP Growth and Income Fund 24
AARP U.S. Stock Index Fund 26
U.S. Growth Fund
AARP Capital Growth Fund 28
AARP Small Company Stock Fund 30
Worldwide Growth Funds
AARP Global Growth Fund 32
AARP International Stock Fund 34
Asset Allocation Funds
AARP Managed Investment Portfolios 36
AARP Funds' Investment Portfolios 39
Financial Statements 119
Financial Highlights 135
Notes to Financial Statements 145
Report of Independent Accountants 154
Officers and Trustees 155
Service Information 158
Tax Information 159
Glossary 160
<PAGE>
AARP Investment Program
from SCUDDER
SIDEBAR TEXT:
TAKE ADVANTAGE OF DOLLAR COST AVERAGING
Dollar cost averaging is a simple systematic approach to managing risk. You
invest a specific amount of money on a regular basis -- usually monthly -- to
reduce the average price you pay over time for mutual fund shares. You will
automatically buy shares at different prices: more shares when the prices are
down, and fewer shares when the prices are up. Because you buy more shares when
prices are low, the average price you pay per share may be lower than the actual
average share price during the same period. While there are no assurances, over
time, dollar cost averaging can offer the potential of greater returns and
greater protection from market volatility. You can invest as little as $50 per
month through the AARP Investment Program's Automatic Investment Plan. It is
simple and hassle free. Call us at 1-800-253-2277 for details.
Annual Review
This Annual Report covers the period from October 1, 1996, through
September 30, 1997. During this time many positive changes took place in the
AARP Investment Program. Most significant was the introduction of six new funds
to the family in February. Together, the 15 AARP Mutual Funds offer you a choice
of uniquely managed investments, whose goal is to provide competitive returns,
but with less share price fluctuation than similar funds. More recently,
Scudder, Stevens & Clark, Inc. reached an agreement to form an alliance with the
Zurich Group, a worldwide provider of insurance services. These exciting
developments are described later in this review.
First, let us turn to the favorable performance of the AARP Mutual Funds
over the year, which in part reflected the overall strength of the U.S. stock
market and declining long-term interest rates. We are pleased to report that as
of September 30, 1997, several of the AARP Mutual Funds were highly rated by
Morningstar, which ranks the relative risk versus returns of comparable funds.
Detailed reviews of the performance of each of the Funds begin after page 11.
CALLOUT:
Several AARP Mutual Funds are highly rated by Morningstar. Read further in
A Message from the Portfolio Managers on page 11.
The Stock Market
The upward pace of the U.S. stock market continued during the past 12
months as inflation remained benign and unemployment sank to the lowest level in
more than 20 years. In addition, positive corporate profits, a strengthening
dollar, the recent tax legislation, and the shrinking deficit combined to create
a healthy environment for both large- and small-cap U.S. stocks. Large-cap
stocks, as measured by the unmanaged Standard & Poor's Composite Index of 500
Stocks (S&P 500), returned 40.46%, and small-cap stocks, as measured by the
Russell 2000 Index, returned 33.20% in the 12 months ending September 30, 1997.
This environment prompted Federal Reserve Chairman Alan Greenspan to remark in
July that the current state of the economy was "exceptional." These positive
forces extended to most foreign
1
<PAGE>
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
THE STOCK MARKET
CHART PERIOD:
1992 - 1997
CHART DATA:
MSCI EAFE Russell 2000 S&P 500
--------- ------------ -------
1992-1993 26.35 33.19 13.00
1993-1994 9.83 2.62 3.69
1994-1995 5.79 23.40 29.75
1995-1996 8.61 13.13 20.34
1996-1997 12.18 33.20 40.46
CAPTION TO PRECEDING CHART:
The stock market total return for the annual period September 30 to
September 30, as measured by the Morgan Stanley Capital International EAFE
Index, the Russell 2000 Index, and the S&P 500 Index.
-------
markets as well, although at a more modest pace. The Morgan Stanley Capital
International Index (MSCI), an unmanaged market- value-weighted measure of
non-U.S. stock markets, rose 12.18% over the period covered by this Report.
It is important to note that while the U.S. stock market has been on an
upward trend, the swings along the way were often quite significant. One of
several examples included the 247-point drop of the Dow Jones Industrial Average
(the Dow) on August 15, 1997. This decline, which represented a 3.1% decline in
the value of the thirty companies included in the Dow, and 2.6% of the S&P 500,
capped a week of declining prices. However, by the following week, stock prices
more than made up for the loss.
THE BOND MARKET
After a strong fourth quarter of 1996 for the bond market, healthy economic
news and fears of potential inflationary pressure caused the bond market to
decline in the first quarter of 1997. In recent months, however, bonds rallied
and more than recovered from these losses. Low inflation, a shrinking federal
deficit, a budget agreement, and reduced government borrowing all had a positive
impact on the bond market. Long-term interest rates, as measured by the 30-year
U.S. Treasury Bond, declined from 6.92% on September 30, 1996, to 6.40% on
September 30, 1997. Short-term rates, as measured by the three-month Treasury
bill, declined from 5.01% to 4.95% over the same period. Bond prices, and
therefore the value of your bond investments, rose.
SIDEBAR TEXT:
A Reminder for Investors -- Have a Long-Term Perspective
While you may be surprised, if not unnerved, by day-to-day swings in the
financial markets, history tells us that long-term investors are best served by
keeping the inevitable volatility of the markets in proper perspective. If you
can accept that both the bond and stock markets will experience volatility, the
downturns in the markets should not be cause for alarm. In fact, these downturns
may provide buying opportunities for some investors.
It is also important to keep the absolute amounts of changes in the markets in
perspective. The Dow Jones Industrial Average has tripled in value over the past
ten years. For example, the 508-point drop in 1987 represented a 22.6% decline
of the market. That same decline would have represented only 6.4% of the market
as of September 30, 1997.
2
<PAGE>
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
THE U.S. BOND MARKET
CHART PERIOD:
1992 - 1997
CHART DATA:
3-Month Treasury 30-Year
Bill Treasury Bond
---------------- -------------
1992-1993 2.98 6.02
1993-1994 4.77 7.82
1994-1995 5.41 6.50
1995-1996 5.03 6.92
1997-1997 4.95 6.40
CAPTION TO PRECEDING CHART:
The U.S. Bond market yield for the annual period September 30 to September
30, as measured by the 3-month Treasury Bill and the 30-year Treasury Bond.
Looking Ahead
As we look toward the end of 1997 into early 1998, it is difficult to
predict how the stock and bond markets will fare. While there are no guarantees
when investing, we continue to believe there is long-term opportunity in both
the stock and bond markets. This should benefit long-term investors (those
willing to invest for five years or more). However, due to the perceived high
value of the U.S. stock market, we maintain a somewhat cautious outlook over the
short term. As always, we encourage diversification among U.S. large- and
small-company equity holdings, international equity holdings, and the fixed
income sector. This serves as protection against a downturn in any one area of
the market.
Reflecting on Important Program Developments
The past year has brought many exciting changes to the AARP Investment
Program. Many of our shareholders, and other AARP members, have expressed a high
level of interest in a greater choice of mutual funds and in taking somewhat
more risk with a portion of their total investment portfolio. In response to
your feedback, we introduced six new funds to the family in February of this
year -- the AARP Bond Fund for Income, the AARP U.S. Stock Index Fund, the AARP
Small Company Stock Fund, the AARP International Stock Fund, and the AARP
Managed Investment Portfolios.
SIDEBAR TEXT:
The AARP Lump Sum Service
For many, receiving a lump sum payout is a significant, if not a
once-in-a-lifetime, event. The process of deciding how best to reinvest this
money can be complex and even intimidating. In fact, many of you have told us
that you need help in making decisions about how to invest your proceeds when
you have received a large lump sum or one-time distribution, such as from a
retirement plan.
In response to your feedback, we have introduced the AARP Lump Sum Service.
You can now work with a specially trained AARP Investment Program retirement
plan specialist who can help you understand tax implications and your investment
options. Our specialists can also assist you in working through the "red tape"
that is sometimes involved with a lump sum distribution.
Taking advantage of the AARP Lump Sum Service can make investment
decision-making easier and the implementation of your decisions hassle free.
Call us at 1-800-253-2277 to find out more about this free service.
3
<PAGE>
While most of the Funds offer the potential of higher returns (and
therefore higher risk) than the existing AARP Mutual Funds, you told us that you
were hopeful that we could manage these Funds for the potential of less downside
risk than comparable funds. The Funds were therefore developed and are managed
to do just that. Their portfolio management teams seek competitive -- but not
the highest -- returns, but with less risk than comparable funds. Designed
specially to meet the needs of AARP members, we know of no other family of funds
that includes a similar risk management mandate for all of its funds. Of course,
while the AARP Mutual Funds are actively managed to reduce share price
fluctuation, remember that your principal is never insured or guaranteed, and
that the value of your investment and your return will move up and down as
market conditions change.
Having launched the six new funds in February, we spent much of the balance
of the year developing a tool that will allow you to actually "pinpoint" how the
AARP Mutual Funds are performing compared to similar mutual funds, from a total
return and risk management standpoint. This new performance measurement system
is being introduced with this Report. We plan to communicate extensively about
it in the future to help you to become more comfortable with the performance
measurement system and to encourage you to use it. Please refer to the special
section of this Report, which describes the system in more detail.
CALLOUT:
The six new AARP Mutual Funds, introduced in February 1997, have been well
received by AARP member investors, having grown to more than 24,000 accounts
with over $271 million in assets as of September 30, 1997.
We were also pleased to announce that Scudder has reached an agreement to
form an alliance with The Zurich Group. Scudder will represent Zurich's core
investment management capability. Zurich, a 125-year-old financial services
company, has a heritage of innovative and customized problem-solving that takes
the form of a disciplined, conservative, and personal approach to risk
management. This is a philosophy that mirrors Scudder's approach to asset
management. As part of the new relationship, Scudder will be combined with
Zurich Kemper Investments, Inc., an investment management company now owned by
Zurich. The new company will be named Scudder Kemper Investments, Inc.
SIDEBAR TEXT:
New Web Site
The AARP Investment Program's Web site is located at:
http://aarp.scudder.com.
This dynamic electronic connection to the Program provides visitors easy
access to a broad range of information, including the AARP Mutual Funds
performance, which is updated daily, and the complete prospectus.
Our Web site also offers News Stories featuring important information about the
markets and investing. The Learning Center offers an investor education overview
through Quick Concepts, and several investment guides, Planning for Retirement
and Managing Your Money In Retirement. The Archives offers newsletter back
issues, while the Resources for Investors offers a Glossary and Lists of
Associations and Publications.
The Program's site allows you to communicate your questions and comments
directly to us and to request informative how-to literature about investing,
published by the AARP Investment Program from Scudder. Visit us often, as
content is regularly updated.
4
<PAGE>
SIDEBAR TEXT:
A Note About the Expense of
Publishing This Report
Some shareholders have appropriately asked about the expense of publishing this
SEC-required Report. Our goal is to provide information about the performance of
the Funds, current investment strategies, and details about the expenses of the
Funds. We also review certain developments in the Program that you should be
aware of as a shareholder.
Further, we go to great lengths to assure easy reading, utilizing larger
typeface and the liberal use of white space. Our challenge is to accomplish all
of this as cost-effectively as possible. So, for example, in addition to sending
only one copy of the Annual Report to every shareholder's home, we use
lower-quality, less-expensive paper.
We have also determined that our consolidated Report, featuring all 15 Funds, is
a less expensive means of communicating Fund information to you than publishing
and mailing individual Fund Reports, as do other mutual fund companies. This
year's Report cost approximately 85 cents per copy to produce. This compares to
the cost of last year's Report at 78 cents per copy. We are comfortable with
this modest increase given the Report's expansion to include the six new AARP
Mutual Funds.
Viewed from the standpoint of expense ratios, the total publication cost is
approximately 1/24th of 1 basis point for the AARP family of fifteen mutual
funds with average expenses of 95 basis points, which compares favorably to the
Lipper average fund expenses of 135 basis points.*
If you require additional copies of the Report, please call 1-800-253-2277.
* Lipper Analytical Services, Inc. is the source for the average expenses of
similar mutual funds.
The Program's core commitment to risk managed investment performance and
the delivery of the highest service levels will not change as a result of the
alliance. In fact, we expect that this new alliance will offer significant
benefits over time resulting from the Program's access to greater resources --
human and capital -- that will take the form of greater investment expertise and
enhanced services.
All of us at the AARP Investment Program from Scudder are excited about the
future and about working with you to make informed investment decisions that
lead to financial security and independence as you plan for and live in
retirement. Please do not hesitate to contact us with any questions you may have
at 1-800-253-2277.
Our best,
/s/Linda C. Coughlin /s/Cornelia Small
Linda C. Coughlin Cornelia Small
Chairperson President and
Investment Director
5
<PAGE>
Special Section:
Measuring the Performance of
The AARP Mutual Funds
The past year has been an exciting one for the AARP Investment Program from
Scudder, due in large part to the addition of six new funds to the family.
Together, the 15 AARP Mutual Funds offer you a choice of uniquely managed
investments, whose goal is to provide competitive returns but with less share
price volatility than similar funds. The addition of the new funds offers you a
significantly greater opportunity to be well diversified in keeping with your
individual circumstances and investment objectives. The family of AARP Mutual
Funds addresses four major investment needs: stability of principal, income,
tax-free income, and growth.
CALLOUT:
We provide these market index comparisons in accordance with the Securities and
Exchange Commission's (SEC) disclosure requirements. Under these requirements,
all mutual funds (except money funds) are required to compare their performance
over the past ten years (or life of the fund) to that of a broad-based
securities market index.
Assessing the risk and return potential of the vast array of mutual funds
available today can be an overwhelming task. Measuring and evaluating the
performance of the AARP Mutual Funds presents a further challenge for investors
because of the emphasis our portfolio managers put on the active management of
risk as they strive to produce competitive returns. As you read through the
individual fund summaries that follow this section, you will note that all of
the AARP Mutual Funds except the AARP Money Funds have been compared to market
indices.
The problem with these comparisons is that the performance of indices may
vary significantly from the performance of actual mutual funds. The reason is
that indices are unmanaged baskets of securities, and do not include the
expenses of operating a fund, such as advisory fees and portfolio transaction
costs. Due to these factors, even index funds such as the AARP U.S. Stock Index
Fund tend to underperform the market indices. Indices, therefore, do not provide
a complete picture. This is important to remember when comparing the performance
of any mutual fund to the performance of a market index.
With this in mind, we have devoted this special section to an explanation
of a new performance measurement system. It is proving to be a valuable tool for
those of us at Scudder and AARP who have responsibility for overseeing the
performance of your funds. It can be helpful to you as well. Your understanding
of the process will make it easier for you to select from the expanded choices
of AARP Mutual Funds.
6
<PAGE>
Our plans are to continue to communicate with you about this new
performance system to help you evaluate investment performance of the AARP
Mutual Funds, not just as it relates to total return but also to the management
of risk. Our goal has been to create an easy-to-understand approach that will
permit you to fairly and objectively assess:
o the total return of the AARP Mutual Funds;
o the downside risk of the AARP Mutual Funds, measured by the
frequency and amount by which the total return fluctuates
downward; and
o the total return and downside risk of the AARP Mutual Funds
relative to similar mutual funds.
Creating a Performance Measurement System:
Four Principles to Remember
We have been guided by four principles that are important to remember as
you familiarize yourself with the performance measurement system.
1) A single performance measure does not necessarily tell the whole story
-- particularly in the case of your AARP Mutual Funds, which put
significant emphasis on the active management of risk. As you will see
in the graphs provided later in this Report, we measure the
performance of your Funds in terms of total return and downside risk.
2) We measure downside risk because most investors view risk as related
to the chances of a loss and the likely size of that loss. We have
therefore chosen to track, measure, and evaluate the frequency and
amount by which each fund's total return fluctuates downward --
absolutely and compared to groups of similar mutual funds.
3) One-year performance is not a strong indicator because of its
variability -- produced by frequent and large swings in the markets.
Of greater significance, however, is the fact that most investors have
an investment horizon of more than one year. Indeed, a recent study
conducted by the Investment Company Institute (ICI) showed that only
4% of investors have a time horizon of less than one year, and that
the median investment time horizon was eight years. We therefore focus
our evaluation of performance over three-year time periods or more,
although we monitor shorter-term performance to identify emerging
trends affecting the longer-term performance of the AARP Mutual Funds.
4) Benchmarks such as the S&P 500 and the various bond market indices may
be of limited use in evaluating performance, as previously mentioned.
Mutual fund investors like you care increasingly about how your funds
are performing compared to similar mutual funds you could have
purchased. We have therefore made a good faith effort to create peer
universes of similar mutual funds
7
<PAGE>
against which you can assess risk and return for each of your AARP
Mutual Funds. We have selected funds from the larger universe of funds
tracked by Lipper Analytical Services, Inc. We included any fund with
at least $100 million in assets, and with a three-year track record.
The universes will be updated periodically as new funds meet the
criteria.
Pinpointing the Tradeoff Between Risk and Return
of the AARP Funds
All of the AARP Mutual Funds with share price volatility (i.e., all except
AARP Money Funds) that have been in existence for three years or more are
represented on risk/return graphs in their individual sections of this Report.
They are the:
o AARP GNMA and U.S. Treasury Fund o AARP Balanced Stock and Bond Fund
o AARP High Quality Bond Fund o AARP Growth and Income Fund
o AARP Insured Tax Free General Bond Fund o AARP Capital Growth Fund
The AARP Bond Fund for Income, AARP Global Growth Fund, AARP U.S. Stock
Index Fund, AARP Small Company Stock Fund, AARP International Stock Fund, and
the two AARP Managed Investment Portfolios have been in existence for less than
three years. Therefore, we have not included them in this analysis. We will be
providing their risk-managed performance information in upcoming AARP Investment
Program communications.
How to Read the Performance Graphs
First, and most important, be patient. While we are confident that the
performance measurement system has great value in helping you to assess the
investment performance of your Funds, it may take more than one review of the
graphs for you to feel comfortable with them.
Here's how to read them:
o The vertical (y) axis represents the percentage of average monthly
return.
o The horizontal (x) axis represents the combination of the frequency
and amount by which monthly total return has fluctuated downward,
expressed in percentage terms. Unlike total return, the lower the risk
percentage, the better we are doing at controlling downside
fluctuation of total return.
o Two dotted lines divide the graph into four sections or quadrants. The
point where the two dotted lines meet represents the median risk and
median return of the peer universe of similar funds.
8
<PAGE>
Our goal is for the AARP Mutual Funds to perform in the upper-left
quadrant. If that cannot be achieved (it is not possible all the time), then our
goal is for the Funds to perform in the lower-left quadrant. This reflects the
priority we put on the management of risk in response to your feedback. You have
told us that the achievement of competitive returns is important, but that you
do not necessarily expect your investments to achieve the highest total returns
if we can provide less downside risk. You know that in general the achievement
of the highest levels of return involves the acceptance of a potentially and
perhaps uncomfortably high level of risk (funds in the upper and lower-right
quadrants).
The graph below pinpoints the performance of the AARP Growth and Income
Fund in terms of average monthly return and average monthly downside risk for
the three years ending September 30, 1997. The result is shown in relation to
the the median performance of its peer universe of other growth and income
funds. The Fund's total return was slightly better than the average of its peers
as represented by its location slightly above the horizontal axis. The Fund is
shown to the left of the vertical axis which means the frequency and magnitude
with which the Fund's total return has declined is less during this period than
the average of the peer mutual fund universe.
A DESCRIPTIVE DIAGRAM EXPLAINING THE REPORT'S SCATTER CHARTS APPEARS HERE
A fund in the upper-left quadrant has better-than-median return and
lower-than-median risk as defined by the frequency of down months and amount by
which total return declines in those months. Such a fund has better overall
performance than the typical peer fund. This is the best combination of results
- -- less risk with more return.
A fund in the upper-right quadrant has better-than-median return but
higher-than-median risk.
AARP Growth and Income Fund Three-Year Risk/Return Performance
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Growth and 2.00 1.26
Income Fund
Peer Funds 1.97 1.52
Average
(Data represented from October 1, 1994 through September 30, 1997 for 269
similar funds.)
A fund in the lower- left quadrant has lower-than-median return but
lower-than- median risk.
A fund in the lower-right quadrant has lower- than-median returns and
higher-than-median risk. Such a fund has worse overall performance than the
typical peer fund. This is the worst combination of results -- more risk with
less return.
9
<PAGE>
Working with Us to Assess Fund Performance
Your frank and honest views about your investment needs and performance
expectations, especially as they relate to your willingness to trade off risk
for return, have been invaluable in helping us to develop the new AARP Mutual
Funds and to refine the investment goals and strategies of the existing AARP
Mutual Funds. More recently your perspectives have greatly informed the
development of a process by which we and you can measure performance of your
funds. As we introduce and refine our new performance measurement system, we
hope you will continue to provide us with your reactions, questions, and
concerns.
Most importantly, we encourage you to get comfortable with and use this
tool. It will help you feel confident with the investment decisions you have
made and continue to make as you plan for, and during, your all-important
retirement years.
If you have any questions about the Program's performance measurement
system, this Annual Report in general, or on how to diversify your portfolio to
achieve competitive returns and protection against the volatility of the
financial markets, please do not hesitate to call one of our AARP Mutual Fund
Representatives, toll free, at 1-800-253-2277, 8:00 a.m. to 8:00 p.m., eastern
time. They can help you to evaluate, if not enhance, the appropriateness of your
investment portfolio based on your risk tolerance, time horizon, and specific
investment objectives -- whether or not your portfolio includes AARP Mutual
Funds.
Remember, we are here to help.
10
<PAGE>
A Message from the Portfolio Managers
On the following pages you will find our reviews of the investment
performance of the individual AARP Mutual Funds for the period October 1, 1996
to September 30, 1997.
The year has been exciting, challenging and rewarding, as we have worked
to:
o integrate the six new AARP Mutual Funds into the family consistent
with our unique mandate to provide competitive returns but with less
downside share price volatility than similar funds;
o deliver on this commitment during a period of considerable market
volatility; and
o develop an easy-to-understand approach that will help you evaluate the
investment performance of your funds -- not just as it relates to
total return, but also to the management of risk.
CALLOUT:
Current performance information for all of your Funds is available through the
Easy Access Line at 1-800-631-4636 or by calling a Mutual Fund Representative at
1-800-253-2277.
The summaries of most funds include the one-, five-, and ten-year total
return or, as in the case of those funds with less than ten years, life of fund
total return. Remember that one-year returns can be extremely high or low due to
market conditions, therefore it is important to evaluate twelve-month returns in
relation to five-year and ten-year returns. You will see that where appropriate,
a one-year total return is expressed in terms of its two components: distributed
income, which includes reinvested dividends; and capital change, defined as the
change in the price per share and includes reinvested capital gains
distributions.
Finally, we have worked to strengthen the quality of our individual
portfolio reviews with the inclusion of more relevant information about the:
o performance of the funds over longer periods of time compared to
various market indices, and
o risk-managed performance of your funds compared to similar mutual
funds. If you have not done so already, read more about our new
performance measurement system in the Special Section that begins on
page 6.
We hope this information helps you to make informed investment decisions
and that you feel confident and comfortable in the process.
SIDE BAR TEXT:
The AARP Mutual Fund family was recently awarded a Five-Star Rating from Mutual
Funds Magazine,* based on its independent evaluations of 210 fund families'
risk-adjusted returns over the last two to ten years. Family ratings are on a
Five-Star to One-Star scale, where the top fifth of all families receive five
stars; the next fifth, four-stars; the middle fifth, three stars; the
next-to-lowest fifth, two stars, and the bottom fifth, just one star.
*1997 edition of Mutual Funds Magazine
Six of the AARP Mutual Funds are rated by Morningstar* and received the
following 3-year ratings as of 9/30/97.
AARP Growth and Income Fund 4 Star
AARP GNMA and
U.S. Treasury Fund 4 Star
AARP Balanced Stock and
Bond Fund 4 Star
AARP Capital Growth Fund 4 Star
AARP High Quality Bond Fund 3 Star
AARP Insured Tax Free
General Bond Fund 3 Star
* Morningstar proprietary rankings reflect historical risk-adjusted
performance and are calculated as of 9/30/97. 2143, 1187, and 638
Equity Funds, 1309, 713 and 301 Taxable Bond Funds and 1374, 668, and
326 Municipal Bond Funds were rated for the 3-, 5-, and 10-year
periods, respectively. The ratings are subject to change each month.
Morningstar ratings are calculated from the Funds' 3-, 5-, and 10-year
average annualized total returns in excess of 90-day T-Bill returns,
with appropriate adjustments and a risk factor that reflects fund
performance below 90-day T-Bill returns. The Funds' 3-, 5-, and
10-year ratings are 5, 5, and 4 Stars, respectively. Those funds
receiving 5 Stars are in the top 10% of their investment category,
while the top 22.5% of funds that Morningstar evaluates receive 4
Stars, and 35% of the funds receive 3 Stars. Past performance is not a
guarantee of future results.
11
<PAGE>
AARP HIGH QUALITY MONEY FUND
----------------------------
FUND OVERVIEW
The AARP High Quality Money Fund is designed to maintain stability and safety of
your principal while providing current income. The Fund has quality standards
high enough to have secured an AAAm rating from Standard & Poor's Corp.,* a
leading national independent rating firm. The Fund seeks to maintain a $1.00
share price, although there may be circumstances under which this goal cannot be
achieved. It is important to note that, unlike bank savings accounts, the Fund
is not insured or guaranteed by the U.S. government and the yield of the Fund
will fluctuate.
FOR WHOM THE
FUND IS DESIGNED
The Fund may be appropriate for investors who have short-term needs or those who
do not want the risks associated with investing in stocks or bonds. These
investors include those requiring current income for day-to-day expenses,
immediate access to their assets through free checkwriting, and investment
diversification with a degree of safety and stability; and those seeking a
short-term investment prior to making long-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
David Wines
Lead Portfolio Manager
K. Sue Cote
Debra A. Hanson
Portfolio Managers
- ----------
* The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
THE FUND'S INVESTMENT STRATEGY
As with most money funds, the performance of the AARP High Quality Money
Fund mirrored the movement of short-term interest rates during the period
covered by this Report. Short-term interest rates, as measured by the
three-month U.S. Treasury Bill, declined from 5.01% on September 30, 1996 to
4.95% on September 30, 1997. In this environment, our aim was to keep a long
average maturity in the Fund. We were able to provide you with a competitive
yield compared to other money funds by lengthening its average maturity from 46
days on September 30, 1996 to 55 days on September 30, 1997.
In keeping with your Fund's objective, all securities we bought over the
past 12 months were rated within the two highest quality rating categories of
one or more rating agencies such as Moody's Investors Service, Inc., Standard &
Poor's Corporation, and Fitch Investors Service, Inc. In addition, we complied
with the guidelines established by S&P, which are more stringent than the
guidelines most money funds utilize. This enabled us to retain our AAAm rating
from S&P, the highest rating available.
Since we do not anticipate interest rates rising significantly over the
next several months, we expect your Fund's average maturity to remain within the
45- to 55-day range. If interest rates rise, we will shorten its average
maturity by purchasing shorter-maturity securities. We believe our overall
strategy will provide competitive income while maintaining stability and
liquidity.
PORTFOLIO STATISTICS
--------------------
Number of Issues 32
7-Day Current Yield 4.64%
Average Maturity 55 days
Average Quality AAAm
PORTFOLIO RETURNS
-----------------
One-Year Cumulative
Total Return 4.72%
Five-Year Average
Annualized Total Return 3.85%
Ten-Year Average
Annualized Total Return 5.15%
Five-Year Cumulative
Total Return 20.82%
Ten-Year Cumulative
Total Return 65.27%
12
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
-------------------------------------
FUND OVERVIEW
The AARP High Quality Tax Free Money Fund is designed to offer you stability and
safety of principal, along with current income free from federal income taxes.^1
The quality of the Fund is high enough to have secured an AAAm rating from
Standard & Poor's (S&P).^2 The AARP High Quality Tax Free Money Fund is designed
to maintain a $1.00 share price, although there may be circumstances under which
this goal cannot be achieved. It is important to note that, unlike bank savings
accounts, the Fund is not insured or guaranteed by the U.S. government, and
yield will fluctuate.
FOR WHOM THE
FUND IS DESIGNED
This Fund may be appropriate for investors in high tax brackets or those who do
not want the risks associated with investing in stocks or bonds. These investors
include those seeking money market income to meet regular day-to-day expenses,
those needing immediate access to their assets through free checkwriting, those
creating a diversified portfolio who want a portion of their assets in an
investment designed to offer stability, and those seeking a short-term
investment prior to making long-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
K. Sue Cote
Lead Portfolio Manager
Donald C. Carleton
Rebecca L. Wilson
Portfolio Managers
- ----------
^1 It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Capital gains may be
subject to taxes as well.
^2 The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
THE FUND'S INVESTMENT STRATEGY
As short-term interest rates in general declined over the period
covered by this Report, our aim was to purchase securities with a one-year
maturity. Recently, securities with a one-year maturity have provided
above-average value. We combined these purchases with short variable rate notes
to create what we think is the best mix of yield and stability. As of September
30, 1997, the average maturity of your Fund was 51 days, which is longer than
the 49-day average maturity of the Fund back on September 30, 1996. Standard &
Poor's Corp. limits the average maturity of all its AAA-rated money funds to 60
days.
As always, all securities we bought over the past 12 months were rated
within the two highest quality ratings of at least one of the three leading
national independent rating firms: Fitch Investors Service, Inc., Moody's
Investors Service, Inc., or S&P. The AARP High Quality Tax Free Money Fund is
rated AAAm by S&P, their highest rating. As a result, there are particular
guidelines with which we must comply in order to maintain our AAAm rating. In
addition, within the universe of securities that fit the S&P criteria, Scudder
credit analysts approve only a small percentage. Therefore, the number of
securities that we have to choose from is much smaller and in most cases of
better quality than other tax-free money funds.
We do not expect short-term interest rates to rise dramatically over
the next few months. Therefore, we intend to maintain a slightly above-average
maturity of the Fund. By doing so, we hope to provide you with price stability
and competitive tax-free income.
PORTFOLIO STATISTICS
--------------------
Number of Issues 54
7-Day Current Yield 3.16%
Average Maturity 51 Days
Average Quality AAAm
PORTFOLIO RETURNS
-----------------
One-Year Cumulative
Total Return 2.80%
Five-Year Average
Annualized Total Return 2.39%
Ten-Year Average
Annualized Total Return 3.81%
Five-Year Cumulative
Total Return 12.55%
Ten-Year Cumulative
Total Return 45.40%
13
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
--------------------------------
FUND OVERVIEW
The AARP GNMA and U.S. Treasury Fund seeks to produce a high level of current
income from a conservatively managed government fixed-income portfolio. Although
your principal is not guaranteed as it is with an insured fixed-rate certificate
of deposit (CD) or savings account, the Fund is managed to have less share price
volatility than other GNMA funds. While the securities in the Fund are
guaranteed as to the timely payment of principal and interest, the guarantee is
not related to the Fund's yield or share price, both of which will fluctuate
daily.
PORTFOLIO
MANAGEMENT TEAM
Thomas M. Poor
Lead Portfolio Manager
Mark S. Boyadjian
Scott E. Dolan
David H. Glen
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
- -------------------------
1 yr. 8.49% 10.27%
5 yr. 30.26% 40.24%
10 yr. 116.18% 155.38%
AVERAGE ANNUAL
FUND INDEX+
-------------------------
1 yr. 8.49% 10.27%
5 yr. 5.43% 6.99%
10 yr. 8.01% 9.82%
HOW THE FUND HAS PERFORMED
The AARP GNMA and U.S. Treasury Fund provided a 6.35% 30-day SEC yield as
of September 30, 1997. The Fund was actively managed to protect you from some of
the share price volatility caused by rising interest rates early in the year.
However, during times of declining interest rates such as that of more recent
months, your Fund will often lag behind other GNMA funds and its comparative
index due to its U.S. Treasury holdings. The Annual Investment Returns chart
below shows that the AARP GNMA and U.S. Treasury Fund's one-year total return of
8.49% (representing 6.81% in distribution of income and 1.68% in capital change)
underperformed the unmanaged Lehman Brothers Mortgage GNMA Index of 10.27%. It
is important to remember that the index return does not reflect investment in
cash or short-term Treasury securities like those held in the Fund; nor does the
index reflect the impact of servicing, investment management, or administrative
expenses that a mutual fund incurs. The Fund's underperformance was due in part
to its holdings of investments in lower yielding U.S. Treasuries and other
short-term instruments in keeping with its discipline to reduce share price
volatility. Secondly, mortgages as a class performed exceptionally well over the
past several months. Therefore, comparable funds that were almost entirely
invested in mortgages performed better than the AARP GNMA and U.S. Treasury
Fund.
Twelve-month returns for the Fund will vary. By maintaining a long-term
focus and staying invested through periods of rising and declining interest
rates, you have the opportunity to earn high monthly income. The graph above
right shows how $10,000 invested in the Fund on September 30, 1987 would have
grown by September 30, 1997, assuming all distributions were reinvested.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- ---------------------
1987 $10000 $10000
1988 11107 11506
1989 12014 12807
1990 13079 14016
1991 14925 16343
1992 16595 18210
1993 17572 19411
1994 17238 19176
1995 19016 21873
1996 19926 23159
1997 21618 25538
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return %)
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- --------------------
1993 5.89% 6.59%
1994 -1.9 -1.22
1995 10.31 14.07
1996 4.79 5.88
1997 8.49 10.27
- ----------
^+ The unmanaged Lehman Brothers Mortgage GNMA Index is a market-value-weighted
measure of all fixed-rate securities backed by mortgage pools of GNMA. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
14
<PAGE>
THE FUND'S INVESTMENT STRATEGY
In keeping with our strategy to produce monthly income from a
conservatively managed government portfolio, we used shorter term U.S. Treasury
securities (20% of the portfolio as of September 30, 1997) to reduce share price
volatility while using high-yielding GNMA securities (76% as of September 30,
1997) for income. We increased our position in GNMA securities to approximately
76% as of September 30, 1997 from 66% on September 30, 1996 for two reasons: we
believed that mortgages were an attractive category relative to Treasuries and
we didn't anticipate a major rise in interest rates. Within the GNMA universe,
we invested across a variety of maturities with interest rate coupons ranging
from 6.5% to 16%. To dampen the share price volatility during this period, the
remainder of the portfolio was invested in shorter term U.S. Treasury
obligations and cash equivalents with maturities of three years or less.
CALLOUT:
This is a unique Fund because it is designed for older Americans who seek more
income from conservative investments. The Fund generally has at least 20% of its
assets in securities such as short-term Treasuries, to cushion it from too much
share price fluctuation.
We believe that the current blend of GNMA securities will continue to
provide a competitive stream of income, while the shorter term Treasury
securities and cash equivalents will continue to help dampen share price
volatility.
The following graph shows your Fund's monthly downside risk and average
monthly return for the last three years compared to its peer group. The dotted
lines divide the graph into four sections or quadrants. The point where they
intersect represents the median risk and the median return for the peer group of
funds. Our goal is for this Fund to place in the upper-left quadrant, otherwise
the lower-left quadrant. See page 6 for a complete description of our
performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP GNMA and U.S. Treasury Fund Three-Year Risk/Return Performance
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP GNMA and U.S.
Treasury Fund .63% .21%
Peer Funds
Average .72% .35%
(Data represented from October 1994 through September 1997 for 20 similar
funds.)
Your Fund is located in the lower-left quadrant. Its return was slightly less
than the median return of its Lipper* GNMA fund peer group. However, it had the
second lowest risk in the universe of 20 similar mutual funds.
- ----------
*Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for conservative investors who want relatively high current
income but some protection from bond market fluctuation. As an investor, you
should be investing for the longer term (three years or more) and be comfortable
with fluctuation in the value of your principal and yield.
PORTFOLIO DIVERSIFICATION
-------------------------
As of September 30, 1997
Government National
Mortgage Association 76%
U.S. Treasury Obligations 20%
Cash Equivalents 4%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 2112
30-Day Yield 6.35%
Average Coupon 7.44%
Yield to Maturity 6.60%
Average Maturity 5.33 Years
Average Duration 2.59 Years
Average Quality AAA
15
<PAGE>
AARP HIGH QUALITY BOND FUND
---------------------------
FUND OVERVIEW
To help achieve a high level of income compared to similar bond funds, the AARP
High Quality Bond Fund invests in a range of investment-grade bonds. The Fund
maintains quality standards that are among the highest of any general bond fund
currently available, with at least 65% of the Fund's assets invested in
securities rated in the two highest rating categories by Moody's and Standard &
Poor's. The Fund may also invest up to 20% of its assets in bonds rated Baa by
Moody's or rated BBB by S&P. The Fund is also managed to have less share price
volatility than other high quality bond funds.
PORTFOLIO
MANAGEMENT TEAM
William M. Hutchinson
Lead Portfolio Manager
Scott E. Dolan
David H. Glen
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX^+
- -------------------------
1 yr. 8.15% 9.73%
5 yr. 35.05% 39.70%
10 yr. 126.98% 147.26%
AVERAGE ANNUAL
FUND INDEX^+
- -------------------------
1 yr. 8.15% 9.73%
5 yr. 6.19% 6.91%
10 yr. 8.54% 9.47%
HOW THE FUND HAS PERFORMED
The AARP High Quality Bond Fund's one-year total return of 8.15%
(representing 6.13% in distribution of income and 2.02% in capital change)
underperformed the unmanaged Lehman Brothers Aggregate Bond Index of 9.73%.
Because your Fund attempts to reduce share price volatility, it will often
underperform the index when long-term interest rates decline, as they have over
much of the period covered by this Report. Long-term interest rates, as measured
by the 30-year Treasury Bond, declined from 6.92% to 6.39% for the same period.
It is important to remember that the index return does not reflect investment in
cash or short-term securities like those held in the Fund; nor does the index
reflect the impact of servicing, investment management, or administrative
expenses that a mutual fund incurs.
The Fund's return will vary from year to year, however, by maintaining
a long-term focus and staying invested through periods of rising and declining
interest rates, you increase the chances of achieving your long-term objective.
The graph to the right shows how $10,000 invested in the Fund on September 30,
1987 would have grown as of September 30, 1997, assuming all distributions were
reinvested.
THE FUND'S INVESTMENT STRATEGY
Over the past 12 months we focused our efforts on implementing our
diversification strategy by investing across a range of maturities, quality
ratings, and industries. Your Fund continued to be well diversified in
high-quality securities. As of September 30, 1997, 66% of the portfolio was
invested in government, AAA-rated, or AA-rated securities; 12% of the Fund was
invested in A-rated bonds; 16% was invested
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------
1987 $10000 $10000
1988 11238 11330
1989 12404 12606
1990 13051 13556
1991 15066 15724
1992 16807 17699
1993 18804 19464
1994 17761 18835
1995 20066 21485
1996 20988 22533
1997 22698 24726
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------
1993 11.88% 9.98%
1994 -5.54 -3.22
1995 12.98 14.06
1996 4.59 4.90
1997 8.15 9.73
- ----------
^+ The unmanaged Lehman Brothers Aggregate Bond Index is a market-value-weighted
measure of Treasury issues, agency issues, corporate bond issues, and
mortgage securities. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not reflect
any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
16
<PAGE>
in BBB securities; and 6% was invested in cash equivalents. We favored
attractively priced mortgage-backed securities, with an allocation of
approximately 25% of the portfolio's assets, because of their high quality and
income potential. We also continued to invest in a broad range of corporate
securities such as those in financial, transportation, and consumer staples
companies. Utilizing an investment provision implemented in February of this
year, we invested 16% of the portfolio assets in BBB-rated securities. This
helped provide you with a 30-day SEC yield of 5.83% as of September 30, 1997.
Overall, we maintained a barbell maturity strategy with 18% of the
portfolio invested in securities that mature in under one year and 24% of the
portfolio invested in securities maturing in more than ten years.
CALLOUT:
The Fund attempts to reduce share price fluctuation by investing in a variety of
different economic sectors.
The following graph shows the Fund's monthly downside risk and average
monthly return for the last three years compared to its peer group. The dotted
lines divide the graph into four sections or quadrants. The point where they
intersect represents the median risk and the median return for the peer group of
funds. Our goal is for this Fund to place in the upper-left quadrant, otherwise
in the lower-left quadrant. See the special section on page 6 for a complete
description of our performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP High Quality Bond Fund Three-Year Risk/Return Performance
SCATTER CHART TITLE:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP High Quality 0.68% 0.46%
Bond Fund
Peer Funds 0.76% 0.53%
Average
(Data represented from October 1994 through September 1997 for 44 similar
funds.)
Your Fund is located in the lower-left quadrant. Its return was slightly less
than the median return of its Lipper* "Corporate Rated A" fund peer group.
However, it had the 12th lowest risk in this universe of 44 similar mutual
funds.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors who want competitive returns from a portfolio
of high credit quality. Investors should be seeking to invest for the longer
term (at least three years or more) and be comfortable with fluctuation in the
value of their principal and yield.
PORTFOLIO DIVERSIFICATION
-------------------------
As of September 30, 1997
Corporate Bonds 33%
U.S. Treasury Obligation 21%
Government National
Mortgage Association 14%
Asset Backed 13%
U.S. Government Agency
Pass-Throughs 11%
Cash Equivalents 6%
Foreign Bonds--U.S. $
Denominated 2%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 52
30-Day SEC Yield 5.83%
Average Coupon 7.19%
Yield to Maturity 5.31%
Average Maturity 9.08 Years
Average Duration 4.35 Years
Average Quality AA
17
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
---------------------------------------
FUND OVERVIEW
The AARP Insured Tax Free General Bond Fund seeks to pay high monthly income
that is free from federal income taxes.* The Fund invests in a portfolio
consisting primarily of high-grade municipal securities that are insured against
default. This insurance does not apply to the value of your shares or the yield
of the Fund, both of which will fluctuate daily. The Fund is also managed to
have less share price volatility than other tax-free bond funds.
PORTFOLIO
MANAGEMENT TEAM
Donald C. Carleton
Lead Portfolio Manager
Philip G. Condon
Portfolio Manager
Total Return
------------
CUMULATIVE
FUND INDEX+
- -------------------------
1 yr. 8.57% 9.04%
5 yr. 38.36% 41.40%
10 yr. 130.07% 131.82%
AVERAGE ANNUAL
FUND INDEX+
- -------------------------
1 yr. 8.57% 9.04%
5 yr. 6.71% 7.17%
10 yr. 8.69% 8.76%
- ----------
* It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Gains on sales of Fund
shares and distributions of capital gains generally will be subject to
federal, state, and local taxes.
HOW THE FUND HAS PERFORMED
The AARP Insured Tax Free General Bond Fund provided you with a competitive
return and high, tax-exempt income over the past 12 months. Your Fund's one-year
total return was 8.57% (representing 5.15% in income distributions and 3.42% in
capital change); its 30-day SEC yield as of September 30, 1997 was 4.31%. This
is a taxable equivalent yield of 7.14% for shareholders in the 39.6% tax
bracket.
The AARP Insured Tax Free General Bond Fund's one-year return
underperformed the unmanaged Lehman Brothers Municipal Bond Index's return of
9.04%. It is important to note that due to the Fund's investment strategy to
moderate share price volatility, the Fund will often underperform versus similar
funds and the index. Also, the index return does not reflect investment in cash
or the deduction of any servicing, investment management, or administrative
expenses as a mutual fund does.
By maintaining a long-term focus and staying invested through strong and
weak markets, your investment has the opportunity to grow over time. The graph
to the right shows how $10,000 invested in the Fund on September 30, 1987 would
have grown by September 30, 1997, assuming all distributions were reinvested.
THE FUND'S INVESTMENT STRATEGY
In keeping with your Fund's objective to reduce share price volatility,
purchasing bonds with call protection remained a fundamental part of the Fund's
investment strategy over the past 12 months. Generally, a bond is called by the
issuer so that it can be refinanced at a lower interest
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
HART DATA:
AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------
1987 10000 10000
1988 11439 11296
1989 12658 12277
1990 13276 13113
1991 15115 14842
1992 16628 16395
1993 19009 18484
1994 18158 18033
1995 20012 20051
1996 21190 21260
1997 23007 23182
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------
1993 14.31% 12.74%
1994 -4.47 -2.44
1995 10.21 11.18
1996 5.88 6.04
1997 8.57 9.04
- ----------
^+ The unmanaged Lehman Brothers Municipal Bond Index is a market-value-weighted
measure of municipal bonds with a maturity of at least two years. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
18
<PAGE>
rate. Our call-protection strategy provided a more reliable income stream than
would have existed if the Fund held a significant amount of bonds that could be
called in by the issuer before their stated maturity. As of September 30, 1997,
85% of the portfolio was invested in non-callable bonds.
CALLOUT:
Investing in securities of varying maturities helps reduce the share price
volatility of this Fund.
The maturity structure of the portfolio was not significantly altered
during the past twelve months. We still prefer bonds from the 5- to 15-year
range of the market, which accounted for approximately 69% of the Fund's assets
as of September 30, 1997. The remaining 31% of the portfolio was divided equally
between short-term securities and bonds maturing in more than 15 years.
In addition, as of September 30, 1997, 95% of the portfolio was invested in
insured securities (or securities with escrowed U.S. Treasuries which provide
the backing of the U.S. government). Remember that this insurance protects the
bond from default but does not apply to the value of your shares or to the yield
of the Fund, both of which will fluctuate daily.
We believe that our strategy of maintaining a moderate duration (see
Glossary on page 160 for a definition of the word "duration"), presently of 7.39
years, will continue to serve you well. We seek to provide you with high income
free from federal income taxes and to keep your Fund's share price more stable
than that of a long-term municipal bond fund.
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise the lower- left quadrant.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Insured Tax Free General Bond Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Tax Free 0.66% 0.68%
General Bond Fund
Peer Funds 0.65% 0.78%
Average
(Data represented from October 1994 through September 1997 for 16 similar
funds.)
Your Fund is located at the intersection of the upper- and lower-left quadrants.
Its return was the same as the median return of its Lipper* Insured Muni Bond
fund peer group. The Fund had the third lowest risk in this universe of 16
similar mutual funds.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors in higher tax brackets who want income that
is free from federal income taxes. Investors should be seeking to invest for the
long term (at least three years or more) and be comfortable with fluctuation in
the value of their principal and yield.
MUNICIPAL BOND EFFECTIVE
MATURITIES ALLOCATION
---------------------
As of September 30, 1997
Less than 1 year 3%
1 to less than 5 years 11%
5 to less than 10 years 28%
10 to less than 15 years 41%
Greater than 15 years 17%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 368
30-Day SEC Yield 4.31%
Average Coupon 4.79%
Average Maturity 10.8 Years
Effective Duration 7.39 Years
Average Quality AAA
19
<PAGE>
AARP BOND FUND FOR INCOME
-------------------------
FUND OVERVIEW
The AARP Bond Fund for Income is designed to provide the highest level of
monthly income of any AARP Fund by investing primarily in investment- grade
bonds. The Fund can invest up to 35% in below-investment-grade bonds (at least
25% of which must be BB or Ba and no more than 10% of which may be B). The AARP
Bond Fund for Income is also managed to have less share price volatility than
other investment-grade long-term bond funds.
PORTFOLIO
MANAGEMENT TEAM
William M. Hutchinson
Lead Portfolio Manager
Kelly D. Babson
David H. Glen
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX^+
- -------------------------
Life of
Fund* 6.06% 6.21%
HOW THE FUND HAS PERFORMED
The AARP Bond Fund for Income has performed close to its index since it was
introduced on February 1, 1997. For the life of the Fund (February 1, 1997
through September 30, 1997), the total return of 6.06% (not annualized) slightly
underperformed the Lehman Brothers Aggregate Bond Index's return of 6.21% for
the same period. It is important to note that due to the Fund's investment
strategy to moderate share price volatility, the Fund will often underperform
versus similar funds and the index. Also, the index return does not reflect
investment in cash or the deduction of any servicing, investment management, or
administrative expenses that a mutual fund has.
CALLOUT:
In pursuit of the highest level of income of any AARP Mutual Fund, the Fund has
the flexibility to invest in a full array of maturities and credit quality.
THE FUND'S INVESTMENT STRATEGY
Your Fund must invest at least 65% of its assets in investment-grade bonds.
The Fund also invests a portion of its assets in lower-grade bonds. Our
investment orientation is towards the "upper end" -- or high-quality end -- of
the low-grade market, primarily BB-quality securities. We anticipate that
investing in these lower-grade securities will produce a higher yield and more
share price appreciation than the other income funds offered by the Program,
although the investment risk is somewhat higher. As of September 30, 1997, 78%
was invested in investment-grade bonds of BBB or higher, 14% in BB bonds, and 8%
in B bonds.
We also chose to keep the Fund richly diversified, utilizing a full array
of maturities and
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Bond Fund Lehman Brothers
for Income Aggregate Bond Index^+
-------------- ---------------------
2/1/97 10000 10000
10039 10025
3/31/97 9921 9914
10004 10062
10139 10158
6/30/97 10266 10279
10567 10556
10457 10467
9/30/97 10606 10621
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Period ended September 30
Total Return %
CHART DATA:
AARP Bond Fund Lehman Brothers
for Income Aggregate Bond Index^+
-------------- ---------------------
2/1/97* - 6.06% 6.21%
9/30/97
- ----------
^+ The unmanaged Lehman Brothers Aggregate Bond Index is a market-value-weighted
measure of Treasury issues, agency issues, corporate bond issues, and
mortgage securities. Index returns are calculated monthly and assume
reinvestment of dividends.
Unlike Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1997.
20
<PAGE>
credit quality. As of September 30, 1997, 53% of the portfolio was invested in
the corporate sector, 6% in mortgage-backed securities, 9% in asset-backed
securities, and 32% in cash and U.S. government securities (due to the large
inflow of cash into this new fund). In the corporate sector, we were invested
32% in industrials, 16% in financials, and 5% in utilities. We also maintained a
barbell strategy where 29% of the portfolio is invested in bonds maturing in ten
years or more and 30% is invested in bonds maturing in under one year.
We will continue to manage the AARP Bond Fund for Income for higher yields
than other AARP Income Funds, but to have less downside share price volatility
than other investment-grade bond funds. In turn, it is important to remember
that this Fund will likely experience more volatility than the AARP GNMA and
U.S. Treasury Fund or the AARP High Quality Bond Fund. Investors in this Fund
must therefore be in a position to tolerate greater risk to the value of their
investment for the potential of greater returns over the long term.
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors who seek high monthly income from a
diversified portfolio of largely investment-grade bonds, but who are willing to
accept the additional risk of a portfolio with some investment in lower-quality
bonds. Investors should be prepared to invest for the long term (at least three
years or more) and be comfortable with fluctuation in the value of their
principal. The AARP Bond Fund for Income could serve as a core bond investment
in most investors' portfolios because it offers the potential for high yields,
competitive total returns, and less share price fluctuation than other
investment-grade bond funds.
PORTFOLIO ALLOCATION
--------------------
As of September 30, 1997
Corporate Bonds 50%
Cash Equivalents 31%
Asset-Backed Securities 9%
Government National
Mortgage Association 4%
Foreign Bonds -- U.S. $
Denominated 3%
U.S. Government Agency
Pass-Throughs 2%
U.S. Treasury Obligations 1%
----
100%
====
PORTFOLIO STATISTICS
--------------------
Number of Issues 67
30-Day SEC Yield 6.92%
Average Coupon 7.85%
Yield to Maturity 5.05%
Average Maturity 9.85 Years
Average Duration 4.96 Years
Average Quality A
21
<PAGE>
AARP BALANCED STOCK AND BOND FUND
---------------------------------
FUND OVERVIEW
By investing in a combination of stocks, bonds, and cash reserves, the AARP
Balanced Stock and Bond Fund seeks to offer you long-term growth of capital and
quarterly income. The Fund attempts to keep the value of its shares more stable
than other balanced funds. The Fund is also managed to have less share price
volatility than other balanced funds.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
William M. Hutchinson
Benjamin W. Thorndike
Portfolio Managers
Total Return
------------
CUMULATIVE
BLENDED
FUND INDEX+
- -------------------------
1 yr. 27.34% 23.96%
Life of
Fund* 66.87% 64.21%
AVERAGE ANNUAL
BLENDED
FUND INDEX+
- -------------------------
1 yr. 27.34% 23.96%
Life of
Fund* 15.00% 14.49%
HOW THE FUND HAS PERFORMED
The AARP Balanced Stock and Bond Fund's one-year total return of 27.34%
(representing 4.57% in income distributions and 22.77% in capital change)
outperformed the blended index's return of 23.96%. The blended index is made up
of the unmanaged Standard & Poor's Composite Index of 500 Stocks (50%), the
unmanaged Lehman Brothers Aggregate Bond Index (40%), and the three-month
Treasury Bill Index (10%). (Please note that the Fund was introduced on February
1, 1994; therefore, five-year and ten-year data are not available.)
By maintaining a long-term focus and staying invested through good and bad
times, your investment has the opportunity to grow significantly over time. The
graph to the right shows how a $10,000 investment in the Fund would have grown
if you invested in the Fund on February 1, 1994, assuming all distributions were
reinvested.
THE FUND'S INVESTMENT STRATEGY
In general, the stock portion of your Fund (representing 61% of the
portfolio as of September 30, 1997) uses an approach similar to the AARP Growth
and Income Fund. We invest in stocks that are believed to have favorable
long-term capital appreciation outlooks and above-average dividend yields. Since
the stock portion of the Fund is managed by the same team and with the same
strategy as the AARP Growth and Income Fund, please refer to the AARP Growth
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Semiannual Periods from February 1, 1994*
to September 30, 1997
CHART DATA:
AARP Balanced Standard & Poor's Lehman Brothers
Stock and Bond 500 Stock Price Aggregate Bond Blended
Fund Index Index Index^+
---- ----- ----- -----
2/94* $10000 $10000 $10000 $10000
3/94 10154 9305 9583 9490
9/94 10584 9800 9543 9747
3/95 11024 10752 10062 10461
9/95 12361 12715 10885 11776
3/96 13343 14203 11146 12602
9/96 13978 15299 11416 13247
3/97 15007 17019 11694 14157
9/97 17800 21489 12527 16421
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Balanced Blended
Stock and Bond Fund Index^+
------------------- -----
2/1/94* -
9/30/94 -0.78% -3.83%
1995 16.80 20.43
1996 13.08 14.50
1997 27.34 23.96
- ----------
^+ The performance of the blended benchmark is a weighting comprised of 50%
Standard & Poor's 500 Stock Price Index (S&P), 40% Lehman Brothers
Aggregate Bond Index (LBAB), and the 3-Month Treasury Bill Index (10%). The
50/40/10 measure is meant to reflect the anticipated long range asset mix
of the Fund, which may change over time. The unmanaged Standard & Poor's
500 Stock Price Index is a market-value-weighted measure of 500 widely held
common stocks listed on the New York Stock Exchange, American Stock
Exchange, and Over-the-Counter market. The unmanaged Lehman Brothers
Aggregate Bond Index is a market-value-weighted measure of Treasury issues,
agency issues, corporate bond issues, and mortgage securities. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1994.
22
<PAGE>
and Income Fund Report on page for details on specific stock selection. (The
Fund may invest up to 70% of its assets in stocks.)
The portion of the Fund invested in bonds (representing 31% of the
portfolio as of September 30, 1997) must include investment-grade securities --
those rated Baa or higher by Moody's or BBB or higher by Standard & Poor's, both
independent ratings organizations. At least 75% of these securities must be
rated within the three highest quality ratings (AAA, AA, and A) by Moody's or
S&P. (At all times, at least 30% of your Fund's assets will be a combination of
investment-grade bonds and cash equivalents.) We moved from intermediate bonds
over the past 12 months to a barbell strategy (with an emphasis on short and
long maturities) in anticipation of a flattening yield curve (short-term yields
rising faster than long-term yields). The remaining 8% of the Fund's assets were
invested in cash equivalents.
ASSET ALLOCATION
----------------
As of September 30, 1997
Stocks 61%
Bonds 31%
Cash Equivalents 8%
----
100%
====
We continue to believe that stocks will outperform bonds and cash over the
longer term; therefore, a majority of the portfolio will continue to be invested
in stocks. While we are comfortable with our current asset allocation of 61%
stocks, 31% bonds, and 8% cash equivalents, this allocation may be gradually
changed depending upon our expectations for the financial markets.
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise in the lower-left quadrant. See page 6 for a complete
description of our performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Balanced Stock and Bond Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Balanced 1.46% 0.76%
Fund
Peer Funds 1.46% 0.93%
Average
(Data represented from October 1994 through September 1997 for 85 similar
funds.)
Your Fund is located at the intersection of the upper- and lower-left quadrants.
Its return was the same as the median return of its Lipper* Balanced fund peer
group. The Fund had the 12th lowest risk in this universe of 85 similar mutual
funds.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
This Fund is designed for investors who are seeking long-term growth of their
assets, but who seek less risk than an investment solely in stocks. Investors
should be able to invest for the long term (at least three years or more) and be
comfortable with the value of their principal fluctuating up and down.
STOCK ALLOCATION
----------------
As of September 30, 1997
Financial 24%
Manufacturing 17%
Energy 8%
Consumer Staples 8%
Communications 7%
Utilities 7%
Durables 6%
Health 6%
Consumer Discretionary 6%
Other 11%
----
100%
====
BOND ALLOCATION
---------------
As of September 30, 1997
Corporate Bonds 41%
U.S. Treasury Obligations 22%
U.S. Gov't. Agency
Pass-Throughs 20%
Asset-Backed Securities 7%
Gov't. National Mortgage
Association 5%
Foreign Bonds-U.S. $
Denominated 5%
----
100%
====
23
<PAGE>
AARP GROWTH AND INCOME FUND
---------------------------
FUND OVERVIEW
The AARP Growth and Income Fund is a conservatively managed equity fund that
provides the potential for long-term growth and quarterly income. It invests in
above-average, dividend-yielding stocks that may offer the opportunity for
long-term growth of capital. The AARP Growth and Income Fund is also managed to
have less share price volatility than other growth and income funds.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
Lori J. Ensinger
Deborah A. Chaplin
Kathleen T. Millard
Benjamin W. Thorndike
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
- ------------------------
1 yr. 40.70% 40.46%
5 yr. 162.57% 156.92%
10 yr. 289.67% 295.87%
AVERAGE ANNUAL
FUND INDEX+
- ------------------------
1 yr. 40.70% 40.46%
5 yr. 21.30% 20.76%
10 yr. 14.57% 14.74%
HOW THE FUND HAS PERFORMED
The AARP Growth and Income Fund performed well over the past 12 months. Its
one-year total return of 40.70% (representing 3.22% in distributions of income
and 37.48% in capital change) outperformed the unmanaged Standard & Poor's
Composite Index of 500 Stocks' return of 40.46%. This performance was due to the
strong appreciation of the Fund's largest holdings.
Of course, the returns for your Fund will vary from year to year, however,
by maintaining a long-term focus and avoiding overreaction to short-term market
volatility, your investment has the opportunity to grow significantly over time.
The graph to the lower right shows what $10,000 invested in the Fund on
September 30, 1987 would be worth on September 30, 1997, assuming all
distributions were reinvested.
THE FUND'S INVESTMENT STRATEGY
We continued to focus on investing in undervalued securities with
above-average relative dividend yields. The manufacturing sector contributed
significantly to the favorable performance over the past 12 months. For example,
Xerox, our largest holding, returned 59.3% for the period. This was due to key,
company-specific events, namely a new product introduction in modular-based
digital office copiers, and an announcement that the company was acquiring the
remaining 20% interest in Rank Xerox, a cornerstone of Xerox's European
strategy. Another manufacturing stock, Philips Electronics, returned 136.1% for
the period, based in part on the success of internal asset restructuring and
news it had
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP Growth and Standard & Poor's
Income Fund 500 Stock Price Index^+
----------- -----------------------
1987 $10000 $10000
1988 8922 8763
1989 11644 11653
1990 10457 10577
1991 13300 13873
1992 14841 15408
1993 17717 17411
1994 19132 18053
1995 23041 23423
1996 27696 28183
1997 38967 39587
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Growth and Income Standard & Poor's 500
Fund Stock Price Index+
---- ------------------
1993 19.38% 12.97%
1994 7.99 3.68
1995 20.43 29.75
1996 20.20 20.34
1997 40.70 40.46
- ----------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a market value
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and traded on the Over-the-Counter
market. Index returns are calculated monthly and assume reinvestment of
dividends. Unlike Fund returns, Index returns do not reflect any fees or
expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
24
<PAGE>
entered into a joint venture with Lucent, a consumer communications company.
CALLOUT:
The Fund focuses on stocks with above-average dividends and sound fundamentals
to help reduce share price volatility.
The Fund's health care weighting, concentrated in pharmaceuticals, also
helped the Fund's favorable performance. Earnings acceleration from new product
introductions and favorable long-term demographic trends have made this group
one of the strongest performing market sectors over the last few years. Holdings
such as Warner Lambert and Bristol Myers performed extremely well over this
period. This kind of dramatic outperformance always forces one to ask how much
higher the stocks can rise and whether their current levels are sustainable. As
pharmaceutical stocks have become more fully valued, we have been gradually
reducing our holdings.
There were mixed results in the financial sector over this period. Our real
estate investment trust (REIT) holdings, despite strong absolute returns,
continued to lag banking and insurance stocks. During the past several months,
we scaled back REITs that have posted strong gains, such as Equity Residential
Properties and Developing Diversified Realty. We did, however, experience solid
total returns with our finance holdings, led by EXEL Limited and Lincoln
National, as well as SLM Holding Corp. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise in the lower-left quadrant. See page 6 for a complete
description of our performance measurement system.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Growth and Income Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Growth and 2.00% 1.26%
Income Fund
Peer Funds 1.97% 1.52%
Average
(Data represented from October 1994 through September 1997 for 269 similar
funds.)
Your Fund is located in the upper-left quadrant. Its return was slightly
better than the median return of its Lipper* Growth and Income peer group. The
Fund also had the 30th lowest risk in this universe of 269 similar mutual funds,
putting it in the top 11% for lowest risk.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
The Fund is suitable for investors who are seeking long-term growth of their
assets and the opportunity to keep ahead of inflation. Investors should be able
to invest for at least five years or more and be comfortable with fluctuation in
the value of their principal that is associated with investing in stocks.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 22%
Manufacturing 20%
Consumer Staples 9%
Energy 8%
Communications 7%
Durables 7%
Utilities 7%
Consumer Discretionary 6%
Health 6%
Other 8%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 97%
Cash Equivalents 3%
----
100%
====
25
<PAGE>
AARP U.S. STOCK INDEX FUND
--------------------------
FUND OVERVIEW
The AARP U.S. Stock Index Fund uses the S&P 500 Index as a benchmark, but holds
securities in S&P 500 companies with higher yields. Standard & Poor's Index is
an unmanaged broad market index of 500 large "blue chip" companies. The Fund is
managed to have less share price volatility than other stock index funds and the
unmanaged S&P 500 Index.
PORTFOLIO
MANAGEMENT TEAM
Philip S. Fortuna
Lead Portfolio Manager
James M. Eysenbach
Portfolio Manager
NOTE:
Bankers Trust Company has been retained as Subadvisor to the Fund. The
Subadvisor handles the day-to-day investment and trading functions. The
Portfolio Managers are in regular contact with the Subadvisor, receive records
of daily transactions, monitor returns and relative risk, and scrutinize
portfolio activity.
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 21.22% 22.02%
HOW THE FUND HAS PERFORMED
The AARP U.S. Stock Index Fund was introduced on February 1, 1997.
Since inception (February 1, 1997 through September 30, 1997), your Fund
provided a total return of 21.22% (not annualized) vs. 22.02% for Standard &
Poor's Index of 500 Stocks. Consistent with its strategy, the Fund has exhibited
slightly lower day-to-day volatility than the S&P 500 Index and outperformed the
index on 61% of the down days.
CALLOUT:
The AARP U.S. Stock Index Fund strives to reduce share price fluctuation by
favoring dividend-paying S&P 500 stocks. Stocks of this type historically have
been more stable, especially in periods of decline.
THE FUND'S INVESTMENT STRATEGY
Our investment strategy is to invest in a broadly diversified portfolio
consisting of more than 400 S&P 500 companies as of the end of September 1997.
Using a technique referred to as "sampling," the portfolio is tilted towards
those common stocks of S&P 500 companies that are expected to pay higher
dividends than S&P 500 companies in the aggregate. By managing the Fund in this
way, we expect performance to be less volatile than the S&P 500 over time. We
also seek to offer shareholders a competitive return with a higher dividend
yield than comparable index funds.
The AARP U.S. Stock Index Fund offers a low-cost way of investing in a
diversified stock portfolio that provides a high degree of performance
similarity to the S&P 500.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP U.S. Standard &
Stock Index Poor's 500 Stock
Fund Price Index^+
---- ------------
2/1/97* $10000 $10000
10073 10078
3/31/97 9659 9664
10207 10241
10802 10864
6/30/97 11293 11352
12146 12255
11508 11568
9/30/97 12122 12202
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Period ended September 30
Total Return %
CHART DATA:
AARP U.S. Standard &
Stock Index Poor's 500 Stock
Fund Price Index^+
---- ------------
2/1/97* -
9/30/97 21.22% 22.02%
----------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a
market-value-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange, American Stock Exchange, and traded on the
Over-the-Counter market. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not reflect
any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1997.
26
<PAGE>
The sector diversification, excluding cash equivalents as of September 30, 1997:
Financial 14%
Technology 13%
Health 11%
Manufacturing 11%
Consumer Staples 10%
Energy 9%
Communications 7%
Utilities 6%
Durables 6%
Other 13%
Asset Allocation
----------------
As of September 30, 1997
Stock Holdings 97%
Cash Equivalents 3%
----
100%
===
FOR WHOM THE
FUND IS DESIGNED
The Fund is suitable for investors seeking long-term growth of their investment
and who prefer a more "passive" approach to stock market investing. It is
appropriate for more conservative investors who are seeking higher dividend
income and somewhat lower than average volatility than a similar S&P 500 Index
Fund. Investors should invest for the long term (at least five years or more)
and be comfortable with the value of their principal moving up and down.
27
<PAGE>
AARP CAPITAL GROWTH FUND
------------------------
FUND OVERVIEW
The AARP Capital Growth Fund is designed to help investors take advantage of the
high growth potential of stocks. It is managed to have less share price
volatility than other growth funds.
PORTFOLIO
MANAGEMENT TEAM
William F. Gadsden
Lead Portfolio Manager
Bruce F. Beaty
Portfolio Manager
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
1 yr. 46.72% 40.46%
5 yr. 149.33% 156.92%
10 yr. 266.94% 295.87%
AVERAGE ANNUAL
FUND INDEX+
-------------------------
1 yr. 46.72% 40.46%
5 yr. 20.05% 20.76%
10 yr 13.88% 14.74%
HOW THE FUND HAS PERFORMED
The AARP Capital Growth Fund performed exceptionally well over the past
year, providing shareholders in the Fund with a one-year total return of 46.72%
(representing 1.27% in distributions of income and 45.45% in capital change).
This return outperformed the Standard & Poor's 500 return of 40.46%. Your Fund's
favorable performance over this period can be attributed to the overall strength
of the U.S. stock market, and to our overweighted position in selected
technology and finance issues -- two strongly performing stock sectors during
this period. We are pleased that our valuation disciplines and diversification,
which we instituted in late 1994 to reposition the Fund within the growth fund
category, lead to competitive returns with less share price volatility.
Remember that returns for the Fund will vary from year to year, however, by
maintaining a long-term focus and staying invested through the ups and downs of
the market, we believe your investment has the opportunity to grow significantly
over time. The graph to the right shows how a $10,000 investment in the Fund on
September 30, 1987 would have grown by September 30, 1997, assuming all
dividends were reinvested.
THE FUND'S INVESTMENT STRATEGY
We have maintained a consistent investment strategy, which resulted in only
a few portfolio changes. The two top performing sectors of the market continued
to be technology and finance. In the technology sector, several of our holdings
experienced spectacular returns. The financial sector rose on the long-term
trends of restructuring and consolidation in the banking industry. Financial
stocks were
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------
87 $10000 $10000
88 9452 8763
89 13575 11653
90 9915 10577
91 14159 13873
92 14717 15408
93 18327 17411
94 17466 18053
95 21565 23423
96 25009 28183
97 36694 39587
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------
1993 24.53% 12.97%
1994 -4.70 3.68
1995 23.47 29.75
1996 15.97 20.34
1997 46.72 40.46
- ----------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a
market-value-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange, American Stock Exchange, and traded on the
Over-the-Counter market. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not reflect
any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
28
<PAGE>
well represented in your Fund's top ten holdings, including American Express,
EXEL, and Franklin Resources.
CALLOUT:
Through a broadly diversified portfolio consisting primarily of high-quality,
medium- to large-sized companies with strong competitive positions in their
industries, the Fund seeks to offer less share price volatility than other
growth funds.
We recently began investing in oil field services companies. This is one of
the few industries where we see competitive pricing and strong demand for
services. After a decade of attrition, downsizing, and restructuring, we expect
oil field service companies to exhibit strong earnings as worldwide oil demand
remains firm. For example, oil companies are now able to drill wells with a
higher success rate because of the improved technology provided by oil field
services companies. This is significant for oil companies because it has
effectively lowered the high cost of drilling deep wells. At the end of
September 1997, the Fund had oil field service holdings in Schlumberger and
Sante Fe International.
While we avoid making predictions about the market and prefer to focus on
picking quality stocks that meet our investment requirements, we think the
favorable investment environment of 1997 should continue into 1998. Company
fundamentals remain positive: growth is strong, inflation is low, and
productivity continues to improve at many companies. We believe that leading
American companies -- the primary focus of your Fund's investment -- will
continue to provide some of the best opportunities in this environment.
The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise in the lower-left quadrant.
A SCATTER CHART APPEARS HERE
SCATTER CHART TITLE:
AARP Capital Growth Fund Three-Year Risk/Return Performance
SCATTER CHART DATA:
Average Monthly Return Monthly Downside Risk
---------------------- ---------------------
AARP Capital 2.10% 1.54%
Growth Fund
Peer Funds 2.01& 1.92%
Average
(Data represented from October 1994 through September 1997 for 74 similar
funds.)
Your Fund is located in the upper-left quadrant. Its return was better than the
median return of its Lipper* Growth fund peer group. The Fund had the fifth
lowest risk in this universe of 74 similar mutual funds, with almost half the
downside risk of the riskiest fund.
- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors seeking long-term growth of their principal.
Investors should be able to invest for the long term (at least five years or
more) and be comfortable with the short-term fluctuation of their principal that
is associated with investing in stocks.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 21%
Technology 17%
Energy 14%
Manufacturing 13%
Consumer Discretionary 9%
Health 9%
Service Industries 5%
Durables 4%
Consumer Staples 4%
Other 4%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 95%
Cash Equivalents 5%
----
100%
====
29
<PAGE>
AARP SMALL COMPANY STOCK FUND
-----------------------------
FUND OVERVIEW
From investment primarily in the stocks of small U.S. companies, the Fund seeks
to provide long-term capital growth. It is also managed to have less share price
volatility than similar small company stock funds.
PORTFOLIO
MANAGEMENT TEAM
James M. Eysenbach
Lead Portfolio Manager
Philip S. Fortuna
Portfolio Manager
Total Return
------------
CUMULATIVE
FUND INDEX+
- -------------------------
Life of
Fund* 33.53% 24.13%
HOW THE FUND HAS PERFORMED
The AARP Small Company Stock Fund was introduced to shareholders on
February 1, 1997. Since inception, (February 1, 1997 through September 30,
1997), your Fund's total return of 33.53% (not annualized) outperformed the
Russell 2000 Index's return of 24.13% for the same period. Consistent with its
risk management mandate, your Fund has exhibited lower volatility than the
Russell 2000 Index of small companies and outperformed the Index on 88% of the
down days.
CALLOUT:
The Fund seeks to be more stable than other small company stock funds by
targeting undervalued small companies which, as a group, typically pay
above-average dividends.
THE FUND'S INVESTMENT STRATEGY
In pursuing capital appreciation from small company stocks, we utilize
a disciplined approach to uncover undervalued stocks within a broad universe of
small companies. First, we conduct a quantitative evaluation of approximately
2,000 small U.S. stocks, analyzing valuations, sales and earnings growth rates,
price momentum, and risk characteristics. We focus on companies selling at
prices that we believe do not reflect their underlying value. We emphasize those
companies with stable or improving sales and earnings growth or other
characteristics indicating that the undervaluation will be recognized in the
future. Then we build a diversified portfolio by assessing the risk/return
tradeoff of various combinations of attractively rated companies, with an
objective of maintaining an overall risk profile that is approximately 10% to
20% below that of the Russell 2000 Index. An important element of
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Small
Company Russell
Stock Fund 2000 Index^+
----------- ------------
2/1/97* $10000 $10000
10120 9758
3/31/97 9940 9297
9933 9323
11033 10360
6/30/97 11660 10805
12273 11307
12513 11566
9/30/97 13353 12413
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Period ended September 30
Total Return %
CHART DATA:
AARP Small
Company Russell
Stock Fund 2000 Index^+
----------- ------------
2/1/97* -
9/30/97 33.53% 24.13%
- ----------
^+ The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1997.
30
<PAGE>
this strategy, given the potential cost of trading small stocks, is working with
our experienced team of traders to ensure the most efficient means of executing
our purchase and sale decisions.
The emphasis on valuation is reflected in the resulting portfolio, which
has an average price-to-earnings ratio of about one-half of the Russell 2000
Index of small companies. (The price-to-earnings [P/E] ratio gives you an idea
of how much you are paying for a company's earning power. The lower the P/E, the
less you are paying for a dollar of earnings. While a high P/E may be an
indication of higher expected earnings growth, high-P/E stocks are typically
riskier.) Many of the lower-P/E stocks are found in the manufacturing sector of
the market. These small U.S. manufacturing firms currently represent the
portfolio's largest sector weighting. Meanwhile, we are finding relatively few
stocks meeting our valuation criteria within the health care sector. In terms of
size, a typical holding in the Fund has a market capitalization (price times
shares outstanding) of $480 million. By comparison, the typical S&P 500 company
has a market capitalization of $5 billion.
As of September 30, 1997, your Fund was well diversified, with 149 stocks
selected from the Russell 2000 Index of small companies. As you may know, the
risk of holding individual small company stocks can be high because small
companies generally have higher business risks than more established companies.
This is because small companies may have untested management, less diversified
product lines, and limited financial resources. This makes small companies more
vulnerable to adverse business developments than larger companies. We attempted
to control these risks by holding a relatively large number of securities in the
portfolio in addition to maintaining an overall above-average dividend yield. As
a direct result, your Fund has experienced lower than average small stock
volatility since inception compared to similar funds.
Going forward, we will continue to apply our disciplined, value- oriented
approach to selecting small company stocks in accordance with your Fund's
objective of seeking long-term capital appreciation with less share price
volatility than other small company stock funds. We believe that the AARP Small
Company Stock Fund continues to be appropriate for investors seeking
diversification and exposure to the small company sector of the stock market as
part of a well-rounded portfolio.
FOR WHOM THE
FUND IS DESIGNED
The AARP Small Company Stock Fund is suitable for investors seeking long-term
growth of their investment. Investors should invest for the long term (at least
five years or more) and be comfortable with the value of their principal
fluctuating up and down.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Manufacturing 25%
Financial 18%
Technology 10%
Consumer Discretionary 8%
Service Industries 7%
Construction 6%
Utilities 5%
Durables 5%
Metals & Minerals 5%
Other 11%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 94%
Cash Equivalents 6%
----
100%
====
31
<PAGE>
AARP GLOBAL GROWTH FUND
-----------------------
FUND OVERVIEW
The AARP Global Growth Fund seeks to offer long-term capital growth in a
globally diversified portfolio. It is also managed to have less share price
volatility than other global growth funds. Because the Fund invests globally, it
will be affected by up-and-down movements in U.S. and international stock
markets. The Fund will also be subject to international investment risks such as
currency exchange risk.
PORTFOLIO
MANAGEMENT TEAM
William E. Holzer
Lead Portfolio Manager
Diego Espinosa
Nicholas Bratt
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
1 yr. 24.67% 24.11%
Life of
Fund* 28.74% 32.31%
AVERAGE ANNUAL
FUND INDEX+
-------------------------
1 yr. 24.67% 24.11%
Life of
Fund* 16.41% 18.30%
HOW THE FUND HAS PERFORMED
The AARP Global Growth Fund performed well returning 24.67% (.46% in income
distributions and 24.21% in capital change) for the one-year period ended
September 30, 1997. Your fund outperformed the unmanaged Morgan Stanley Capital
International (MSCI) World Index's return of 24.11%. Its outperformance was due
in part to the strong performance of many of our top holdings and the favorable
global investment environment.
THE FUND'S INVESTMENT STRATEGY
Our approach to investing in the global equity markets focuses first on
identifying long-term growth trends of the world economy and capital markets,
and then identifying the companies with appropriate stock values that are best
positioned to take advantage of these opportunities. This strategy results in a
well-diversified portfolio of approximately 120 issues across many countries. We
do not try to pick the best country or the best currency. Rather, we focus on
picking the best individual companies.
We continued to expand your Fund's holdings of companies that share two
characteristics we believe will provide an increasingly important advantage in
the new global environment: dominant worldwide market share and declining
production costs.
Over the past 12 months, we looked to companies in previously regulated
economies or industries that are restructuring. We already have seen
considerable restructuring in Europe --
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Quarterly Periods from February 1, 1996*
to September 30, 1997
CHART DATA:
AARP Global
Growth Fund MSCI World Index^+
----------- ------------------
2/1/96* $10000 $10000
3/96 10180 10224
6/96 10280 10521
9/96 10327 10661
12/96 10907 11149
3/97 11141 11181
6/97 12399 12863
9/97 12874 13231
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Periods ended September 30
Total Return %
CHART DATA:
AARP Global
Growth Fund MSCI World Index^+
----------- ------------------
2/1/96*
3/31/97 3.27% 6.60%
9/30/97 24.67% 24.11%
- ----------
^+ The MSCI (Morgan Stanley Capital International) World Index is an unmanaged
capitalization-weighted measure of global stock markets, including the U.S.,
Canada, Europe, Australia, and the Far East. Index returns assume dividends
reinvested net of withholding tax and, unlike Fund returns, do not reflect
any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1996.
32
<PAGE>
primarily Germany and France -- in the chemicals and pharmaceutical industries.
Many industries, such as insurance, utilities, and banks, are still in the early
stages of restructuring. Stocks such as Daimler-Benz, Mannesmann, and Siemens,
all in Germany, contributed to the Fund's favorable performance. We also began
to turn our attention to Japan, where there are early indications that the first
wave of restructuring is beginning. As a result, we have added Nomura, a
Japanese financial services company to the portfolio.
We have favored companies that have completed the restructuring process and
are becoming industry leaders. The tire industry is a good example where
Bridgestone (Japan), and Michelin (France) in particular have been strong
performers.
CALLOUT:
The Fund seeks to offer less share price volatility than other global growth
funds by maintaining core holdings in well-established companies of developed
countries.
Another theme focuses on the world's demographics. Due to an aging
population, we believe pharmaceutical products and health providers, such as
Astra (Sweden), Biogen (U.S.), and Novartis (Switzerland) will continue to
thrive. In addition, many retirees are looking for both a healthy and a wealthy
retirement. Therefore we believe financial companies should also benefit.
Insurance companies such as AEGON (the Netherlands) and Skandia (Sweden) are
examples of companies that fit this theme. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)
We have recently taken a more cautious approach toward equities, adding to
both cash and bonds. While we remain optimistic about our equity holdings, we
recognize that rising valuations, particularly in the U.S., have increased the
risk of equity ownership. However, we continue to search for outstanding
investment opportunities in individual stocks.
PIE CHART TITLE:
Geographical Diversification -- Excludes Cash Equivalents
As of September 30, 1997
CHART PERIOD:
CHART DATA:
Europe 56%
U.S. & Canada 23%
Japan 10%
Pacific Basin 5%
Latin America 4%
Africa 2%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The AARP Global Growth Fund is suitable for investors who want to add worldwide
stock opportunities to their portfolio. Investors should invest for the long
term (at least five years or more) and be comfortable with the value of their
principal fluctuating up-and-down.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 24%
Manufacturing 22%
Technology 8%
Metals and Minerals 7%
Durables 5%
Health 5%
Consumer Staples 4%
Service Industries 4%
Energy 4%
Other 17%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 83%
Cash Equivalents 11%
Bond Holdings 6%
----
100%
====
33
<PAGE>
AARP INTERNATIONAL STOCK FUND
-----------------------------
FUND OVERVIEW
The AARP International Stock Fund seeks to offer long-term capital growth and
income from a diversified portfolio of foreign securities. It is managed to have
less share price volatility than other international equity funds. Because the
Fund invests internationally, it will be affected by up-and-down movements in
international stock markets. The Fund will also be subject to international
investment risks such as currency exchange risk.
PORTFOLIO
MANAGEMENT TEAM
Sheridan Reilly
Lead Portfolio Manager
Irene Cheng
Marc Joseph
Portfolio Managers
Total Return
------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 15.73% 14.43%
HOW THE FUND HAS PERFORMED
The AARP International Stock Fund performed well over the period covered by
this Report, with a total return of 15.73% (not annualized) for the period
February 1, 1997 to September 30, 1997. Your Fund outperformed the Morgan
Stanley Capital International (MSCI) EAFE Index return of 14.43%. This was due
in part to the Fund's geographic distribution. We were heavily weighted in
Europe, at roughly 77% of the portfolio. Europe not only displayed strong
performance in the earlier part of the year, but also weathered the August
decline quite well when foreign markets fell significantly. Southeast Asia was
hit hard in August, causing considerable market declines in this region. Our
underweighting in Southeast Asia, reflecting less than 10% of the portfolio,
helped us weather these turbulent times. In fact, over the past three months,
when the MSCI EAFE provided a return of -0.71%, the AARP International Stock
Fund provided shareholders a positive return of 5.60%.
THE FUND'S INVESTMENT STRATEGY
Since the Fund was introduced in February 1997, our priority has been to
make this a well-diversified portfolio in keeping with our strategy to
concentrate on individual stocks of well-established companies in developed
overseas markets. As of September 30, 1997, your Fund was diversified among 17
countries, including Germany, the United Kingdom, France, and Japan. As stated
in the section above, our geographic distribution contributed to the Fund's
favorable performance over this period.
On an industry and sector level, the Fund had significant weightings in
banks and insurers, manufacturers, and consumer goods companies, all of which
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP
International
Stock Fund MSCI EAFE Index^+
----------- -----------------
2/1/97* $10000 $10000
10053 10164
3/31/97 10140 10201
10007 10255
10507 10922
6/30/97 10960 11524
11287 11711
10833 10836
9/30/97 11573 11443
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:
AARP
International
Stock Fund MSCI EAFE Index^+
----------- -----------------
2/1/97 -
9/30/97 15.73% 14.43%
- ----------
^+ The MSCI (Morgan Stanley Capital International) EAFE Index is an unmanaged
capitalization-weighted measure of global stock markets, including Europe,
Australia, and the Far East. Index returns assume dividends reinvested net of
withholding tax and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1997.
34
<PAGE>
held up better than the overall market. We identify companies within these
sectors through a "relative yield" investment approach. This means we target
stocks that have high dividend yields relative to the median of the market --
typically 25% or higher. Reflective of this strategy was our investment in Bank
of Austria, Dorling Kindersley (a U.K. publisher), Elf Aquitane (a French oil
company), and Winterthur (a Swiss insurer). Bank of Austria has a dividend yield
approximately 50% higher than the local market and was priced well below the
book value of the company. At the time we purchased Dorling Kindersley, the
company's dividend yield was double its historical level.
CALLOUT:
By primarily targeting well-managed, dividend-paying companies in established
markets other than the United States, the Fund seeks long-term growth with less
downside share price fluctuation than other international stock funds.
We also sold some stocks that were extremely profitable to the Fund and
used these profits to make some of the investments mentioned above. We sold our
positions in Shishedo (a Japanese cosmetics company) and Chubb Securities (an
insurance company based in the U.K.). (Please note that portfolio changes should
not be considered recommendations for action by individual investors.)
Since the Fund's inception, we have seen increased volatility in the
foreign markets, with steep highs and lows. We believe that this was ideal
ground for testing the Fund's strategy. We were able to offer competitive
returns during market rallies, while offering protection from severe share price
declines when the market declined. We are confident that our emphasis on value
will continue to be appropriate for investors who wish to allocate assets
overseas in a relatively conservative fashion, and for investors seeking to add
balance to other more aggressive international investments.
PIE CHART TITLE:
Geographical Diversification -- Excludes Cash Equivalents
As of September 30, 1997
CHART PERIOD:
CHART DATA:
Europe 77%
Japan 11%
Pacific Basin 8%
Canada 4%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is suitable for investors seeking long-term growth of their principal
who want to add international stock market opportunities to their portfolio.
Investors in this Fund should have an investment time horizon of at least five
years or more, and be comfortable with the value of their principal fluctuating
up and down.
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997
Financial 24%
Manufacturing 22%
Consumer Staples 8%
Transportation 8%
Consumer Discretionary 7%
Communications 7%
Durables 6%
Construction 4%
Energy 3%
Other 11%
----
100%
====
ASSET ALLOCATION
----------------
As of September 30, 1997
Stock Holdings 93%
Cash Equivalents 7%
----
100%
====
35
<PAGE>
AARP MANAGED INVESTMENT PORTFOLIOS:
-----------------------------------
AARP DIVERSIFIED INCOME PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
PORTFOLIO OVERVIEWS
The AARP Managed Investment Portfolios are conservatively managed "funds of
funds" -- portfolios that invest exclusively in other AARP Mutual Funds. Two
portfolios are offered.
o The AARP Diversified Income Portfolio seeks current income with modest
long-term appreciation. It invests 60% to 80% of its assets in the AARP Bond
Mutual Funds and AARP Money Mutual Funds.
o The AARP Diversified Growth Portfolio seeks long-term growth of capital by
investing 60% to 80% of its assets in the AARP Stock Mutual Funds.
The investment mix in both portfolios may change when certain asset classes
appreciate or depreciate significantly as economic conditions change.
PORTFOLIO
MANAGEMENT TEAM
Philip S. Fortuna
Lead Portfolio Manager
Salvatore J. Bruno
Shahram Tajbakhsh
Portfolio Managers
TOTAL RETURN
DIVERSIFIED INCOME PORTFOLIO
- ----------------------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 9.35% 10.87%
TOTAL RETURN
DIVERSIFIED GROWTH PORTFOLIO
- ----------------------------
CUMULATIVE
FUND INDEX+
-------------------------
Life of
Fund* 16.00% 17.20%
HOW THE PORTFOLIOS HAVE PERFORMED
The AARP Managed Investment Portfolios performed well since their inception
in February. The Diversified Income Portfolio provided a total return of 9.35%
(not annualized) vs. the blended index's total return of 10.87% for the same
period. The blended index is made up of the unmanaged Standard & Poor's 500
Index (30%) and the Lehman Brothers Aggregate Bond Index (70%). The Diversified
Growth Portfolio provided shareholders with a total return of 16.00% (not
annualized) vs. the blended index's total return of 17.20% for the same period.
The blended index is made up of the unmanaged Standard & Poor's 500 Index (70%)
and the Lehman Brothers Aggregate Bond Index (30%).
THE PORTFOLIOS' INVESTMENT STRATEGIES
Since the Portfolios were introduced in early February, we have been
implementing an investment process that applies our global perspective and
judgment of capital markets, combined with sophisticated quantitative risk
management techniques, to investing in a mix of AARP Mutual Funds. Each
underlying Fund is also managed to reduce risk of loss to the Portfolio.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
DIVERSIFIED INCOME PORTFOLIO
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Standard & Lehman
Diversified Poor's 500 Brothers
Income Stock Price Aggregate Blended
Portfolio Index Bond Index Index+
----------- ----------- ---------- -------
2/1/97* $10000 $10000 $10000 $10000
10090 10078 10025 10041
3/31/97 9987 9664 9914 9839
10127 10241 10062 10119
10339 10864 10158 10371
6/30/97 10548 11352 10279 10597
10849 12255 10556 11050
10689 11568 10467 10798
9/30/97 10935 12202 10621 11087
BAR CHART TITLE: GROWTH OF A $10,000 INVESTMENT
DIVERSIFIED GROWTH PORTFOLIO
CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997
CHART DATA:
AARP Standard & Lehman
Diversified Poor's 500 Brothers
Growth Stock Price Aggregate Blended
Portfolio Index Bond Index Index+
----------- ----------- ---------- -------
2/1/97* $10000 $10000 $10000 $10000
10113 10078 10025 10062
3/31/97 9973 9664 9914 9739
10133 10241 10062 10190
10560 10864 10158 10653
6/30/97 10927 11352 10279 11026
11413 12255 10556 11729
11127 11568 10467 11239
9/30/97 11600 12202 10621 11720
- ----------
^+ The performance of the blended benchmark is a weighting comprised of the
Standard & Poor's 500 Stock Price Index (S&P), and the Lehman Brothers
Aggregate Bond Index (LBAB). The 30/70 measure of the Diversified Income
Portfolio and 70/30 measure of the Diversified Growth Portfolio is meant to
reflect the anticipated long-range asset mix of the Fund, which may change
over time. The unmanaged Standard & Poor's 500 Stock Price Index is a
market-value-weighted measure of 500 widely held common stocks listed on
the New York Stock Exchange, American Stock Exchange, and Over-the-Counter
market. The unmanaged Lehman Brothers Aggregate Bond Index is a
market-value-weighted measure of Treasury issues, agency issues, corporate
bond issues, and mortgage securities. Index returns are calculated monthly
and assume reinvestment of dividends. Unlike Fund returns, Index returns do
not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* These Funds commenced operations on February 1, 1997.
36
<PAGE>
We began by deciding which asset classes we expected to outperform and
compared that to historical trends. We then used this data to allocate the
Portfolios as follows: The Diversified Income Portfolio allocation as of
September 30, 1997:
AARP High Quality Money Fund 14%
AARP Bond Fund for Income 30%
AARP GNMA and U.S. Treasury Fund 31%
AARP Growth and Income Fund 11%
AARP U.S. Stock Index Fund 5%
AARP Global Growth Fund 9%
The Diversified Growth Portfolio allocation as of September 30, 1997:
AARP High Quality Money Fund 1%
AARP GNMA and U.S. Treasury Fund 18%
AARP Bond Fund for Income 18%
AARP U.S. Stock Index Fund 11%
AARP Growth and Income Fund 24%
AARP Global Growth Fund 10%
AARP International Stock Fund 7%
AARP Small Company Stock Fund 7%
AARP Capital Growth Fund 4%
As you can see by these breakdowns, both Portfolios were well diversified
among the AARP Mutual Funds. We believe the current mix of investments in the
Diversified Income Portfolio provide a competitive yield from its bond
investments and the potential for growth through its stock exposure. For the
Diversified Growth Portfolio, we believe that the 35% investment in fixed-income
securities will help protect the Fund from share price volatility. We also
included some international exposure for further diversification.
The AARP Managed Investment Portfolios offer shareholders a simplified,
all-in-one approach to diversification. Moreover, investors also benefit from
the professional investment management and strong risk control disciplines of
each AARP Mutual Fund in which the Portfolios invest.
FOR WHOM THE
PORTFOLIOS ARE DESIGNED
The AARP Managed Investment Portfolios are for investors who don't have time or
are less confident in making the all-important asset allocation decisions. They
in turn prefer to entrust the selection of their portfolios of mutual funds to
professional money managers. These portfolios offer a simple, inexpensive (among
the lowest management fees for this type of fund), one-step approach to
investing all or a portion of an individual's assets.
The AARP Managed Investment Portfolios are appropriate for investors seeking to
create an investment plan during pre- and post-retirement. The AARP Diversified
Income Portfolio may be appropriate for investors in retirement with an
investment time horizon of three to five years. The AARP Diversified Growth
Portfolio is designed for investors with an investment time horizon of more than
five years.
ASSET ALLOCATION
AARP DIVERSIFIED
INCOME PORTFOLIO
----------------
As of September 30, 1997
Stock Holdings 25%
Bond Holdings 61%
Cash Equivalents 14%
----
100%
====
ASSET ALLOCATION
AARP DIVERSIFIED
GROWTH PORTFOLIO
----------------
As of September 30, 1997
Stock Holdings 64%
Bond Holdings 35%
Cash Equivalents 1%
----
100%
====
37
<PAGE>
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intentionally
left blank.
38
<PAGE>
A A R P F U N D S
I N V E S T M E N T P O R T F O L I O S
List of investments as of September 30: A detailed
breakdown of the investments in each AARP Mutual Fund's
portfolio at the close of the fiscal year.
Principal amount/shares: The face value of a bond or the
shares held by an AARP Mutual Fund.
Cost: The amount the AARP Mutual Fund actually paid for
the listed securities.
In addition, the tax-free AARP Funds list the credit
ratings for each of their bond holdings. Moody's
Investors Service, Inc., Fitch Investors Service, Inc.,
and Standard & Poor's Corporation -- three independent
rating services -- have developed credit rating systems
that are designed to indicate a bond issuer's ability to
meet its obligations. For example, bonds with the lowest
risk of default receive a rating of "AAA," while bonds
involving greater risk receive progressively lower
ratings. Bonds rated "BBB" or better are considered
investment grade ("AAA" ratings are assigned only to
bonds with the highest credit quality). The Portfolios
also shows the coupon rates and maturity dates of the
AARP Funds' bond holdings. The coupon rate is the
interest rate on a debt security the bond issuer
promises to pay to the bond holder until maturity. The
maturity date is the date on which a bond issuer is
scheduled to repay the principal to the bond holder.
Market value: The current value of the securities held
in a fund's portfolio.
39
<PAGE>
This page
intentionally
left blank.
40
<PAGE>
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 9.9%
- -------------------------------------------------------------------------------------------------------------------------------
41,334,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125%
to be repurchased at $41,341,033 on 10/01/97 collateralized by a $35,110,000
U.S. Treasury Bond, 8.125%, 8/15/19 ................................................... 41,334,000
5,379,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $5,379,897 on 10/01/97 collateralized by a
$5,475,000 U.S. Treasury Note, 6.125%, 3/31/98 ........................................ 5,379,000
-----------
Total Repurchase Agreements (Cost $46,713,000) ........................................... 46,713,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 50.0%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Staples 3.1%
Food & Beverage
15,000,000 Campbell Soup Company, 5.51%, 3/04/98** .................................................... 14,642,854
-----------
Financial 37.4%
Business Finance 4.2%
20,000,000 New Center Asset Trust Discount Note, 5.55%, 10/10/97** .................................... 19,969,444
-----------
Other Financial Companies 33.2%
20,000,000 AVCO Financial Services, 5.668%, 12/12/97** ................................................ 19,775,728
23,000,000 Associates Corp. of North America, 5.51%, 3/03/98** ........................................ 22,455,909
15,000,000 CSW Credit, Inc., 5.52%, 11/18/97** ........................................................ 14,887,503
20,000,000 Ciesco, L.P., 5.51%, 10/30/97** ............................................................ 19,911,228
20,000,000 General Electric Capital Corp., 5.5%, 10/15/97** ........................................... 19,954,166
17,000,000 Household Finance Co., 5.53%, 11/05/97** ................................................... 16,906,159
11,000,000 Matterhorn Capital Corp., 5.53%, 10/02/97** ................................................ 10,998,310
20,000,000 Norwest Corp., 5.49%, 10/20/97** ........................................................... 19,938,888
12,000,000 Prudential Funding Corp., 5.764%, 3/26/98** ................................................ 11,673,730
-----------
156,501,621
-----------
Manufacturing 4.2%
Chemicals
20,000,000 E.I. du Pont de Nemours & Co., 5.47%, 2/17/98** ............................................ 19,569,889
-----------
Energy 2.1%
Oil & Gas Production
10,000,000 Elf Aquitaine Finance S.A. Discount Note, 5.73%, 10/27/97** ................................ 9,958,599
-----------
Utilities 3.2%
Electric Utilities
15,000,000 Virginia Electric Power Corp., 5.51%, 10/09/97** ........................................... 14,979,375
-----------
Total Commercial Paper (Cost $235,659,919) ................................................. 235,621,782
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 12.7%
- -------------------------------------------------------------------------------------------------------------------------------
10,000,000 Abbey National North America, 5.5%, 11/26/97 ............................................... 9,995,664
20,000,000 Chase Bank Delaware, 5.81%, 12/05/97 ....................................................... 20,001,565
10,000,000 Federal Farm Credit Bank, 5.6%, 11/03/97 ................................................... 10,001,727
10,000,000 Lasalle National Bank, 5.91%, 8/12/98 ...................................................... 10,012,035
5,000,000 Morgan Guaranty Trust Company, 5.71%, 1/06/98 .............................................. 4,996,619
</TABLE>
The accompanying notes are an integral part of the financial statements
41
<PAGE>
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
<C> <S> <C>
5,000,000 National Bank of Detriot, 5.76%, 2/03/98 ................................................... 4,996,934
-----------
Total Certificates Of Deposit (Cost $59,998,768) ........................................... 60,004,544
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 9.0%
- -------------------------------------------------------------------------------------------------------------------------------
17,000,000 Federal National Mortgage Association, 5.29%, 7/14/99* ..................................... 16,911,260
10,000,000 Student Loan Marketing Association, 5.41%, 10/30/97* ....................................... 10,004,623
15,500,000 Student Loan Marketing Association, 5.29%, 7/12/99* ........................................ 15,475,200
-----------
Total U. S. Government Agency Obligations (Cost $42,500,000) ............................... 42,391,083
-----------
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 18.1%
- -------------------------------------------------------------------------------------------------------------------------------
Financial
10,000,000 American Express Centurion Bank, 5.626%, 4/24/98* .......................................... 9,998,200
15,000,000 Bank One, Columbus, N.A., 5.52%, 6/10/98* .................................................. 15,015,600
10,000,000 Bank of America Illinois, 6.15%, 5/05/98 ................................................... 10,016,629
20,000,000 Bankers Trust Co., Medium-Term Note, 5.71%, 4/14/98* ....................................... 20,000,000
5,000,000 FCC National Bank Note, 5.725%, 1/07/98 .................................................... 4,996,792
10,000,000 FCC National Bank Note, 5.59%, 11/07/97 .................................................... 9,997,021
15,000,000 First Bank Minnesota Corp., 5.616%, 11/19/97* .............................................. 15,001,720
-----------
Total Short-Term Notes (Cost $85,005,147) .................................................. 85,025,962
-----------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $469,876,834) (a) .................... 99.7 469,756,371
Other Assets and Liabilities, Net ..................................... 0.3 1,554,496
----- -----------
Net Assets ............................................................ 100.0 471,310,867
===== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Floating rate notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon equivalent of
the U.S. Treasury bill rate. These securities are shown at their rate as
of September 30, 1997.
** (Unaudited) Bond equivalent yield to maturity; not a coupon rate.
(a) At September 30, 1997, the net unrealized depreciation on investments
based on cost for federal income tax purposes of $469,876,834 was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 45,640
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (166,103)
---------
Net unrealized depreciation $(120,463)
=========
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $132,230, of which $74,841
expires September 30, 2004, and $57,389 expires September 30, 2005. In
addition, from November 1, 1996 through September 30, 1997, the Fund
incurred approximately $3,906 of net realized capital losses which the
Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
42
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INVESTMENTS 101.0%
- -----------------------------------------------------------------------------------------------------------------------------
ALASKA
Alaska Housing Finance Corp., General Mortgage Revenue,
Series 1991-A, Weekly Demand Note, 4%, 6/01/26* ............................ 3,000,000 A1+ 3,000,000
ARIZONA
Apache County, AZ, Industrial Development Authority, Tucson Electric
Power Co., 1983 Series C, Weekly Demand Note, 4.15%, 12/15/18* ............. 1,000,000 A1 1,000,000
Maricopa County, AZ, Pollution Control Revenue:
Palos Verde Project, Series 1985F, Tax Exempt Commercial Paper,
3.7%, 1/20/98 ........................................................... 1,500,000 A1 1,500,000
Public Service of New Mexico, Weekly Demand Note, 4%, 11/01/22* ............ 4,000,000 A1+ 4,000,000
Pima County, AZ, Industrial Development Authority,
Tucson Electric Power Co.:
Series 1982, Weekly Demand Note, 4.15%, 10/01/22* ....................... 3,900,000 A1+ 3,900,000
Series 1992 A, Weekly Demand Note, 4.15%, 7/01/22* ...................... 1,000,000 A1+ 1,000,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper, Weekly
Demand Note, 4.15%, 12/01/11* .............................................. 1,900,000 A1 1,900,000
CALIFORNIA
Los Angeles County, CA, Tax and Revenue Anticipation Notes,
Series 1997 A, 4.5%, 6/30/98 ............................................... 2,000,000 SP1+ 2,009,326
COLORADO
Clear Creek County, CO, Colorado Counties Financing Program,
Series 1988, Weekly Demand Note, 4.1%, 6/01/98* ............................ 55,000 A1+ 55,000
Colorado Health Facilities Authority, Composite Issue for Kaiser
Permanente, 1995 Series A, Weekly Demand Note, 4%, 8/01/15* ................ 3,000,000 A1+ 3,000,000
DISTRICT OF COLUMBIA
District of Columbia, Tax and Revenue Anticipation Note, Series 1997B,
4.5%, 9/30/98 .............................................................. 1,500,000 SP1+ 1,509,060
FLORIDA
City of Gainesville, FL, Utilities System, Series C, Tax Exempt
Commercial Paper, 3.7%, 11/14/97 ........................................... 1,000,000 A1+ 1,000,000
Dade County, FL, Industrial Development Authority Revenue,
Dolphins Stadium Project:
Series C, Weekly Demand Note, 4.1%, 1/01/16* ............................ 1,000,000 A1+ 1,000,000
Series D, Weekly Demand Note, 4.1%, 1/01/16* ............................ 1,300,000 A1+ 1,300,000
Palm Beach County, FL, Tax Exempt Commercial Paper,
3.7%, 1/12/98 (c) .......................................................... 2,000,000 AAA 2,000,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric
Cooperative Finance Corp., 1984 Series H-1, Weekly Demand Note,
4.1%, 3/15/14* ............................................................. 4,150,000 A1+ 4,150,000
INDIANA
City of Sullivan, IN, National Rural Utilities Cooperative Finance Corp.,
Hoosier Energy Rural Electric, Tax Exempt Commercial Paper,
3.75%, 12/11/97 ............................................................ 1,790,000 A1+ 1,790,000
Indiana Bond Bank, Advance Funding Notes, Series 1997 A-2,
4.25%, 1/21/98 ............................................................. 3,000,000 MIG1 3,004,892
</TABLE>
The accompanying notes are an integral part of the financial statements
43
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jasper County, IN, Pollution Control Revenue, Series 88C, Tax Exempt
Commercial Paper, 3.75%, 1/13/98 ........................................... 1,000,000 A1+ 1,000,000
IOWA
Iowa Schools Cash Anticipation Program, Series 1997 A, 4.5%,
6/26/98 (c) ................................................................ 1,000,000 SP1+ 1,004,948
West Des Moines, IA, Commercial Development Revenue, Greyhound
Lines, Weekly Demand Note, 4.05%, 12/01/14* ................................ 6,400,000 A1+ 6,400,000
KENTUCKY
Kentucky Development Finance Authority, Healthcare System,
Appalachian Regional Health Care, Series 1991, Weekly Demand Note,
4.1%, 9/01/06* ............................................................. 6,300,000 VMIG1 6,300,000
MARYLAND
Anne Arundel County, MD, Baltimore Electric & Gas Company,
Tax Exempt Commercial Paper, 3.85%, 11/14/97 ............................... 800,000 A1 800,000
MASSACHUSETTS
Massachusetts Bay Transportation Authority, Series 1997B, 4.25%,
9/04/98 .................................................................... 1,000,000 SP1 1,005,612
MINNESOTA
Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982,
Weekly Demand Note, 4.071%, 8/01/12* ....................................... 300,000 AAA 300,000
Southern Minnesota Municipal Power Agency, Power Supply System,
Series B, Tax Exempt Commercial Paper, 3.75%, 11/21/97 ..................... 1,300,000 P1 1,300,000
MISSOURI
Missouri Health & Educational Facilities Authority Revenue,
Washington University, Series 1996 C, Variable Rate Demand Note,
3.85%, 9/01/30* ............................................................ 1,000,000 VMIG1 1,000,000
NEVADA
Clark County, NV, Airport System, McCarran International Airport,
Series A, Weekly Demand Note, 4.1%, 7/01/12 (c)* ........................... 5,100,000 A1+ 5,100,000
NEW HAMPSHIRE
New Hampshire Business Finance Authority, Connecticut Light & Power,
Weekly Demand Note, 4.15%, 12/01/22* ....................................... 1,700,000 A1+ 1,700,000
NEW MEXICO
Albuquerque, NM, Gross Receipts/Lodgers Tax, Series 1991,
Weekly Demand Note, 4.15%, 7/01/22* ........................................ 2,000,000 A1+ 2,000,000
NEW YORK
New York City, NY, General Obligation, Series A-4, Daily Demand
Note, 3.8%, 8/01/22* ....................................................... 1,100,000 VMIG1 1,100,000
State of New York, General Obligation, Bond Anticipation Note, Series T,
Tax Exempt Commercial Paper, 3.6%, 11/06/97 ................................ 1,500,000 A1 1,500,000
OHIO
Hamilton County, OH, Franciscan Sisters of the Poor Health System,
Series A, Daily Demand Note, 3.95%, 3/01/17* ............................... 300,000 VMIG1 300,000
</TABLE>
The accompanying notes are an integral part of the financial statements
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA
Emmaus, PA, General Authority, Local Government Revenue Bond
Pool Program:
1989 Series E, Weekly Demand Note, 4.2%, 3/01/24* ....................... 1,800,000 A1 1,800,000
1989 Series E-6, Weekly Demand Note, 4.15%, 3/01/24* .................... 2,000,000 A1+ 2,000,000
1989 Series E-8, Weekly Demand Note, 4.15%, 3/01/24* .................... 1,200,000 A1+ 1,200,000
Philadelphia, PA, School District General Obligation, Series 1993A,
4.5%, 7/01/98 (c) .......................................................... 2,000,000 AAA 2,008,712
Philadelphia, PA, Tax and Revenue Anticipation Note, Series 1997A,
4.5%, 6/30/98 .............................................................. 2,000,000 MIG1 2,007,163
Temple University of the Commonwealth, PA, Higher Education,
Series 1997, 4.75%, 5/18/98 ................................................ 3,000,000 SP1+ 3,015,382
SOUTH CAROLINA
South Carolina Public Service Authority, Series 1997, Tax Exempt
Commercial Paper, 3.75%, 10/21/97 .......................................... 1,000,000 A1 1,000,000
TENNESSEE
Franklin, TN, Industrial Development Revenue, Franklin Oaks
Apartments, Weekly Demand Note, Series 1985, 4.15%, 12/15/21* .............. 5,000,000 VMIG1 5,000,000
TEXAS
Grapevine, TX, Industrial Development Revenue Bond, Variable Rate
Demand Note, 3.85%, 12/01/24* .............................................. 800,000 P1 800,000
Harris County Children's Hospital, Series 1996, Weekly Demand Note,
4.1%, 8/01/20* ............................................................. 1,000,000 A1+ 1,000,000
Harris County, TX, Tax Anticipation Note, Series 1997,
4.25%, 2/27/98 ............................................................. 1,000,000 MIG1 1,002,112
Harris County, TX, Health Facilities Authority, Saint Lukes:
Series A, Daily Demand Note, 3.85%, 2/15/27* ............................... 300,000 A1+ 300,000
Series B, Daily Demand Note, 3.85%, 2/15/27* ............................... 900,000 A1+ 900,000
State of Texas, Tax and Revenue Anticipation Note, Series 1998A,
4.75%, 8/31/98 ............................................................. 1,000,000 MIG1 1,008,106
State of Texas, General Obligation, Veterans Housing Assistance
Refunding Bonds, Series 1995, Weekly Demand Note, 4.1%,
12/01/16* .................................................................. 1,500,000 A1+ 1,500,000
Texas Municipal Power Agency, Bond Anticipation Note, Tax
Exempt Commercial Paper, 3.7%, 1/20/98 ..................................... 1,100,000 A1 1,100,000
UTAH
Salt Lake City, UT, Tax Exempt Commercial Paper, 3.7%, 11/13/97 ............... 1,000,000 A1+ 1,000,000
State of Utah, General Obligation Highway, Series 1997B,
Tax Exempt Commercial Paper, 3.8%, 10/07/97 ................................ 2,000,000 A1+ 2,000,000
VERMONT
Vermont Educational & Health Buildings Financing Agency Revenue,
Capital Asset Financing, Series 2005-A, Weekly Demand Note,
4.1%, 8/01/05* ............................................................. 3,200,000 VMIG1 3,200,000
WASHINGTON
Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand
Note, 4%, 11/01/18* ........................................................ 1,900,000 A1+ 1,900,000
</TABLE>
The accompanying notes are an integral part of the financial statements
45
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WYOMING
Sweetwater County, WY, Pollution Control Revenue Refunding,
Pacificorp Project, 1990 Series A, Weekly Demand Note,
4%, 7/01/15* ............................................................... 2,000,000 VMIG1 2,000,000
Total Municipal Investments (Cost $103,670,313) ............................... 103,670,313
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio (Cost $103,670,313) (a) ......... 101.0 103,670,313
Other Assets and Liabilities, Net .......................... (1.0) (1,056,420)
----- -----------
Net Assets ................................................. 100.0 102,613,893
===== ===========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of
the U.S. Treasury bill rate. Variable rate demand notes are securities
whose interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
(a) At September 30, 1997, the cost for federal income tax purposes of
$103,670,313.
(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings
Group, Moody's Investors Service, Inc. or Fitch Investors Service, Inc.
Unrated securities (NR) and securities rated by Scudder (SS&C) have been
determined to be of comparable quality to rated eligible securities.
(c) (Unaudited) Bond is insured by one of these companies: AMBAC, FGIC, FSA,
BIG, or MBIA.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $655,541, of which $19,559
expires September 30, 1999, $323,801 expires September 30, 2000, $401
expires September 30, 2001, $89,046 expires September 30, 2003, $5,140
expires September 30, 2004, and $217,594 expires September 30, 2005. In
addition, from November 1, 1996 through September 30, 1997, the Fund
incurred approximately $102,679 of net realized capital losses which the
Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
46
<PAGE>
AARP GNMA and U.S. Treasury Fund
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 4.0%
- -----------------------------------------------------------------------------------------------------------------------------
96,622,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/97 at 6.02%
to be repurchased at $96,638,157 on 10/01/97 collateralized by
a $96,561,000 U.S. Treasury Note, 6%, 8/15/99 ......................................... 96,622,000
73,000,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125% to
be repurchased at $73,012,420 on 10/01/97 collateralized by
a $62,010,000 U.S. Treasury Bond, 8.125%, 8/15/19 ..................................... 73,000,000
12,000,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $12,002,000 on 10/01/97 collateralized by
a $12,210,000 U.S. Treasury Note, 6.125%, 3/31/98 ..................................... 12,000,000
-------------
Total Repurchase Agreements (Cost $181,622,000) .......................................... 181,622,000
-------------
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 20.3%
- -----------------------------------------------------------------------------------------------------------------------------
250,000,000 U.S. Treasury Note, 5.375%, 11/30/97 ..................................................... 250,000,000
200,000,000 U.S. Treasury Note, 5.25%, 12/31/97 ...................................................... 199,968,000
180,000,000 U.S. Treasury Note, 5.5%, 2/28/99 ........................................................ 179,409,600
200,000,000 U.S. Treasury Note, 6.375%, 5/15/00 ...................................................... 202,374,000
100,000,000 U.S. Treasury Note, 5.5%, 11/15/98 ....................................................... 99,766,000
-------------
Total U. S. Treasury Obligations (Cost $932,878,906) .................................... 931,517,600
-------------
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 79.3%
- -----------------------------------------------------------------------------------------------------------------------------
278,062,162 6.5% with various maturities to 9/15/25 .................................................. 272,945,491
710,640,982 7% with various maturities to 7/15/25 .................................................... 713,075,381
39,208,348 7.125% with various maturities to 9/15/24 ................................................ 40,409,979
748,766,034 7.5% with various maturities to 9/15/27 .................................................. 761,950,976
890,038,904 8% with various maturities to 7/15/27 (b) ................................................ 921,534,055
164,141,932 8.5% with various maturities to 9/15/22 .................................................. 173,459,423
295,125,474 9% with various maturities to 11/15/25 ................................................... 319,080,776
209,460,578 9.5% with various maturities to 9/15/24 .................................................. 227,882,584
151,875,628 10% with various maturities to 3/15/25 ................................................... 168,926,213
42,464 10.25%, 12/15/98 ......................................................................... 44,441
14,507,665 10.5% with various maturities to 1/20/21 ................................................. 16,304,223
3,105,215 11.5% with various maturities to 2/15/16 ................................................. 3,577,751
6,362,423 12% with various maturities to 7/15/15 ................................................... 7,437,849
4,761,039 12.5% with various maturities to 8/15/15 ................................................. 5,625,209
938,535 13% with various maturities to 8/20/15 ................................................... 1,117,986
701,647 13.5% with various maturities to 10/15/14 ................................................ 844,838
295,359 14% with various maturities to 12/15/14 .................................................. 356,154
94,630 14.5%, 10/15/14 .......................................................................... 115,152
190,602 15% with various maturities to 10/15/12 .................................................. 232,744
163,342 16%, 2/15/12 ............................................................................. 200,195
-------------
Total Government National Mortgage Association (Cost $3,550,215,482) ..................... 3,635,121,420
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
47
<PAGE>
AARP GNMA and U.S. Treasury Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $4,664,716,388) (a) .................... 103.6 4,748,261,020
Other Assets and Liabilities, Net ....................................... (3.6) (164,280,560)
----- -------------
Net Assets .............................................................. 100.0 4,583,980,460
===== =============
</TABLE>
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $4,664,716,388 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost .......................................... $ 90,347,064
Aggregate gross unrealized depreciation for all
investments in which there is an excess of
tax cost over value .................................... (6,802,432)
-------------
Net unrealized appreciation ............................ $ 83,544,632
=============
(b) When-issued or forward delivery pools included.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities, all of which were U.S.
Government and U.S. Government agencies' obligations (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$4,050,070,014 and $4,415,045,854, respectively.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $316,261,626, all of which
expires September 30, 2003. In addition, from November 1, 1996 through
September 30, 1997, the Fund incurred approximately $6,993,048 of net
realized capital losses which the Fund intends to elect to defer and treat
as arising in the fiscal year ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
48
<PAGE>
AARP HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 5.7%
- -----------------------------------------------------------------------------------------------------------------------------
25,971,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02%
to be repurchased at $25,975,343 on 10/01/97, collateralized by a $25,394,000
U.S. Treasury Note, 6.625%, 7/31/01 (Cost $25,971,000) ................................ 25,971,000
-----------
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 20.6%
- -----------------------------------------------------------------------------------------------------------------------------
40,000,000 U.S. Treasury Note, 5.75%, 10/31/97 ...................................................... 40,012,400
6,500,000 U.S. Treasury Note, 5.875%, 8/15/98 ...................................................... 6,511,180
20,000,000 U.S. Treasury Note, 6.75%, 5/31/99 ....................................................... 20,300,000
12,500,000 U.S. Treasury Note, 6.875%, 7/31/99 ...................................................... 12,722,625
14,000,000 U.S. Treasury Note, 6.25%, 10/31/01 ...................................................... 14,126,840
-----------
Total U. S. Treasury Obligations (Cost $93,998,750) ...................................... 93,673,045
-----------
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 13.4%
- -----------------------------------------------------------------------------------------------------------------------------
26,297,261 8% with various maturities to 4/15/27 .................................................... 27,217,717
33,045,074 7.5% with various maturities to 9/15/27 .................................................. 33,612,789
-----------
Total Government National Mortgage Association (Cost $59,926,976) ........................ 60,830,506
-----------
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 10.8%
- -----------------------------------------------------------------------------------------------------------------------------
8,190,493 Federal Home Loan Mortgage Corp. 8%, 4/01/08 ............................................. 8,432,932
9,533,592 Federal Home Loan Mortgage Corp. 7.79%, 9/01/24 .......................................... 9,920,942
7,083,331 Federal National Mortgage Association 8.5%, 11/01/09 ..................................... 7,402,081
12,381,444 Federal National Mortgage Association 8% with various maturities to 12/01/09 ............. 12,763,411
10,988,012 Federal National Mortgage Association 6.5%, 11/01/25 ..................................... 10,737,265
-----------
Total U. S. Government Agency Pass-Thrus (Cost $49,171,515) .............................. 49,256,631
-----------
- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 2.2%
- -----------------------------------------------------------------------------------------------------------------------------
10,000,000 Abbey National PLC Global Medium-Term Note, 6.69%, 10/17/05
(Cost $9,997,100) ..................................................................... 10,022,300
-----------
- -----------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 13.9%
- -----------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 3.0%
13,500,000 Ford Credit Automobile Trust Series 1996-B A3, 6.1%, 3/15/00 ............................. 13,516,875
-----------
Credit Card Receivables 1.1%
5,000,000 Advanta Corp. Series 1997-1 A4, 7.65%, 5/25/27 ........................................... 5,143,750
-----------
Home Equity Loans 4.8%
10,000,000 Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/28 ................. 10,184,375
6,682,000 The Money Store Home Equity Loan Trust Series 1996-B A1, 6.72%, 2/15/10 .................. 6,677,791
5,000,000 The Money Store Home Equity Series 1997-A A6, 7.21%, 10/15/21 ............................ 5,114,063
-----------
21,976,229
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
49
<PAGE>
AARP HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufactured Housing 5.0%
3,750,000 Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/28 ................... 3,868,945
4,500,000 Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/26 .............................. 4,619,520
4,000,000 Green Tree Financial Corp., Series 1997-1 B1, 7.23%, 3/15/28 ............................. 4,009,063
1,500,000 Green Tree Financial Corp., Series 1997-2 B2, 8.05%, 4/15/28 ............................. 1,561,172
3,730,000 Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/27 ............................ 3,765,406
4,500,000 Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/11 ................ 4,736,250
-----------
22,560,356
-----------
Total Asset Backed (Cost $62,115,271) .................................................... 63,197,210
-----------
- -----------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 32.1%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Staples 2.5%
10,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/01/22 ............................................... 11,470,000
-----------
Financial 10.2%
1,500,000 American Express Credit Corp., 11.625%, 12/12/00 ......................................... 1,544,250
15,000,000 Associates Corp. of North America, 6.625%, 5/15/01 ....................................... 15,126,000
10,000,000 Deutsche Bank, 7.5%, 4/25/09 ............................................................. 10,567,400
5,500,000 Shurgard Storage Centers, Inc. (REIT), 7.5%, 4/25/04 ..................................... 5,701,520
5,000,000 Susa Partnership L.P., 8.2%, 6/01/17 ..................................................... 5,281,250
8,250,000 Taubman Realty Group L.P., Medium-Term Note, 7%, 10/01/03 ................................ 8,346,690
-----------
46,567,110
-----------
Media 1.6%
7,000,000 A.H. Belo Corp., 7.75%, 6/01/27 .......................................................... 7,321,650
-----------
Service Industries 2.2%
10,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................................................... 10,087,500
-----------
Durables 1.8%
7,500,000 Northrop Grumman Corp., 7.875%, 3/01/26 .................................................. 8,065,800
-----------
Technology 3.2%
15,000,000 International Business Machines Corp., 7%, 10/30/45 ...................................... 14,583,150
-----------
Energy 2.9%
2,500,000 Lyondell Petrochemical Co., 7.55%, 2/15/26 ............................................... 2,509,400
-----------
10,000,000 Norsk Hydro AS, 7.75%, 6/15/23 ........................................................... 10,598,100
-----------
13,107,500
-----------
Metals & Minerals 1.5%
6,500,000 Potash Corp., 7.125%, 6/15/07 ............................................................ 6,627,400
-----------
Transportation 4.1%
13,500,000 Continental Airlines Inc., Series 1997-1A, 7.461%, 4/01/15 ............................... 14,145,300
4,000,000 Norfolk Southern Corp., 7.8%, 5/15/27 .................................................... 4,283,880
-----------
18,429,180
-----------
Utilities 2.1%
10,000,000 Public Service Electric & Gas Co., 1st Refunding Mortgage, 6.25%, 1/01/07 ................ 9,655,400
-----------
Total Corporate Bonds (Cost $141,260,543) ................................................ 145,914,690
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $442,441,155) (a) .................... 98.7 448,865,382
Other Assets and Liabilities, Net ..................................... 1.3 6,004,136
----- -----------
Net Assets ............................................................ 100.0 454,869,518
===== ===========
</TABLE>
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $442,441,155 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ......... $ 7,613,705
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ......... (1,189,478)
-----------
Net unrealized appreciation ................................ $ 6,424,227
===========
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $2,264,764,844.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the year ended September 30, 1997 aggregated $220,023,243
and $92,541,818, respectively. Purchases and sales of obligations of the
U.S. Government and U.S. Government agencies aggregated $138,952,123 and
$266,185,773, respectively.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had a capital loss carryforward of approximately $8,993,357, of which
$7,756,158 expires September 30, 2003, and $1,237,199 expires September
30, 2005. In addition, from November 1, 1996 through September 30, 1997,
the Fund incurred approximately $1,252,429 of net realized capital losses
which the Fund intends to elect to defer and treat as arising in the
fiscal year ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
51
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL INVESTMENTS (UNDER 1 YEAR) - 0.5%
- -----------------------------------------------------------------------------------------------------------------------------
INDIANA
Jasper County, IN, Pollution Control Revenue, Northern Indiana Public
Services, Series C, Daily Demand Bond, 3.8%, 4/01/19* ....................... 1,400,000 VMIG1 1,400,000
MASSACHUSETTS
Massachusetts Health & Educational Facilities Authority, Brigham and
Women's Hospital, Series A, Weekly Demand Note, 4.1%,
7/01/17* .................................................................... 900,000 AA 900,000
OHIO
Cuyahoga County, OH, Health & Education, University Hospital of
Cleveland, Daily Demand Note, 3.85%, 1/01/16* ............................... 3,400,000 VMIG1 3,400,000
PUERTO RICO
Puerto Rico, Series 1996, Variable Rate Demand Bond, 3.65%,
7/01/11* (c) ................................................................ 2,000,000 AAA 2,000,000
TEXAS
Harris County, TX, Health Facilities Authority, Saint Lukes, Daily
Demand Note:
Series A, 3.85%, 2/15/27* ................................................ 400,000 A1+ 400,000
Series B, 3.85%, 2/15/27* ................................................ 1,000,000 A1+ 1,000,000
-------------
Total Short-Term Municipal Investments (Cost $9,100,000) ....................... 9,100,000
-------------
- -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL INVESTMENTS (OVER 1 YEAR) - 97.8%
- -----------------------------------------------------------------------------------------------------------------------------
ALASKA
Alaska Housing Finance Corp., Veterans Mortgage Project, 8.1%,
9/01/20 ..................................................................... 3,675,000 AAA 3,748,537
Anchorage, AK, Electric Utility Revenue, 6.5%, 12/01/07 (c) .................... 2,620,000 AAA 2,993,009
North Slope Borough, AK, General Obligation Capital Appreciation:
Series 1997A, Zero Coupon, 6/30/08 (c) ...................................... 7,000,000 AAA 4,116,560
Series A, Zero Coupon, 6/30/06 (c) .......................................... 4,000,000 AAA 2,630,000
Series B, Zero Coupon:
1/01/03 (c) .............................................................. 16,000,000 AAA 12,580,640
6/30/04 (c) .............................................................. 15,500,000 AAA 11,305,390
6/30/05 (c) .............................................................. 25,600,000 AAA 17,752,064
ARIZONA
Arizona Municipal Finance Program, Certificate of Participation,
Series 25, 7.875%, 8/01/14 (c) .............................................. 3,500,000 AAA 4,602,500
Maricopa County, AZ, School District #28, Kyrene Elementary, Series B,
Zero Coupon, 1/01/04 (c) .................................................... 4,000,000 AAA 3,004,440
Maricopa County, AZ, School District #6, Washington Elementary,
Series B, 4.1%, 7/01/13 (c) ................................................. 2,950,000 AAA 2,578,300
Maricopa County, AZ, Unified School District #41, Gilbert School,
Zero Coupon, 1/01/05 (c) .................................................... 5,280,000 AAA 3,775,042
CALIFORNIA
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/01/09 (c) ......................................................... 8,995,000 AAA 9,526,694
</TABLE>
The accompanying notes are an integral part of the financial statements
52
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Banning, CA, Wastewater, Certificate of Participation:
8%, 1/01/19 (c) ............................................................. 960,000 AAA 1,294,061
8%, 1/01/19 (c) ............................................................. 1,080,000 AAA 1,455,818
Big Bear Lake, CA, Series 1996, 6%, 4/01/11 (c) ................................ 3,800,000 AAA 4,233,276
California Housing Finance Agency, 5.7%, 8/01/16 (c) ........................... 5,175,000 AAA 5,270,893
California Housing Finance Agency, 5.3%, 8/01/14 (c) ........................... 3,460,000 AAA 3,506,745
California State Public Works Board, Lease Revenue, Series A, 6.3%,
12/01/06 (c) (d) ............................................................ 8,095,000 AAA 9,211,867
Irvine Ranch, CA, Water District, 7.875%, 2/15/23 .............................. 3,000,000 A 3,042,750
Los Angeles County, CA, Capital Asset Leasing, 6%, 12/01/06 (c) ................ 9,000,000 AAA 9,990,180
Los Angeles County, CA, Public Works Authority:
Series 1996B, 5.25%, 9/01/11 (c) ............................................ 3,000,000 AAA 3,052,290
Series 1996A, 6%, 9/01/04 (c) ............................................... 2,920,000 AAA 3,208,759
Los Angeles County, CA, Public Works Finance Authority, Lease
Revenue, Multiple Projects IV, 4.75%, 12/01/10 (c) .......................... 11,140,000 AAA 10,862,503
Madera County, CA, Certificates of Participation, Valley Children's
Hospital, 6.5%, 3/15/10 (c) ................................................. 2,840,000 AAA 3,291,617
Oakland, CA, Redevelopment Agency, Tax Allocation, 6%,
2/01/07 (c) ................................................................. 2,000,000 AAA 2,223,280
Riverside, CA, Transportation Commission, Sales Tax Revenue, Series A,
5.7%, 6/01/06 (c) ........................................................... 5,400,000 AAA 5,892,966
San Diego Water Authority, CA, Certificate of Participation:
5.632%, 4/25/07 (c) ......................................................... 6,300,000 AAA 6,782,265
5.681%, 4/22/09 (c) ......................................................... 4,500,000 AAA 4,848,435
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue
Refunding, 6.75%, 7/01/10 (c) ............................................... 2,000,000 AAA 2,370,680
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road
Revenue, Capital Appreciation, Refunding, Series 1997A, Zero
Coupon, 1/15/12 (c) ......................................................... 3,000,000 AAA 1,424,460
San Joaquin, CA, Certificate of Participation, County Public Facilities
Project, 5.5%, 11/15/13 (c) ................................................. 2,000,000 AAA 2,109,680
Sweetwater Authority, CA, Water Revenue, 5.25%, 4/01/10 (c) .................... 10,000,000 AAA 10,428,900
Three Valleys Municipal Water District Certificates of Participation, CA,
5%, 11/01/14 (c) ............................................................ 3,000,000 AAA 2,939,130
Whittier, CA, Presbyterian Intercommunity Hospital, Health Facilities
Revenue, 6.25%, 6/01/08 (c) ................................................. 1,780,000 AAA 2,015,672
COLORADO
Castle Rock Ranch, CO, Public Facilities Revenue:
6.3%, 12/01/07 .............................................................. 3,115,000 AA 3,429,272
6.4%, 12/01/08 .............................................................. 3,310,000 AA 3,672,677
6.375%, 12/01/11 ............................................................ 2,000,000 AA 2,205,840
Mesa County, CO, Residual Revenue, Single Family Housing, ETM,
Zero Coupon, 12/01/11** (c) ................................................. 3,855,000 AAA 1,857,455
CONNECTICUT
Connecticut Resource Recovery Authority:
Series 1996, 6.25%, 11/15/05 (c) ............................................ 2,000,000 AAA 2,224,360
Series 1996A, 6.25%, 11/15/06 (c) ........................................... 4,525,000 AAA 5,065,240
Connecticut State Health Facility Authority, Series 1992B, 6.15%,
11/15/04 .................................................................... 5,000,000 AA 5,222,300
</TABLE>
The accompanying notes are an integral part of the financial statements
53
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISTRICT OF COLUMBIA
District of Colombia, General Obligation:
6.5%, 6/01/10 (c) ........................................................... 2,270,000 AAA 2,581,943
Series B, Zero Coupon, 6/01/00 (c) .......................................... 3,500,000 AAA 3,117,730
Series B, 6.125%, 6/01/03 (c) ............................................... 4,000,000 AAA 4,319,720
Refunding, 1993 Series A, 5.875%, 6/01/05 (c) ............................... 4,750,000 AAA 5,108,720
Series B, 5.4%, 6/01/06 (c) (d) ............................................. 18,905,000 AAA 19,782,192
Series B3, 5.4%, 6/01/06 (c) ................................................ 10,000,000 AAA 10,464,000
Series B, 5.5%, 6/01/07 (c) (d) ............................................. 25,000,000 AAA 26,319,500
Series B, 5.5%, 6/01/08 (c) (d) ............................................. 21,300,000 AAA 22,459,146
Series A, Prerefunded 6/1/99 at 102, 7.5%, 6/01/09*** (c) ................... 5,000,000 AAA 5,373,100
Series B, 5.5%, 6/01/09 (c) (d) ............................................. 16,150,000 AAA 16,958,307
Series B, 5.5%, 6/01/09 (c) ................................................. 2,840,000 AAA 2,982,142
Series B, 5.5%, 6/01/10 (c) (d) ............................................. 15,590,000 AAA 16,284,067
Series B, 5.5%, 6/01/12 (c) ................................................. 1,050,000 AAA 1,090,729
FLORIDA
Florida Department of Environmental Preservation, Series A, 4.75%,
7/01/12 (c) ................................................................. 10,000,000 AAA 9,549,600
Florida Municipal Power Agency, Stanton II Project, 4.5%, 10/01/16 (c) ......... 4,400,000 AAA 3,880,580
GEORGIA
Cobb County, GA, Kennestone Hospital Authority, Series A, 5.625%,
4/01/11 (c) ................................................................. 2,305,000 AAA 2,461,602
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central
Georgia, Series C, 5.25%, 8/01/11 (c) ....................................... 6,975,000 AAA 7,217,730
Municipal Electric Authority of Georgia, 5th Crossover, Project #1, 6.4%,
1/01/13 (c) ................................................................. 3,500,000 AAA 3,990,000
HAWAII
Hawaii State, General Obligation, Series 1992 BZ, 6%, 10/01/09 (c) ............. 2,000,000 AAA 2,217,040
ILLINOIS
Central Lake County, IL, Joint Action Water Agency, Refunding Revenue,
Zero Coupon, 5/01/02 (c) .................................................... 2,245,000 AAA 1,823,995
Chicago O'Hare International Airport, IL, Refunding Revenue:
Series 1996A, 6%, 1/01/06 (c) ............................................... 2,000,000 AAA 2,178,840
Series C, 5%, 1/01/11 (c) ................................................... 6,500,000 AAA 6,537,115
Chicago, IL, Board of Education, 6.125%, 1/01/06 (c) ........................... 4,000,000 AAA 4,403,080
Chicago, IL, Wastewater Transmission Revenue:
5.5%, 1/01/09 (c) (d) ....................................................... 11,990,000 AAA 12,744,411
5.5%, 1/01/10 (c) ........................................................... 7,220,000 AAA 7,656,016
Chicago, IL, General Obligation:
6.25%, 1/01/11 (c) .......................................................... 3,000,000 AAA 3,366,150
Emergency Telephone System, 5.55%, 1/01/08 (c) (d) .......................... 5,820,000 AAA 6,189,163
Series A, 5.375%, 1/01/13 (c) (d) ........................................... 15,410,000 AAA 15,887,248
Series B, 5.125%, 1/01/15 (c) ............................................... 9,550,000 AAA 9,484,391
Series B, 5%, 1/01/10 (c) ................................................... 5,200,000 AAA 5,232,760
Series B, 5%, 1/01/11 (c) ................................................... 1,620,000 AAA 1,621,426
Chicago, IL, General Obligation Lease, Board of Education:
Series 1996, 6.25%, 12/01/11 (c) ............................................ 1,600,000 AAA 1,804,656
Series A, 6.25%, 1/01/10 (c) ................................................ 11,550,000 AAA 12,938,656
Series A, 6.25%, 1/01/15 (c) (d) ............................................ 26,000,000 AAA 29,145,480
</TABLE>
The accompanying notes are an integral part of the financial statements
54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A, 6%, 1/01/16 (c) ................................................... 11,025,000 AAA 12,000,933
Series A, 6%, 1/01/20 (c) ................................................... 36,625,000 AAA 39,797,091
Chicago, IL, Public Building Commission, Building Revenue:
Series A, 5.25%, 12/01/07 (c) ............................................... 3,500,000 AAA 3,648,225
Series A, 5.25%, 12/01/09 (c) (d) ........................................... 10,420,000 AAA 10,877,021
Series A, 5.25%, 12/01/11 (c) ............................................... 9,705,000 AAA 10,018,277
Chicago, IL, Public Building Commission, Board of Education, Series A,
Zero Coupon, 1/01/06 (c) .................................................... 2,430,000 AAA 1,642,850
Cook & Dupage Counties, IL, Housing Development Authority:
Zero Coupon, 12/01/07 (c) ................................................... 2,550,000 AAA 1,550,910
Zero Coupon, 12/01/08 (c) ................................................... 2,625,000 AAA 1,503,836
Zero Coupon, 12/01/09 (c) ................................................... 2,860,000 AAA 1,538,566
Cook County, IL, General Obligation, Zero Coupon, 11/01/04 (c) ................. 3,205,000 AAA 2,315,612
Cook County, IL, Community High School District #233,
Capital Appreciation:
Series 1993 B, Zero Coupon, 12/01/08 (c) ................................. 1,700,000 AAA 979,234
Series 1993 B, Zero Coupon, 12/01/09 (c) ................................. 1,700,000 AAA 919,972
Series 1993 B, Zero Coupon, 12/01/10 (c) ................................. 1,665,000 AAA 845,753
Cook County, IL, General Obligation, Series C, 6%, 11/15/07 (c) ................ 5,000,000 AAA 5,527,100
Decatur, IL, General Obligation:
Series 1991, Zero Coupon, 10/01/03 (c) ...................................... 1,455,000 AAA 1,105,436
Series 1991, Zero Coupon, 10/01/04 (c) ...................................... 1,415,000 AAA 1,019,946
Decatur, IL, Public Building Commission, General Obligation,
Certificate of Participation:
6.5%, 1/01/03 (c) ........................................................ 1,725,000 AAA 1,890,565
6.5%, 1/01/06 (c) ........................................................ 1,500,000 AAA 1,689,360
Evergreen Park, IL, Little Company of Mary Hospital, 7.75%,
2/15/09 (c) ................................................................. 2,935,000 AAA 3,033,029
Hoffman Estates, IL, Tax Increment Revenue, Capital Appreciation,
Junior Lien, Series 1991, Zero Coupon, 5/15/07 .............................. 17,460,000 A 10,803,724
Illinois Dedicated Tax Revenue, Civic Center Project:
6.25%, 12/15/11 (c) ......................................................... 3,000,000 AAA 3,414,090
6.25%, 12/15/20 (c) ......................................................... 6,975,000 AAA 7,823,090
Series A, 6.5%, 12/15/07 (c) ................................................ 4,765,000 AAA 5,487,136
Series A, 6.5%, 12/15/08 (c) ................................................ 5,255,000 AAA 6,081,349
Illinois Educational Facilities Authority, Loyola University:
Series 1991 A, Zero Coupon, 7/01/04 (c) ..................................... 2,860,000 AAA 2,085,769
Zero Coupon, 7/01/05 (c) .................................................... 4,000,000 AAA 2,773,400
Illinois Health Facilities Authority, Brokaw-Mennonite Healthcare:
6%, 8/15/06 (c) ............................................................. 1,380,000 AAA 1,506,781
6%, 8/15/07 (c) ............................................................. 1,460,000 AAA 1,597,620
6%, 8/15/08 (c) ............................................................. 1,550,000 AAA 1,701,915
6%, 8/15/09 (c) ............................................................. 1,640,000 AAA 1,802,409
Illinois Health Facilities Authority:
Children's Memorial Hospital, 6.25%, 8/15/13 (c) ............................ 3,400,000 AAA 3,813,848
Felician Healthcare Inc., Series A, 6.25%, 12/01/15 (c) (d) ................. 17,000,000 AAA 18,953,300
Memorial Medical Center, 6.75%, 10/01/11 (c) ................................ 2,135,000 AAA 2,307,444
Methodist Health Service, Series 1985 G, 8%, 8/01/15 (c) .................... 9,880,000 AAA 10,622,087
Sherman Hospital, 6.75%, 8/01/11 (c) ........................................ 2,700,000 AAA 2,943,567
SSM Healthcare System, 6.4%, 6/01/08 (c) .................................... 1,350,000 AAA 1,527,390
</TABLE>
The accompanying notes are an integral part of the financial statements
55
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joliet, IL, Junior College Assistance Corp., Lease Revenue, North Campus
Extension Center, 6.7%, 9/01/12 (c) ......................................... 2,500,000 AAA 2,969,275
Kane County, IL, Series 1996A, 6.5%, 2/01/10 (c) ............................... 1,775,000 AAA 2,039,013
Kane, Cook and Dupage Counties, IL, School District #46 Elgin:
Series 1996B, Zero Coupon, 1/01/11 (c) ...................................... 1,040,000 AAA 517,941
Series 1996B, Zero Coupon, 1/01/12 (c) ...................................... 1,300,000 AAA 609,999
Series 1996B, Zero Coupon, 1/01/13 (c) ...................................... 2,095,000 AAA 925,299
Kendall, Kane and Will Counties, IL, Community Unit School District
Number 308, Oswego:
Zero Coupon, 3/01/02 (c) ................................................. 1,055,000 AAA 863,655
Zero Coupon, 3/01/05 (c) ................................................. 1,540,000 AAA 1,084,699
Zero Coupon, 3/01/06 (c) ................................................. 1,595,000 AAA 1,065,460
Metropolitan Pier & Exposition Authority, IL, McCormick Place
Expansion Project:
Series 1994, Zero Coupon, 6/15/13 (c) .................................... 5,625,000 AAA 2,424,544
Zero Coupon, 12/15/03 (c) ................................................ 3,200,000 AAA 2,408,448
Zero Coupon, 6/15/04 (c) ................................................. 10,300,000 AAA 7,527,240
Northwest Surburban Municipal Joint Action Water Agency, IL, Supply
System Revenue, 6.45%, 5/01/07 (c) .......................................... 2,575,000 AAA 2,915,183
Rosemont, IL, Tax Increment:
Series C, Zero Coupon, 12/01/05 (c) ......................................... 4,455,000 AAA 3,028,643
Series C, Zero Coupon, 12/01/07 (c) ......................................... 2,655,000 AAA 1,614,771
Skokie, IL, Park District, Series 1994B, Zero Coupon, 12/01/11 (c) ............. 3,000,000 AAA 1,423,710
State University Retirement System, IL, Special Revenue, Zero Coupon,
10/01/03 (c) ................................................................ 2,750,000 AAA 2,089,312
University of Illinois, Board of Trustees:
Series 1991, Zero Coupon, 4/01/03 (c) ....................................... 3,890,000 AAA 3,023,853
Series 1991, Zero Coupon, 4/01/05 (c) ....................................... 3,830,000 AAA 2,687,051
Will County, IL, Community Unit School District #201-U, Crete-Monee,
Capital Appreciation:
Zero Coupon, 12/15/00 (c) ................................................ 1,325,000 AAA 1,153,041
Zero Coupon, 12/15/01 (c) ................................................ 1,730,000 AAA 1,435,727
INDIANA
Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%,
11/15/12 (c) ................................................................ 1,400,000 AAA 1,485,932
Indiana Health Facilities Finance Authority, Hospital Revenue,
Community Hospital Project:
6.4%, 5/01/12 (c) ........................................................ 5,000,000 AAA 5,431,900
6%, 7/01/01 (c) .......................................................... 1,395,000 AAA 1,474,292
Indiana Health Facilities Financing Authority, Hospital Revenue, Tax
Exempt Custodian Receipts Refund, Series 1997A, 6%, 7/01/02 (c) ............. 1,480,000 AAA 1,579,796
Indiana Health Facilities Financing Authority:
Series 1990A, 6%, 7/01/03 (c) ............................................... 1,570,000 AAA 1,688,896
Series 1990A, 6%, 7/01/04 (c) ............................................... 1,665,000 AAA 1,799,865
Series 1990A, 6%, 7/01/05 (c) ............................................... 1,765,000 AAA 1,916,066
Series 1990A, 6%, 7/01/06 (c) ............................................... 1,875,000 AAA 2,045,306
Series 1990A, 6%, 7/01/07 (c) ............................................... 1,985,000 AAA 2,171,848
Series 1990A, 6%, 7/01/09 (c) ............................................... 1,125,000 AAA 1,231,313
Series 1990A, 6%, 7/01/10 (c) ............................................... 1,185,000 AAA 1,293,297
</TABLE>
The accompanying notes are an integral part of the financial statements
56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1990A, 6%, 7/01/11 (c) ............................................... 1,260,000 AAA 1,374,912
Series 1990A, 6%, 7/01/12 (c) ............................................... 1,345,000 AAA 1,466,386
Series 1990A, 6%, 7/01/13 (c) ............................................... 1,420,000 AAA 1,545,812
Series 1990A, 6%, 7/01/14 (c) ............................................... 1,505,000 AAA 1,634,881
Series 1990A, 6%, 7/01/15 (c) ............................................... 1,600,000 AAA 1,733,456
Series 1990A, 6%, 7/01/16 (c) ............................................... 1,700,000 AAA 1,835,949
Series 1990A, 6%, 7/01/17 (c) ............................................... 1,800,000 AAA 1,941,444
Series 1990A, 6%, 7/01/18 (c) ............................................... 1,910,000 AAA 2,054,281
Series 1997A, 6%, 7/01/08 (c) ............................................... 1,085,000 AAA 1,189,453
Indiana University, Revenue Refunding, Series H, Zero Coupon,
8/01/06 (c) ................................................................. 8,500,000 AAA 5,565,715
Indiana University, Student Fee Revenue, Series J, 5%, 8/01/18 (c) ............. 4,200,000 AAA 3,971,016
Indiana University, Revenue Refunding, Student Fee Revenue, Series H,
Zero Coupon, 8/01/08 (c) .................................................... 10,000,000 AAA 5,825,000
Madison County, IN, Community Hospital of Anderson, Prerefunded
1/1/98 at 102, 8%, 1/01/14*** (c) ........................................... 7,055,000 AAA 7,269,260
Merrillville, IN, Multiple School Building Corp., First Mortgage,
Zero Coupon, 1/15/11 (c) .................................................... 4,000,000 AAA 1,988,000
IOWA
Polk County, IA, Mercy Hospital, 6.75%, 11/01/05 (c) ........................... 5,000,000 AAA 5,464,900
KANSAS
Kansas City, KS, Utility System Revenue:
Capital Appreciation, Prerefunded, Zero Coupon, 3/01/01*** (c) .............. 4,095,000 AAA 3,529,931
ETM, Zero Coupon, 9/01/04** (c) ............................................. 3,575,000 AAA 2,602,743
ETM, Zero Coupon, 9/01/05** (c) ............................................. 5,300,000 AAA 3,657,212
ETM, Zero Coupon, 9/01/06** (c) ............................................. 1,875,000 AAA 1,228,181
Zero Coupon, 9/01/04 (c) .................................................... 2,640,000 AAA 1,929,840
Zero Coupon, 9/01/05 (c) .................................................... 3,950,000 AAA 2,748,963
Zero Coupon, 9/01/06 (c) .................................................... 1,375,000 AAA 908,545
LOUISIANA
Louisiana Public Facilities Authority, Prerefunded, 2/15/08 at 100,
4.75%, 5/01/16*** ........................................................... 5,765,000 AAA 5,844,903
New Orleans, LA, General Obligation:
Zero Coupon, 7/15/06 (c) .................................................... 4,850,000 AAA 2,941,379
Zero Coupon, 9/01/07 (c) .................................................... 10,000,000 AAA 6,216,700
Orleans, LA, Levee District, Levee Improvement Bonds, Series 1986,
5.95%, 11/01/14 (c) ......................................................... 1,945,000 AAA 2,079,847
MARYLAND
Baltimore, MD, Revenue Exchanged, Auto Parking Revenue,
Series 1996A, 5.9%, 7/01/12 (c) ............................................. 3,100,000 AAA 3,405,474
MASSACHUSETTS
Massachusetts General Obligation, Series D, 7%, 10/01/03 (c) ................... 7,000,000 AAA 7,532,490
MICHIGAN
Detroit, MI, General Obligation, Distributable State Aid Refunding,
5.25%, 5/01/08 (c) .......................................................... 1,500,000 AAA 1,566,855
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess
Medical Center, Series A, 6%, 7/01/09 (c) ................................... 8,250,000 AAA 8,530,252
Michigan Hospital Finance Authority, Sisters of Mercy Healthcorp
Obligated Group, Series P, 5.25%, 8/15/08 (c) ............................... 8,655,000 AAA 9,018,770
</TABLE>
The accompanying notes are an integral part of the financial statements
57
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MINNESOTA
Northern Minnesota Municipal Power Agency, Series 1989A, 7.25%,
1/01/16 ..................................................................... 7,500,000 A 7,928,475
MISSOURI
Missouri Health & Educational Facilities Authority, SSM Healthcare:
1992 Series AA, 6.35%, 6/01/08 (c) .......................................... 8,125,000 AAA 9,231,787
1992 Series AA, 6.4%, 6/01/09 (c) ........................................... 8,640,000 AAA 9,863,510
NEVADA
Clark County, NV, School District:
General Obligation, Series B, Zero Coupon, 3/01/05 (c) ...................... 8,070,000 AAA 5,725,504
Series 1991B, Zero Coupon, 3/01/09 (c) ...................................... 4,350,000 AAA 2,458,489
NEW JERSEY
New Jersey Highway Authority, ETM, 6.5%, 1/01/11 ............................... 4,835,000 AAA 5,350,266
New Jersey Housing and Finance Agency, Home Mortgage Purchase
Revenue, Zero Coupon, 10/01/16 (c) .......................................... 3,980,000 AAA 603,806
New Jersey Turnpike Authority:
6.5%, 1/01/09 (c) ........................................................... 5,000,000 AAA 5,760,200
Series 1991A, 6.3%, 1/01/01 (c) ............................................. 1,250,000 AAA 1,329,325
NEW YORK
New York City, NY, General Obligation:
8%, 11/01/01 (c) ............................................................ 760,000 AAA 774,128
5.9%, 2/01/05 (c) ........................................................... 5,500,000 AAA 5,936,975
8.125%, 11/01/05 (c) ........................................................ 1,400,000 AAA 1,426,166
Series 1989 E, 7%, 12/01/07 (c) ............................................. 115,000 AAA 117,348
Series A, ETM, 8%, 11/01/01** (c) ........................................... 740,000 AAA 790,720
Series A, 3%, 8/15/02 (c) ................................................... 9,000,000 AAA 8,418,420
Series C, 6.4%, 8/01/04 (c) ................................................. 500,000 AAA 546,200
Series C, 6.4%, 8/01/05 (c) ................................................. 430,000 AAA 468,167
Series C, Prerefunded 8/01/02 at 101.50, 6.4%, 8/01/05*** (c) ............... 10,000,000 AAA 11,061,900
Series D, 8%, 8/01/05 (c) ................................................... 5,000 AAA 5,167
Series D, 6%, 8/01/06 (c) ................................................... 140,000 AAA 144,525
Series D, 6%, 8/01/08 (c) ................................................... 370,000 AAA 381,958
Series E, ETM, 7%, 12/01/07** (c) ........................................... 1,385,000 AAA 1,408,143
New York State Dormitory Authority:
College and University Pooled Capital Program, 7.8%, 12/01/05 (c) ........... 8,840,000 AAA 9,394,445
State University of New York, 6%, 7/01/09 (c) ............................... 2,000,000 AAA 2,215,400
New York State Dormitory Authority Revenue, City University:
Series C, 7.5%, 7/01/10 (c) ................................................. 5,750,000 AAA 7,173,470
Series D, 7%, 7/01/09 (c) ................................................... 4,000,000 AAA 4,787,040
New York State Energy Research and Development Authority, Pollution
Control Revenue, Electric and Gas, 5.9%, 12/01/06 (c) ....................... 5,300,000 AAA 5,818,658
New York State, Urban Development Authority, Correctional Facilities,
6.5%, 1/01/11 (c) ........................................................... 4,500,000 AAA 5,185,845
Suffolk County, NY, Industrial Development Agency, Southwest Sewer
System, 6%, 2/01/07 (c) ..................................................... 8,000,000 AAA 8,771,760
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency:
5.5%, 1/01/07 (c) ........................................................... 2,000,000 AAA 2,121,860
Power System Revenue, Series B, 6%, 1/01/18 (c) ............................. 8,775,000 AAA 9,611,959
</TABLE>
The accompanying notes are an integral part of the financial statements
58
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
North Carolina Municipal Power Agency, Number One, Catawba Electric
Power Revenue:
5.25%, 1/01/08 (c) ....................................................... 2,500,000 AAA 2,612,725
6%, 1/01/11 (c) .......................................................... 8,235,000 AAA 9,101,157
7.5%, 1/01/17 ............................................................ 4,520,000 A 4,648,730
Series 1992, 7.25%, 1/01/07 (c) .......................................... 5,000,000 AAA 5,947,300
Series 1997, 6%, 1/01/08 (c) ............................................. 2,585,000 AAA 2,849,058
NORTH DAKOTA
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center, Series 1991,
Zero Coupon, 5/01/02 (c) .................................................... 2,850,000 AAA 2,324,716
OHIO
Cleveland, OH, Water Works Revenue, Series 1993G, 5.5%,
1/01/13 (c) (d) ............................................................. 10,000,000 AAA 10,495,600
Hamilton County, OH, Electric System Mortgage Revenue, Series B,
Prerefunded 10/15/98 at 102, 8%, 10/15/22*** (c) ............................ 3,720,000 AAA 3,948,296
Ohio Air Quality Development Authority, Ohio Power Company,
Series B, 7.4%, 8/01/09 (c) ................................................. 5,000,000 AAA 5,367,550
OKLAHOMA
Tulsa, OK, Industrial Development Authority, Hospital Revenue,
St. John's Medical Center:
Zero Coupon, 12/01/02 (c) ................................................ 3,930,000 AAA 3,133,428
Zero Coupon, 12/01/04 (c) ................................................ 5,430,000 AAA 3,924,695
Zero Coupon, 12/01/06 (c) ................................................ 6,430,000 AAA 4,199,626
PENNSYLVANIA
Pennsylvania Industrial Development Authority, Economic
Development Revenue:
5.8%, 1/01/08 (c) ........................................................ 4,250,000 AAA 4,622,938
5.8%, 7/01/08 (c) ........................................................ 4,875,000 AAA 5,318,918
Philadelphia, PA, Water & Wastewater Refunding Revenue:
5.5%, 6/15/07 (c) ........................................................... 5,000,000 AAA 5,304,550
5.625%, 6/15/09 (c) ......................................................... 20,000,000 AAA 21,537,600
5.625%, 6/15/09 (c) ......................................................... 10,855,000 AAA 11,689,532
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health System, 5.375%, 7/01/11 (c) ............................. 7,300,000 AAA 7,621,054
PUERTO RICO
Commonwealth of Puerto Rico, Highway & Transportation Authority
Revenue, 5.5%, 7/01/09 (c) .................................................. 10,940,000 AAA 11,732,822
RHODE ISLAND
Rhode Island Clean Water Protection Agency, Pollution Control Revenue,
Revolving Fund, Series A, 5.4%, 10/01/15 (c) ................................ 2,000,000 AAA 2,058,220
Rhode Island Convention Center Authority, Refunding Revenue:
Series 1993 B, 5%, 5/15/10 (c) .............................................. 5,000,000 AAA 5,046,400
Series 1993 B, 5.25%, 5/15/15 (c) (d) ....................................... 22,000,000 AAA 22,251,460
Rhode Island Depositors Economic Protection Corp., Special Obligation:
Series B, 5.8%, 8/01/10 (c) ................................................. 6,200,000 AAA 6,751,242
Series B, 5.8%, 8/01/11 (c) ................................................. 4,525,000 AAA 4,920,892
Series B, 5.8%, 8/01/12 (c) ................................................. 2,500,000 AAA 2,715,775
Series B, 5.8%, 8/01/13 (c) ................................................. 7,340,000 AAA 7,959,790
</TABLE>
The accompanying notes are an integral part of the financial statements
59
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOUTH CAROLINA
Piedmont Municipal Power Agency, SC, Electric Revenue:
5.5%, 1/01/12 (c) ........................................................... 2,810,000 AAA 2,966,461
Series 1991 A, 6.5%, 1/01/16 (c) ............................................ 2,570,000 AAA 2,977,114
Series 1991 A, ETM, 6.5%, 1/01/16** (c) ..................................... 430,000 AAA 498,116
Series 1993, 5.5%, 1/01/08 (c) .............................................. 1,075,000 AAA 1,139,758
Series 1993, ETM, 5.5%, 1/01/08** (c) ....................................... 840,000 AAA 899,052
Series 1993, ETM, 5.5%, 1/01/12** (c) ....................................... 2,190,000 AAA 2,311,939
TENNESSEE
Knox County, TN, Health & Educational Hospital Facilities Board,
Fort Sanders Alliance:
5.75%, 1/01/11 (c) ....................................................... 15,405,000 AAA 16,637,862
5.75%, 1/01/12 (c) ....................................................... 17,880,000 AAA 19,290,732
6.25%, 1/01/13 (c) ....................................................... 4,000,000 AAA 4,519,600
Knox County, TN, Health, Education and Housing Facilities Board:
5.75%, 1/01/14 (c) .......................................................... 2,000,000 AAA 2,149,180
Fort Sanders Alliance, 7.25%, 1/01/09 (c) ................................... 3,750,000 AAA 4,544,888
TEXAS
Austin, TX, Utility Systems Revenue Refunding, Series A, Zero Coupon,
11/15/08 (c) ................................................................ 3,460,000 AAA 1,997,423
Austin, TX, Combined Utility System Revenue, Zero Coupon,
11/15/09 (c) ................................................................ 5,020,000 AAA 2,722,697
Bexar County, TX, Health Facilities Development Corporation, Baptist
Health System:
Series 1997A, 6%, 11/15/11 (c) ........................................... 2,000,000 AAA 2,211,460
Series 1997, 6%, 11/15/12 (c) ............................................ 3,000,000 AAA 3,315,510
Brownsville, TX, Utility System Revenue, 6.25%, 9/01/10 (c) .................... 4,085,000 AAA 4,608,084
Cedar Hill, TX, Zero Coupon:
Series 1996, 8/15/09 ........................................................ 1,500,000 AAA 823,890
Series 1996, 8/15/10 ........................................................ 3,130,000 AAA 1,614,204
Dallas, TX, Housing Finance Corp., Single Family Mortgage Revenue,
Zero Coupon, 10/01/16 (c) ................................................... 6,535,000 AAA 934,701
Dallas-Fort Worth, TX, Airport Revenue:
7.75%, 11/01/03 (c) ......................................................... 1,000,000 AAA 1,176,060
7.8%, 11/01/05 (c) .......................................................... 2,000,000 AAA 2,398,760
7.8%, 11/01/06 (c) .......................................................... 2,025,000 AAA 2,431,053
7.375%, 11/01/08 (c) ........................................................ 4,500,000 AAA 5,252,265
7.375%, 11/01/10 (c) ........................................................ 3,500,000 AAA 4,074,245
Harris County, TX, Health Facilities Development:
6.25%, 5/15/08 (c) .......................................................... 2,785,000 AAA 3,135,158
6.25%, 5/15/09 (c) .......................................................... 2,965,000 AAA 3,338,798
Harris County, TX, General Obligation:
Capital Appreciation Bond, Zero Coupon, 10/01/06 (c) ........................ 9,035,000 AAA 5,894,795
Flood Control District, Zero Coupon, 10/01/00 (c) ........................... 1,000,000 AAA 879,300
Toll Road Authority, Toll Road Revenue, Subordinate Lien:
Series A, Zero Coupon, 8/15/05 (c) ....................................... 4,025,000 AAA 2,785,340
Series A, Zero Coupon, 8/15/06 (c) ....................................... 4,010,000 AAA 2,632,204
Unlimited Tax, Series A, Zero Coupon, 8/15/04 (c) ........................ 2,050,000 AAA 1,491,519
</TABLE>
The accompanying notes are an integral part of the financial statements
60
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston, TX, Water & Sewer System Authority:
Series C, Zero Coupon, 12/01/06 (c) ......................................... 14,575,000 AAA 9,434,543
Series C, Zero Coupon, 12/01/08 (c) ......................................... 19,000,000 AAA 10,944,380
Series C, Zero Coupon, 12/01/09 (c) ......................................... 14,750,000 AAA 7,982,110
Zero Coupon, 12/01/10 (c) ................................................... 5,000,000 AAA 2,539,800
Series 1991C, Zero Coupon, 12/01/12 (c) ..................................... 3,350,000 AAA 1,508,338
Hurst Euless Bedford, TX, Independent School District, Series 1994,
Zero Coupon, 8/15/09 (c) .................................................... 4,925,000 AAA 2,705,106
Lubbock, TX, Health Facilities Development Corp., Methodist Hospital:
Series B, 5.5%, 12/01/06 (c) ................................................ 3,945,000 AAA 4,070,806
Series B, 5.6%, 12/01/07 (c) ................................................ 2,415,000 AAA 2,500,781
Series B, 5.625%, 12/01/08 (c) .............................................. 4,400,000 AAA 4,541,504
Lubbock, TX, Health Facilities Development Corporation, Series B,
5.625%, 12/01/09 (c) ........................................................ 4,640,000 AAA 4,752,659
Montgomery County, TX, General Obligation, Library Refunding:
Zero Coupon, 9/01/03 (c) .................................................... 3,475,000 AAA 2,657,923
Zero Coupon, 9/01/04 (c) .................................................... 3,475,000 AAA 2,523,128
Zero Coupon, 9/01/05 (c) .................................................... 3,475,000 AAA 2,399,766
North Central Texas Health Facilities Development Corp., Presbyterian
Hospital, Prerefunded 12/01/97 at 102, 8.875%, 12/01/15*** (c) .............. 5,000,000 AAA 5,141,700
Northeast Hospital Authority, TX, Revenue, Series 1997, 6%,
5/15/10 (c) ................................................................. 2,180,000 AAA 2,396,300
Northwest Texas Independent School District, Capital Appreciation
Bonds, Series 1991, Zero Coupon, 8/15/10 (c) ................................ 3,690,000 AAA 1,903,007
San Antonio, TX, Electric and Gas, Revenue Refunding:
Series A, Zero Coupon, 2/01/05 (c) .......................................... 2,500,000 AAA 1,774,175
Series A, Zero Coupon, 2/01/05 (c) .......................................... 8,000,000 AAA 5,677,360
Series A, Zero Coupon, 2/01/06 (c) .......................................... 17,900,000 AAA 12,054,039
San Antonio, TX, Electric and Gas, Zero Coupon, 2/01/08 (c) .................... 8,115,000 AAA 4,870,785
San Antonio, TX, Hotel Revenue, Series 1996, 6%, 8/15/06 (c) ................... 2,000,000 AAA 2,202,020
San Antonio, TX, Series 1991 B, Zero Coupon, 2/01/09 (c) ....................... 4,400,000 AAA 2,483,360
Tarrant County, TX, Health Facilities Development Corp., Hospital
Refunding Revenue, Fort Worth Osteopathic Hospital:
6%, 5/15/11 (c) .......................................................... 4,615,000 AAA 5,124,727
6%, 5/15/21 (c) .......................................................... 6,235,000 AAA 6,792,097
Texas General Obligation:
Capital Appreciation Bond, Super Collider, Series C, Zero Coupon,
4/01/06 (c) .............................................................. 7,385,000 AAA 4,933,919
Superconductor Revenue, Series C, Zero Coupon, 4/01/05 (c) .................. 8,390,000 AAA 5,907,902
Texas Municipal Power Agency:
6.1%, 9/01/07 (c) ........................................................... 9,250,000 AAA 10,297,933
6.1%, 9/01/09 (c) ........................................................... 4,435,000 AAA 4,974,961
Texas Public Finance Authority, Building Authority:
Series B, 6.25%, 2/01/08 (c) ................................................ 5,190,000 AAA 5,860,444
Zero Coupon, 2/01/06 (c) .................................................... 13,915,000 AAA 9,370,500
</TABLE>
The accompanying notes are an integral part of the financial statements
61
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTAH
Associated Municipal Power System, UT, Hunter Project,
Refunding Revenue:
Zero Coupon, 7/01/00 (c) ................................................. 2,755,000 AAA 2,448,534
Zero Coupon, 7/01/02 (c) ................................................. 5,200,000 AAA 4,202,848
Zero Coupon, 7/01/04 (c) ................................................. 5,895,000 AAA 4,313,372
Zero Coupon, 7/01/05 (c) ................................................. 5,900,000 AAA 4,106,282
Zero Coupon, 7/01/06 (c) ................................................. 5,895,000 AAA 3,892,056
Zero Coupon, 7/01/07 (c) ................................................. 3,750,000 AAA 2,338,763
Intermountain Power Supply Agency, UT, Power Supply Revenue:
5%, 7/01/12 (c) ............................................................. 1,000,000 AAA 986,580
Series A, Zero Coupon, 7/01/02 (c) .......................................... 1,655,000 AAA 1,334,526
Series A, Zero Coupon, 7/01/03 (c) .......................................... 1,000,000 AAA 768,500
Series A, Zero Coupon, 7/01/04 (c) .......................................... 1,730,000 AAA 1,261,672
Series A, 6.5%, 7/01/08 (c) ................................................. 4,000,000 AAA 4,583,720
Series B, Zero Coupon, 7/01/02 (c) .......................................... 8,230,000 AAA 6,636,343
Intermountain Power Supply Agency, UT, Series 1993, 5.55%, 7/01/11 ............. 7,000,000 A 7,145,110
Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15** (c) ................ 1,800,000 AAA 2,603,826
VIRGINIA
Roanoke, VA, Industrial Development Authority, Roanoke Memorial
Hospital, Series B, 6.125%, 7/01/17 (c) ..................................... 5,500,000 AAA 6,115,670
Southeastern Public Service Authority, VA, Refunding Revenue, Series A,
5.25%, 7/01/10 (c) .......................................................... 7,380,000 AAA 7,672,027
Virginia Beach, VA, Development Authority, Virginia Beach General
Hospital Project:
6%, 2/15/11 (c) .......................................................... 1,595,000 AAA 1,767,212
5.125%, 2/15/18 (c) ...................................................... 3,000,000 AAA 2,927,580
Winchester County, VA, Industrial Development Authority, Hospital
Revenue, 6.0%, 1/01/15* (c) ................................................. 5,700,000 AAA 5,749,362
WASHINGTON
Clark County, WA, Public Utility District No. 1:
6%, 1/01/06 (c) ............................................................. 7,500,000 AAA 8,192,175
Series 1995, 6%, 1/01/08 (c) ................................................ 2,200,000 AAA 2,420,990
King County, WA, Public Hospital District #1, Valley Medical Center,
Series 1992, 5.5%, 9/01/17 (c) .............................................. 3,500,000 AAA 3,505,810
King & Snohomish Counties, WA, General Obligation, School District #417,
5.6%, 12/01/10 (c) .......................................................... 1,650,000 AAA 1,770,945
Snohomish County, WA, School District #6, 6.5%, 12/01/07 ....................... 3,325,000 A 3,798,380
Washington, General Obligation Series AT-5, Zero Coupon,
8/01/10 (c) ................................................................. 2,625,000 AAA 1,364,974
Washington Health Care Facilities Authority, Empire Health
Services-Spokane:
5.65%, 11/01/05 (c) ...................................................... 2,155,000 AAA 2,297,273
5.7%, 11/01/06 (c) ....................................................... 3,440,000 AAA 3,689,228
5.75%, 11/01/07 (c) ...................................................... 7,350,000 AAA 7,921,022
5.8%, 11/01/09 (c) ....................................................... 4,595,000 AAA 4,977,350
5.8%, 11/01/10 (c) ....................................................... 2,100,000 AAA 2,266,131
</TABLE>
The accompanying notes are an integral part of the financial statements
62
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Public Power Supply System, Revenue Refunding,
Nuclear Power Project #1:
6%, 7/01/08 (c) .......................................................... 5,000,000 AAA 5,481,350
Series A, 7%, 7/01/11 (c) ................................................ 3,830,000 AAA 4,178,224
Series B, 7.25%, 7/01/12 (c) ............................................. 10,895,000 AAA 11,955,737
Series 1989A, 7.5%, 7/01/15 .............................................. 1,500,000 AAA 1,615,875
Series A, 7.5%, 07/01/15 (c) ............................................. 1,595,000 AAA 1,718,214
Series A, Prerefunded 7/1/99 at 102, 7.5%, 07/01/15*** (c) ............... 2,405,000 AAA 2,590,786
Washington Public Power Supply System, Revenue Refunding,
Nuclear Project #2:
Series 1992A, Zero Coupon, 7/01/11 (c) ................................... 4,200,000 AAA 2,037,378
Series A, 7.25%, 7/01/03 (c) ............................................. 2,000,000 AAA 2,197,460
Series A, 5.7%, 7/01/08 (c) .............................................. 5,000,000 AAA 5,342,050
Series C, 7%, 7/01/01 (c) ................................................ 10,000,000 AAA 10,907,600
Series C, 7.375%, 7/01/11 (c) ............................................ 1,370,000 AAA 1,523,892
Washington Public Power Supply System, Revenue Refunding,
Nuclear Project #3:
7.5%, 7/01/08 (c) ........................................................ 4,000,000 AAA 4,883,400
Series 1989A, Zero Coupon, 7/01/10 (c) ................................... 5,860,000 AAA 3,022,295
Series A, Prerefunded 7/1/99 at 102, 7.25%, 7/01/16*** (c) ............... 3,630,000 AAA 3,895,208
Series A, Zero Coupon, 7/01/04 (c) ....................................... 3,625,000 AAA 2,643,676
Series A, Zero Coupon, 7/01/05 (c) ....................................... 4,125,000 AAA 2,860,069
Washington State Housing Finance, Series A, 7.1%, 12/01/17 ..................... 5,105,000 AAA 5,230,532
WEST VIRGINIA
West Virginia, School Building Authority Revenue, Series B, 6.75%,
7/01/10 (c) ................................................................. 4,000,000 AAA 4,343,400
WISCONSIN
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/01/04 (c) ............ 3,475,000 AAA 2,552,458
Wisconsin Health & Educational Facilities Authority:
6.1%, 8/15/09 (c) ........................................................... 2,000,000 AAA 2,217,820
Felician Healthcare Inc., Series B, 6.25%, 1/01/22 (c) ...................... 5,285,000 AAA 5,918,724
Hospital Sisters Services Inc. - Obligated Group, 5.375%,
6/01/18 (c) .............................................................. 4,800,000 AAA 4,708,656
St. Luke's Medical Center, 7.1%, 8/15/11 (c) ................................ 2,000,000 AAA 2,206,300
Villa St. Francis Inc., Series C, 6.25%, 1/01/22 (c) ........................ 9,230,000 AAA 10,336,769
Wheaton Franciscan Services, 6.1%, 8/15/08 (c) .............................. 4,580,000 AAA 5,100,151
Wisconsin Health & Educational Facilities Authority Aurora Medical:
5.75%, 11/15/06 (c) ......................................................... 2,000,000 AAA 2,148,120
5.75%, 11/15/07 (c) ......................................................... 1,500,000 AAA 1,618,125
6%, 11/15/08 (c) ............................................................ 4,085,000 AAA 4,507,185
6%, 11/15/09 (c) ............................................................ 4,330,000 AAA 4,820,026
Wisconsin Health & Educational Facilities Authority, SSM Healthcare:
Series 1992 AA, 6.4%, 6/01/08 (c) ........................................... 2,335,000 AAA 2,645,999
Series 1992 AA, 6.45%, 6/01/09 (c) .......................................... 2,485,000 AAA 2,857,502
Series 1992 AA, 6.45%, 6/01/10 (c) .......................................... 2,650,000 AAA 3,050,336
Series 1992 AA, 6.5%, 6/01/11 (c) ........................................... 2,820,000 AAA 3,232,002
Series 1992 AA, 6.5%, 6/01/12 (c) ........................................... 3,000,000 AAA 3,480,630
-------------
Total Long-Term Municipal Investments (Cost $1,533,349,712) .................... 1,674,354,483
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
63
<PAGE>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $1,542,449,712) (a) ........ 98.3 1,683,454,483
Other Assets and Liabilities, Net ........................... 1.7 28,553,685
----- -------------
Net Assets .................................................. 100.0 1,712,008,168
===== =============
</TABLE>
* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of
the U.S. Treasury bill rate. Variable rate demand notes are securities
whose interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.
*** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $1,542,746,371 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ........ $140,968,309
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ........ (260,197)
------------
Net unrealized appreciation ............................... $140,708,112
============
(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. Unrated securities (NR) and
securities rated by Scudder (SS&C) have been determined to be of
comparable quality to rated eligible securities.
(c) (Unaudited) Bond is insured by one of these companies: AMBAC, BIG, MBIA,
FGIC, FSA, PSFG or Capital Guaranty.
(d) At September 30, 1997, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.
At September 30, 1997, open futures contracts sold were as follows:
<TABLE>
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
U.S Treasury Bond ........ December, 1997 945 106,665,885 108,940,781
-----------
Total net unrealized depreciation on open futures contracts sold ....... 2,274,896
===========
</TABLE>
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $449,459,820 and $466,467,485,
respectively.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$126,793,957 and $181,012,552, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
64
<PAGE>
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 11.2%
- -------------------------------------------------------------------------------------------------------------------------------
6,505,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02%
to be repurchased at $6,506,088 on 10/01/97, collateralized
by a $6,626,000 U.S. Treasury Note, 4.75%, 9/30/98 (Cost $6,505,000) .................. 6,505,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 18.9%
- -------------------------------------------------------------------------------------------------------------------------------
11,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/01/97
(Cost $11,000,000) .................................................................... 10,998,307
-------------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 1.3%
- -------------------------------------------------------------------------------------------------------------------------------
3,000,000 U.S. Treasury STRIP (Principal only) 11/15/18 (Cost $717,527) ............................ 758,010
-------------
- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 4.3%
- -------------------------------------------------------------------------------------------------------------------------------
436,344 9%, 8/15/21 .............................................................................. 470,157
941,565 8.5%, 6/15/26 ............................................................................ 985,111
1,005,290 7.5%, 4/15/27 ............................................................................ 1,022,561
-------------
Total Government National Mortgage Association (Cost $2,445,149) ......................... 2,477,829
-------------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 1.7%
- -------------------------------------------------------------------------------------------------------------------------------
953,359 Federal Home Loan Mortgage Corp., 7.79% with various maturities to 9/01/24
(Cost $996,558) ....................................................................... 992,094
-------------
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 3.0%
- -------------------------------------------------------------------------------------------------------------------------------
250,000 Fage Dairy Industry SA, 9%, 2/01/07 ...................................................... 243,750
1,000,000 Hutchison Whampoa, Ltd., 7.5%, 8/01/27 ................................................... 984,750
500,000 Petroleos Mexicanos SA, 8.85%, 9/15/07 ................................................... 511,500
-------------
Total Foreign Bonds - U.S.$ Denominated (Cost $1,738,998) ................................ 1,740,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 8.7%
- -------------------------------------------------------------------------------------------------------------------------------
Credit Card Receivables 0.9%
500,000 Advanta Corp., Series 1997-1 A4, 7.65%, 5/25/27 .......................................... 514,375
-------------
Home Equity Loans 2.2%
500,000 Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/28 ................. 509,219
300,000 The Money Store Inc. Home Equity Loan Trust, Series 1996-C A4,
7.4%, 6/15/21 ......................................................................... 306,750
500,000 The Money Store Inc. Home Equity Series 1997-A A2, 6.56%, 12/15/09 ....................... 503,125
-------------
1,319,094
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
65
<PAGE>
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufactured Housing 5.6%
375,000 Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/28 ................... 386,895
330,062 Green Tree Financial Corp., Series 1997-A A1, 6.3%, 8/15/23 .............................. 330,577
500,000 Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/26 .............................. 513,280
500,000 Green Tree Financial Corp., Series 1997-1 B2, 7.76%, 3/15/28 ............................. 511,094
500,000 Green Tree Financial Corp., Series 1997-2 B2, 8.05%, 4/15/28 ............................. 520,391
1,000,000 Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/27 ............................ 1,009,492
-------------
3,271,729
-------------
Total Asset Backed (Cost $4,995,928) ..................................................... 5,105,198
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 49.5%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 1.8%
500,000 Rite Aid Corp., 7.7%, 2/15/27 ............................................................ 525,535
500,000 Tultex Corp., 9.625%, 4/15/07 ............................................................ 530,000
-------------
1,055,535
-------------
Consumer Staples 0.7%
400,000 Polymer Group, Inc., 9%, 7/01/07 ......................................................... 404,000
-------------
Health 1.7%
500,000 NBTY Inc., 8.625%, 9/15/07 ............................................................... 496,250
500,000 Tenet Healthcare Corp., 8.625%, 1/15/07 .................................................. 517,500
-------------
1,013,750
-------------
Communications 3.5%
500,000 Comcast Cellular, 9.5%, 5/01/07 .......................................................... 522,500
1,000,000 Rogers Cantel Inc., 8.3%, 10/01/07 ....................................................... 1,000,000
500,000 WorldCom, Inc., 7.75%, 4/01/07 ........................................................... 524,170
-------------
2,046,670
-------------
Financial 14.6%
1,000,000 First Industrial L.P., 7.6%, 5/15/07 ..................................................... 1,041,850
1,000,000 First Union Capital II, 7.85%, 1/01/27 ................................................... 1,008,240
1,000,000 General Motors Acceptance Corp., 6.869%, 8/15/07 ......................................... 1,013,438
1,000,000 Security Capital Industrial Trust, 7.625%, 7/01/17 ....................................... 1,020,000
500,000 Shurgard Storage Centers, Inc. (REIT), 7.5%, 4/25/04 ..................................... 518,320
1,000,000 Spieker Properties, Inc., 7.125%, 7/01/09 ................................................ 1,007,110
1,000,000 Susa Partnership L.P., 8.2%, 6/01/17 ..................................................... 1,056,250
500,000 Taubman Realty Group LP Medium Term Note, 8%, 7/30/01 .................................... 519,165
250,000 Taubman Realty Group LP Medium Term Note, 7%, 10/01/03 ................................... 252,930
1,000,000 US West Capital Funding Inc., 7.9%, 2/01/27 .............................................. 1,053,740
-------------
8,491,043
-------------
Media 6.5%
1,000,000 Harcourt General, Inc., 7.2%, 8/01/27 .................................................... 974,270
500,000 Hollinger International, 8.625%, 3/15/05 ................................................. 515,000
500,000 Outdoor Systems, Inc., 8.875%, 6/15/07 ................................................... 510,000
125,000 Tele-Communications, Inc., 8%, 8/01/05 ................................................... 130,390
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ........................................................ 1,147,590
520,000 Viacom Inc., 6.75%, 1/15/03 .............................................................. 509,106
-------------
3,786,356
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Service Industries 5.3%
500,000 Pierce Leahy Corp., 9.125%, 7/15/07 ...................................................... 523,750
1,000,000 Prime Hospitality Corp., 9.25%, 1/15/06 .................................................. 1,045,000
500,000 SC International Services, Inc., 9.25%, 9/01/07 .......................................... 508,750
1,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................................................... 1,008,750
-------------
3,086,250
-------------
Durables 0.4%
250,000 Tracor, Inc., 8.5%, 3/01/07 .............................................................. 256,250
-------------
Manufacturing 1.8%
500,000 Argo-Tech Corp., 8.625%, 10/01/07 ........................................................ 501,250
50,000 GFSI Inc., 9.625%, 3/01/07 ............................................................... 51,375
500,000 Mead Corp., 7.55%, 3/01/47 ............................................................... 519,600
-------------
1,072,225
-------------
Technology 2.8%
500,000 Amphenol Corp., 9.875%, 5/15/07 .......................................................... 532,500
100,000 Fairchild Semiconductor Corp., 10.125%, 3/15/07 .......................................... 107,500
1,000,000 International Business Machines Corp., 7%, 10/30/45 ...................................... 972,210
-------------
1,612,210
-------------
Energy 5.0%
500,000 Barrett Resources Corp., 7.55%, 2/01/07 .................................................. 511,250
500,000 Chesapeake Energy Corp., 8.5%, 3/15/12 ................................................... 487,500
250,000 Dawson Production Services, Inc., 9.375%, 2/01/07 ........................................ 260,625
250,000 Lomak Petroleum, Inc., 8.75%, 1/15/07 .................................................... 248,750
1,000,000 Lyondell Petrochemical Co., 7.55%, 2/15/26 ............................................... 1,003,760
400,000 Pride Petroleum Services, Inc., 9.375%, 5/01/07 .......................................... 428,000
-------------
2,939,885
-------------
Metals & Minerals 2.7%
500,000 AK Steel Corp., 9.125%, 12/15/06 ......................................................... 526,250
1,000,000 Potash Corp., 7.125%, 6/15/07 ............................................................ 1,019,600
-------------
1,545,850
-------------
Construction 0.4%
250,000 Nortek, Inc., 9.25%, 3/15/07 ............................................................. 253,750
-------------
Transportation 2.3%
300,000 Continental Airlines Inc. Series 1997-1B, 7.461%, 4/01/13 ................................ 313,371
500,000 Norfolk Southern Corp., 7.8%, 5/15/27 .................................................... 535,485
500,000 Allied Holdings, Inc., 8.625%, 10/01/07 .................................................. 506,875
1,355,731
-------------
Total Corporate Bonds (Cost $28,241,662) ................................................. 28,919,505
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $56,640,822) (a) ......................... 98.6 57,495,943
Other Assets and Liabilities, Net ......................................... 1.4 828,203
----- ----------
Net Assets ................................................................ 100.0 58,324,146
===== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
67
<PAGE>
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $56,640,822 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $ 905,465
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (50,344)
---------
Net unrealized appreciation ................................ $ 855,121
=========
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the period February 1, 1997 (commencement of operations)
through September 30, 1997, aggregated $33,747,629 and $1,303,851,
respectively. Purchases and sales of obligations of the U.S. Government
and Government agencies aggregated $7,091,422, and $637,484, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
68
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 7.9%
- -------------------------------------------------------------------------------------------------------------------------------
50,692,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at
6.125% to be repurchased at $50,700,624 on 10/01/97, collateralized by a
$39,775,000 U.S. Treasury Bond, 8.75%, 5/15/20 (Cost $50,692,000) ................... 50,692,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 6.9%
- -------------------------------------------------------------------------------------------------------------------------------
5,000,000 U.S. Treasury Bond, 6.25%, 8/15/23 ..................................................... 4,853,900
5,000,000 U.S. Treasury Note, 5.125%, 4/30/98 .................................................... 4,989,050
10,000,000 U.S. Treasury Note, 5.75%, 12/31/98 .................................................... 10,006,200
2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 .................................................... 2,504,300
3,000,000 U.S. Treasury Note, 6.75%, 5/31/99 ..................................................... 3,045,000
6,000,000 U.S. Treasury Note, 6.875%, 7/31/99 .................................................... 6,106,860
4,500,000 U.S. Treasury Note, 5.875%, 11/15/99 ................................................... 4,502,790
2,000,000 U.S. Treasury Note, 6.125%, 7/31/00 .................................................... 2,012,180
1,500,000 U.S. Treasury Note, 5.75%, 10/31/00 .................................................... 1,492,740
3,500,000 U.S. Treasury STRIP (Interest only), (6.38%***), 2/15/09 ............................... 1,712,550
10,000,000 U.S. Treasury STRIP (Principal only), (6.62%***), 11/15/18 ............................. 2,526,700
-----------
Total U. S. Treasury Obligations (Cost $43,022,393) .................................... 43,752,270
-----------
- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION** 1.6%
- -------------------------------------------------------------------------------------------------------------------------------
3,214,790 10% with various maturities to 2/15/25 ................................................. 3,580,349
6,503,131 8.5%, 11/15/25 ......................................................................... 6,807,933
-----------
Total Government National Mortgage Association (Cost $10,159,715) ...................... 10,388,282
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS** 6.0%
- -------------------------------------------------------------------------------------------------------------------------------
14,224,171 Federal National Mortgage Association, 6.5% with various maturities
to 3/01/26 .......................................................................... 13,869,957
24,646,080 Federal National Mortgage Association, 7% with various maturities
to 8/01/26 .......................................................................... 24,576,189
-----------
Total U. S. Government Agency Pass-Thrus (Cost $37,394,733) ............................ 38,446,146
-----------
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 1.6%
- -------------------------------------------------------------------------------------------------------------------------------
1,000,000 ABN-AMRO Bank NV, Subordinated note, 7.125%, 10/15/93 .................................. 982,330
6,000,000 Deutsche Bank, 7.5%, 4/25/09 ........................................................... 6,340,440
3,000,000 Province of Ontario Global, 6%, 2/21/06 ................................................ 2,901,480
-----------
Total Foreign Bonds - U. S. $ Denominated (Cost $9,817,851) ............................ 10,224,250
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
69
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 2.1%
- -----------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 1.1%
4,000,000 Ford Credit Automobile Trust Series 1996-A A4, 6.75%, 9/15/00 .......................... 4,045,000
3,000,000 Premier Auto Trust Asset Backed Certificate, Series 1996-3 A4, 6.75%, 11/06/00 ......... 3,029,040
-----------
7,074,040
-----------
Credit Card Receivables 1.0%
4,000,000 Chase Manhattan Credit Card Master Trust, Series 1996-4A, 6.73%, 2/15/03 ............... 4,043,720
2,000,000 Sears Credit Account Master Trust, Series 1995-4A, 6.25%, 1/15/03 ...................... 2,003,740
-----------
6,047,460
-----------
Total Asset Backed (Cost $12,997,645) .................................................. 13,121,500
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 12.4%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.6%
4,000,000 ITT Corp., 7.375%, 11/15/15 ............................................................ 3,874,920
-----------
Communications 0.9%
5,250,000 WorldCom, Inc., 7.75%, 4/01/27 ......................................................... 5,603,115
-----------
Financial 5.2%
5,850,000 Associates Corp. of North America, 6.625%, 5/15/01 ..................................... 5,899,140
4,000,000 Capital One Bank Medium Term Note, 5.95%, 2/15/01 ...................................... 3,919,520
1,000,000 General Electric Capital Services Inc., 7.5%, 8/21/35 .................................. 1,069,320
5,000,000 Highwoods/Forsyth L.P., 7%, 12/01/06 ................................................... 5,011,650
5,000,000 Meditrust Corp., 7%, 8/15/07 ........................................................... 4,977,900
4,000,000 Southern National Corp., 7.05%, 5/23/03 ................................................ 4,080,480
1,500,000 Spieker Properties, Inc., 7.875%, 12/01/16 ............................................. 1,524,915
4,500,000 US West Capital Funding Inc., 7.9%, 1/01/27 ............................................ 4,741,830
2,000,000 Wells Fargo & Co., 6.875%, 4/01/06 ..................................................... 2,014,260
-----------
33,239,015
-----------
Media 1.4%
4,000,000 Tele-Communications, Inc., 8%, 8/01/05 ................................................. 4,172,480
4,500,000 Time Warner Inc., 9.125%, 1/15/13 ...................................................... 5,164,155
-----------
9,336,635
-----------
Service Industries 1.3%
5,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ..................................................... 5,043,750
2,700,000 U.S. Filter Corp., 4.5%, 12/15/01 ...................................................... 3,199,500
-----------
8,243,250
-----------
Durables 1.5%
1,000,000 Ford Motor Co., 8.875%, 1/15/22 ........................................................ 1,196,760
2,000,000 Lockheed Martin Corp., 7.75%, 5/01/26 .................................................. 2,133,520
1,000,000 McDonnell Douglas Corp., 9.75%, 4/01/12 ................................................ 1,262,450
2,000,000 Northrop Grumman Corp., 7%, 3/01/06 .................................................... 2,036,520
3,100,000 Northrop Grumman Corp., 7.875%, 3/01/26 ................................................ 3,333,864
-----------
9,963,114
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
70
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Technology 0.3%
1,500,000 Loral Corp., 8.375%, 6/15/24 ........................................................... 1,703,640
-----------
Energy 0.7%
4,150,000 PanEnergy Corp., 7.375%, 9/15/03 ....................................................... 4,323,429
-----------
Transportation 0.5%
2,500,000 AMR Corp., 9.75%, 8/15/21 .............................................................. 3,131,575
-----------
Total Corporate Bonds (Cost $75,947,204) ............................................... 79,418,693
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 1.3%
- -------------------------------------------------------------------------------------------------------------------------------
Health 0.1%
Pharmaceuticals
290,000 Sandoz Capital BVI Ltd., 2%, 10/06/02 .................................................. 424,850
-----------
Financial 0.1%
Other Financial Companies
200,000 First Financial Management Corp., 5%, 12/15/99 ......................................... 352,500
-----------
Media 0.9%
Advertising
7,000,000 Interpublic Group of Companies Inc., 1.8%, 9/16/04 ..................................... 5,810,000
-----------
Service Industries 0.2%
Miscellaneous Commercial Services
1,000,000 ADT Operations Inc. Liquid Yield Option Note, 7/06/10 .................................. 1,113,750
260,000 Jardine Strategic Holdings Ltd., 7.5%, 5/07/49 (b) ..................................... 317,200
-----------
1,430,950
-----------
Total Convertible Bonds (Cost $6,812,228) .............................................. 8,018,300
-----------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 1.0%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
Consumer Discretionary 0.5%
Department & Chain Stores
56,200 K Mart 7.75% ........................................................................... 3,287,700
-----------
Financial 0.3%
Consumer Finance 0.2%
33,100 Advanta Corp. 6.75% .................................................................... 1,026,100
-----------
Real Estate 0.1%
18,900 Security Capital Industrial Trust, 7% .................................................. 571,725
-----------
Manufacturing 0.2%
Containers & Paper 0.0%
2,100 International Paper Co. 5.25% .......................................................... 118,650
-----------
Industrial Specialty 0.1%
31,300 Cooper Industries, Inc. 6% ............................................................. 719,900
-----------
Office Equipment / Supplies 0.1%
4,700 Ikon Office Solutions, Inc., 5.04% ..................................................... 303,150
-----------
Total Convertible Preferred Stocks (Cost $5,656,472) ................................... 6,027,225
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
71
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 58.6%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 2.9%
Department & Chain Stores
66,800 J.C. Penney Co., Inc. .................................................................. 3,891,100
45,100 May Department Stores .................................................................. 2,457,950
55,000 Mercantile Stores, Inc. ................................................................ 3,461,563
88,900 Rite Aid Corp. ......................................................................... 4,928,394
73,200 Sears, Roebuck & Co. ................................................................... 4,167,825
-----------
18,906,832
-----------
Hotels & Casinos 0.0%
15,033 Homestead Village, Inc. Warrants (expire 10/29/97)* .................................... 122,143
-----------
Consumer Staples 4.8%
Consumer Electronic & Photographic Products 1.0%
95,900 Whirlpool Corp. ........................................................................ 6,359,357
-----------
Food & Beverage 2.8%
43,900 General Mills, Inc. .................................................................... 3,026,356
159,950 H.J. Heinz Co. ......................................................................... 7,387,691
35,200 Unilever NV (New York shares) .......................................................... 7,484,400
-----------
17,898,447
-----------
Package Goods / Cosmetics 1.0%
124,700 Kimberly-Clark Corp. ................................................................... 6,102,506
-----------
Health 3.8%
Pharmaceuticals
47,600 American Home Products Corp. ........................................................... 3,474,800
67,600 Baxter International Inc. .............................................................. 3,532,100
67,200 Bristol-Myers Squibb Co. ............................................................... 5,560,800
70,800 Schering-Plough Corp. .................................................................. 3,646,200
78,400 SmithKline Beecham PLC (ADR) ........................................................... 3,831,800
122,100 Zeneca Group PLC ....................................................................... 3,987,442
-----------
24,033,142
-----------
Communications 4.4%
Telephone / Communications
111,500 Alltel Corp. ........................................................................... 3,846,750
94,932 Bell Atlantic Corp. .................................................................... 7,636,093
83,200 BellSouth Corp. ........................................................................ 3,848,000
113,500 Frontier Corp. ......................................................................... 2,610,500
126,500 GTE Corp. .............................................................................. 5,739,938
79,400 Sprint Corp. ........................................................................... 3,970,000
100,000 Telecom Corp. of New Zealand ........................................................... 507,395
-----------
28,158,676
-----------
Financial 14.2%
Banks 6.7%
71,500 Banc One Corp. ......................................................................... 3,990,594
43,500 Bankers Trust New York Corp. ........................................................... 5,328,750
</TABLE>
The accompanying notes are an integral part of the financial statements
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
11,700 Centura Banks, Inc. .................................................................... 644,231
64,800 Chase Manhattan Corp. .................................................................. 7,646,400
52,800 CoreStates Financial Corp. ............................................................. 3,494,700
24,800 First American Corp. ................................................................... 1,212,100
12,300 First Tennessee National Corp. ......................................................... 701,100
44,100 First Union Corp. ...................................................................... 2,207,756
92,400 Firstar Corp. .......................................................................... 3,349,500
34,100 J.P. Morgan & Co., Inc. ................................................................ 3,874,613
67,600 KeyCorp ................................................................................ 4,301,050
35,500 Old Kent Financial Corp. ............................................................... 2,289,750
34,700 US Bancorp ............................................................................. 3,348,550
-----------
42,389,094
-----------
Insurance 2.4%
62,600 EXEL, Ltd. (ADR) ....................................................................... 3,728,613
73,300 Lincoln National Corp. ................................................................. 5,103,513
42,100 Mid Ocean, Ltd. ........................................................................ 2,668,088
72,400 Safeco Corp. ........................................................................... 3,837,200
-----------
15,337,414
-----------
Consumer Finance 0.5%
22,100 SLM Holding Corp. ...................................................................... 3,414,450
-----------
Other Financial Companies 0.3%
44,800 Federal National Mortgage Association .................................................. 2,105,600
-----------
Real Estate 4.3%
75,700 Arden Realty Group, Inc. ............................................................... 2,375,088
137,600 Equity Office Properties Trust (REIT) .................................................. 4,669,800
116,100 General Growth Properties, Inc. (REIT) ................................................. 4,295,700
66,600 Health Care Property Investment Inc. (REIT) ............................................ 2,580,750
61,700 Meditrust SBI (REIT) ................................................................... 2,560,550
101,600 Nationwide Health Properties Inc. (REIT) ............................................... 2,444,750
26,000 Omega Healthcare Investors (REIT) ...................................................... 936,000
243,962 Security Capital Atlantic Inc. ......................................................... 5,458,650
88,454 Security Capital Industrial Trust (REIT) ............................................... 2,062,084
22,593 Security Capital Industrial Trust Warrants (expire 9/18/98) ............................ 180,744
-----------
27,564,116
-----------
Durables 3.8%
Aerospace 1.2%
28,309 Lockheed Martin Corp. .................................................................. 3,018,447
70,100 Rockwell International Corp. ........................................................... 4,411,919
-----------
7,430,366
-----------
Automobiles 2.1%
93,400 Dana Corp. ............................................................................. 4,611,625
20,800 Eaton Corp. ............................................................................ 1,921,400
160,800 Ford Motor Co. ......................................................................... 7,276,200
-----------
13,809,225
-----------
Construction / Agricultural Equipment 0.5%
56,900 PACCAR, Inc. ........................................................................... 3,186,400
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
73
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufacturing 10.3%
Chemicals 2.7%
22,400 Akso Nobel N.V. (ADR) .................................................................. 1,918,000
22,800 Dow Chemical Co. ....................................................................... 2,067,675
19,400 E.I. du Pont de Nemours & Co. .......................................................... 1,194,313
63,600 Eastman Chemical Co. ................................................................... 3,943,200
121,400 Imperial Chemical Industries PLC (ADR) (New) ........................................... 8,027,575
-----------
17,150,763
-----------
Containers & Paper 0.5%
2,643 Boise Cascade Corp. .................................................................... 111,171
82,100 Westvaco Corp. ......................................................................... 2,960,731
-----------
3,071,902
-----------
Diversified Manufacturing 1.9%
82,600 Olin Corp. ............................................................................. 3,866,713
153,200 TRW Inc. ............................................................................... 8,406,850
-----------
12,273,563
-----------
Electrical Products 2.1%
123,600 Philips Electronics NV (New York shares) ............................................... 10,382,400
57,100 Thomas & Betts Corp. ................................................................... 3,119,088
-----------
13,501,488
-----------
Industrial Specialty 0.1%
16,100 Corning Inc. ........................................................................... 760,725
-----------
Office Equipment / Supplies 1.7%
126,000 Xerox Corp. ............................................................................ 10,607,625
-----------
Specialty Chemicals 1.3%
55,300 BetzDearborn Inc. ...................................................................... 3,781,138
101,100 Witco Corp. ............................................................................ 4,612,688
-----------
8,393,826
-----------
Technology 0.3%
Electronic Components / Distributors
40,100 AMP Inc. ............................................................................... 2,147,856
-----------
Energy 4.8%
Oil Companies 4.4%
28,600 Exxon Corp. ............................................................................ 1,832,188
93,300 Lyondell Petrochemical Co. ............................................................. 2,443,294
8,500 Pennzoil Co. ........................................................................... 677,344
60,000 Royal Dutch Petroleum Co. (New York shares) ............................................ 3,330,000
90,381 Societe Nationale Elf Aquitaine (ADR) .................................................. 6,027,283
93,800 Texaco Inc. ............................................................................ 5,762,838
70,201 Total SA (ADR) ......................................................................... 4,023,395
109,500 YPF S.A. "D" (ADR) ..................................................................... 4,037,813
-----------
28,134,155
-----------
Oil / Gas Transmission 0.4%
51,800 Williams Cos., Inc. .................................................................... 2,424,888
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
74
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Metals & Minerals 1.6%
Steel & Metals
114,435 Allegheny Teledyne Inc. ................................................................ 3,275,702
99,000 Freeport McMoRan Copper & Gold, Inc. "A" ............................................... 2,728,688
101,500 Oregon Steel Mills, Inc. ............................................................... 2,753,188
21,900 Phelps Dodge Corp. ..................................................................... 1,699,988
-----------
10,457,566
-----------
Construction 1.9%
Building Materials 0.3%
46,653 Martin Marietta Materials, Inc. ........................................................ 1,679,508
-----------
Forest Products 1.6%
51,800 Georgia Pacific Corp. .................................................................. 5,406,625
73,900 Louisiana-Pacific Corp. ................................................................ 1,847,500
48,700 Weyerhaeuser Co. ....................................................................... 2,891,563
-----------
10,145,688
-----------
Transportation 1.4%
Marine Transportation 0.6%
137,500 Knightsbridge Tankers Ltd. ............................................................. 3,892,969
-----------
Railroads 0.8%
59,900 CSX Corp. .............................................................................. 3,504,150
15,500 Canadian National Railway .............................................................. 805,668
14,300 Union Pacific Corp. .................................................................... 895,538
-----------
5,205,356
-----------
Utilities 4.4%
Electric Utilities 3.8%
71,400 CINergy Corp. .......................................................................... 2,387,437
20,700 CMS Energy Corp. ....................................................................... 765,900
110,289 Duke Energy Corp. ...................................................................... 5,452,412
63,000 PacifiCorp ............................................................................. 1,409,625
105,200 PG & E Corporation ..................................................................... 2,439,325
38,900 PowerGen PLC (ADR) ..................................................................... 1,915,825
216,500 TNP Enterprises Inc. ................................................................... 5,439,563
114,400 Unicom Corp. ........................................................................... 2,674,100
59,600 Wisconsin Energy Corp. ................................................................. 1,549,600
-----------
24,033,787
-----------
Natural Gas Distribution 0.6%
115,300 MCN Energy Group, Inc. ................................................................. 3,689,600
-----------
Total Common Stocks (Cost $260,773,738) ................................................ 374,389,033
-----------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $513,273,979) (a) .................... 99.4 634,477,699
Other Assets and Liabilities, Net ..................................... 0.6 3,878,558
----- -----------
Net Assets ............................................................ 100.0 638,356,257
===== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
75
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Non income producing security
** Effective maturities will be shorter due to prepayments.
*** (Unaudited) Bond equivalent yield to maturity; not a coupon rate.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $513,246,352 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ......................................... $ 121,979,635
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ....................................... (748,288)
-------------
Net unrealized appreciation ........................... $ 121,231,347
=============
(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $317,200 (.05% of net assets). Their values have been
estimated by the Board of Trustees in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation,
those estimated values may differ significantly from the values that would
have been used had a ready market for the securities existed, and the
difference could be material. The cost of these securities was $295,244 at
September 30, 1997. These securities may also have certain restrictions as
to resale.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the year ended September 30, 1997 aggregated $193,993,681
and $109,398,379, respectively. Purchases and sales of U.S. Government and
U.S. Government agencies' obligations aggregated $19,648,049 and
$18,561,811, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
76
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.1%
- -----------------------------------------------------------------------------------------------------------------
9,855,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/97 at 6.02% to be repurchased at $9,856,648 on
10/01/97, collateralized by a $8,374,000 U.S. Treasury
Bond, 9.125%, 5/15/09 (Cost $9,855,000) ..................................... 9,855,000
------------
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 2.0%
- -----------------------------------------------------------------------------------------------------------------
33,000,000 Associates Corp. of North America, Discount Note, 10/01/97 ..................... 33,000,000
35,000,000 General Electric Capital Corp., Discount Note, 10/03/97 ........................ 34,989,150
20,000,000 Norwest Financial Corp., Discount Note, 10/01/97 ............................... 20,000,000
44,000,000 Omnicom Finance Inc., Discount Note, 10/07/97 .................................. 43,958,787
------------
Total Commercial Paper (Cost $131,947,937) ..................................... 131,947,937
------------
- -----------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 0.4%
- -----------------------------------------------------------------------------------------------------------------
25,000,000 Fifth Third Bancorp., 5.52%, 10/09/97 (Cost $25,000,000) ....................... 24,999,576
------------
- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 4.3%
- -----------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.9%
Department & Chain Stores
12,550,000 Federated Department Stores, Inc., Debenture, 5%, 10/01/03 ..................... 16,911,125
34,500,000 Home Depot Inc., 3.25%, 10/01/01 ............................................... 42,262,500
------------
59,173,625
------------
Consumer Staples 0.5%
Miscellaneous
490,000 Ralston Purina Group, 7%, 8/01/00 .............................................. 33,013,750
------------
Health 0.1%
Pharmaceuticals
6,260,000 Sandoz Capital BVI Ltd., Debenture, 2%, 10/06/02 ............................... 9,170,900
------------
Communications 0.0%
Telephone / Communications
1,000,000 Compania de Telefonos de Chile, S.A., 4.5%, 1/15/03 ............................ 1,682,500
------------
Financial 1.5%
Banks 1.0%
102,590,000 Deutsche Bank Financial Inc., Convertible to Daimler Benz AG shares,
Zero Coupon, 2/12/17 ........................................................ 48,089,063
17,290,000 MBL International Finance Bermuda, 3%, 11/30/02 ................................ 18,846,100
------------
66,935,163
------------
Other Financial Companies 0.2%
5,200,000 First Financial Management Corp., Debenture, 5%, 12/15/99 ...................... 9,165,000
------------
Real Estate 0.3%
18,250,000 Security Capital Group, Inc., 6.5%, 3/29/16 (b) (c) ............................ 22,585,146
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
77
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Service Industries 0.8%
Miscellaneous Commercial Services 0.6%
25,000,000 ADT Operations Inc., Liquid Yield Option Note, Zero Coupon, 7/06/10 ............ 27,843,750
7,036,000 Jardine Strategic Holdings Ltd., 7.5%, 5/07/49 (b) ............................. 8,583,920
------------
36,427,670
------------
Miscellaneous Consumer Services 0.2%
14,000,000 CUC International Inc., 3%, 2/15/02 ............................................ 16,205,000
------------
Durables 0.2%
Automobiles
6,800,000 Magna International, Inc., 5%, 10/15/02 ........................................ 8,967,500
------------
Manufacturing 0.1%
Diversified Manufacturing
5,000,000 Thermo Electron Corp., 4.25%, 1/01/03 .......................................... 5,825,000
------------
Technology 0.2%
Electronic Components / Distributors 0.1%
5,700,000 HMT Technology Corp., 5.75%, 1/15/04 ........................................... 5,400,750
------------
EDP Peripherals 0.1%
5,500,000 Adaptec Inc., 4.75%, 2/01/04 ................................................... 6,215,000
------------
Total Convertible Bonds (Cost $226,034,527) .................................... 280,767,004
------------
- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 1.6%
- -----------------------------------------------------------------------------------------------------------------
Shares
- ---------------
Consumer Discretionary 0.8%
Department & Chain Stores
956,200 K Mart 7.75% ................................................................... 55,937,700
------------
Financial 0.2%
Consumer Finance 0.1%
129,000 Advanta Corp. 6.75% ............................................................ 3,999,000
------------
Real Estate 0.1%
321,500 Security Capital Industrial Trust "B", 7% ...................................... 9,725,375
------------
Manufacturing 0.4%
Containers & Paper 0.1%
50,200 International Paper Co. 5.25% .................................................. 2,836,300
------------
Industrial Specialty 0.2%
652,400 Cooper Industries, Inc. 6% ..................................................... 15,005,200
------------
Office Equipment / Supplies 0.1%
102,800 Ikon Office Solutions, Inc., 5.04% ............................................. 6,630,600
------------
Metals & Minerals 0.2%
Precious Metals
500,000 Freeport McMoRan Copper & Gold, Inc., Cum. $1.25 ............................... 13,843,750
------------
Total Convertible Preferred Stocks (Cost $96,396,839) .......................... 107,977,925
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
78
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.1%
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Consumer Discretionary 4.5%
Department & Chain Stores
767,200 J.C. Penney Co., Inc. .......................................................... 44,689,400
782,700 May Department Stores .......................................................... 42,657,150
861,450 Mercantile Stores, Inc. ........................................................ 54,217,509
1,589,100 Rite Aid Corp. ................................................................. 88,095,731
1,257,200 Sears, Roebuck & Co. ........................................................... 71,581,825
------------
301,241,615
------------
Consumer Staples 7.8%
Consumer Electronic & Photographic Products 1.7%
1,656,000 Whirlpool Corp. ................................................................ 109,813,500
------------
Food & Beverage 4.5%
598,400 General Mills, Inc. ............................................................ 41,252,200
2,720,200 H.J. Heinz Co. ................................................................. 125,639,237
105,000 Unilever NV .................................................................... 22,412,944
515,200 Unilever NV (New York shares) .................................................. 109,544,400
------------
298,848,781
------------
Package Goods / Cosmetics 1.6%
2,154,000 Kimberly-Clark Corp. ........................................................... 105,411,375
------------
Health 5.8%
Pharmaceuticals
772,800 American Home Products Corp. ................................................... 56,414,400
1,166,300 Baxter International Inc. ...................................................... 60,939,175
1,154,000 Bristol-Myers Squibb Co. ....................................................... 95,493,500
1,208,800 Schering-Plough Corp. .......................................................... 62,253,200
1,322,600 SmithKline Beecham PLC (ADR) ................................................... 64,642,075
1,446,900 Zeneca Group PLC ............................................................... 47,251,676
------------
386,994,026
------------
Communications 7.2%
Telephone / Communications
1,896,300 Alltel Corp. ................................................................... 65,422,350
1,648,840 Bell Atlantic Corp. ............................................................ 132,628,567
1,424,000 BellSouth Corp. ................................................................ 65,860,000
1,976,900 Frontier Corp. ................................................................. 45,468,700
2,126,300 GTE Corp. ...................................................................... 96,480,862
1,164,600 Sprint Corp. ................................................................... 58,230,000
2,036,000 Telecom Corp. of New Zealand ................................................... 10,330,556
------------
474,421,035
------------
Financial 19.5%
Banks 10.2%
1,215,500 Banc One Corp. ................................................................. 67,840,094
251,000 BankAmerica Corp. .............................................................. 18,401,437
670,300 Bankers Trust New York Corp. ................................................... 82,111,750
1,119,000 Chase Manhattan Corp. .......................................................... 132,042,000
</TABLE>
The accompanying notes are an integral part of the financial statements
79
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
983,800 CoreStates Financial Corp. ..................................................... 65,115,262
299,400 First Chicago NBD Corp. ........................................................ 22,529,850
755,100 First Union Corp. .............................................................. 37,802,194
574,800 J.P. Morgan & Co., Inc. ........................................................ 65,311,650
980,200 KeyCorp ........................................................................ 62,365,225
1,098,600 NationsBank Corp. .............................................................. 67,975,875
643,500 US Bancorp ..................................................................... 62,097,750
------------
683,593,087
------------
Insurance 3.8%
979,100 EXEL Ltd. (ADR) ................................................................ 58,317,644
1,110,200 Lincoln National Corp. ......................................................... 77,297,675
754,300 Mid Ocean Limited .............................................................. 47,803,763
1,248,400 Safeco Corp. ................................................................... 66,165,200
------------
249,584,282
------------
Consumer Finance 0.9%
381,200 SLM Holding Corp. .............................................................. 58,895,400
------------
Other Financial Companies 0.6%
789,400 Federal National Mortgage Association .......................................... 37,101,800
------------
Real Estate 4.0%
245,800 Avalon Properties, Inc. (REIT) ................................................. 7,312,550
386,200 Camden Property Trust (REIT) ................................................... 11,827,375
2,004,900 General Growth Properties, Inc. (REIT) (d) ..................................... 74,181,300
409,800 Health Care Property Investment Inc. (REIT) .................................... 15,879,750
31,100 Mark Centers Trust (REIT) ...................................................... 293,506
457,900 Meditrust SBI (REIT) ........................................................... 19,002,850
680,800 Nationwide Health Properties Inc. (REIT) ....................................... 16,381,750
71,200 Post Properties Inc. (REIT) .................................................... 2,830,200
17,398 Security Capital Group, Inc. (b) (c) ........................................... 24,843,660
1,485,172 Security Capital Industrial Trust (REIT) ....................................... 34,623,072
88,318 Security Capital Industrial Trust Warrants (expire 9/1/98)* .................... 706,544
2,688,521 Security Capital US Realty (REIT) .............................................. 40,058,963
150,000 Spieker Properties, Inc. ....................................................... 6,084,375
102,100 Vornado Realty Trust (REIT) .................................................... 8,672,119
------------
262,698,014
------------
Durables 6.4%
Aerospace 1.9%
445,323 Lockheed Martin Corp. .......................................................... 47,482,565
1,195,100 Rockwell International Corp. (New) ............................................. 75,216,606
------------
122,699,171
------------
Automobiles 3.7%
1,609,000 Dana Corp. ..................................................................... 79,444,375
444,100 Eaton Corp. .................................................................... 41,023,737
2,798,000 Ford Motor Co. ................................................................. 126,609,500
------------
247,077,612
------------
Construction / Agricultural Equipment 0.8%
996,800 PACCAR, Inc. ................................................................... 55,820,800
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
80
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufacturing 18.1%
Chemicals 5.3%
474,115 Akzo-Nobel NV .................................................................. 81,024,326
518,300 Dow Chemical Co. ............................................................... 47,003,331
328,100 E.I. du Pont de Nemours & Co. .................................................. 20,198,656
945,000 Eastman Chemical Co. ........................................................... 58,590,000
8,662,000 Imperial Chemical Industries PLC ............................................... 140,710,473
------------
347,526,786
------------
Containers & Paper 0.7%
49,581 Boise Cascade Corp. ............................................................ 2,085,501
1,200,000 Westvaco Corp. ................................................................. 43,275,000
------------
45,360,501
------------
Diversified Manufacturing 3.2%
1,404,600 Olin Corp. ..................................................................... 65,752,837
2,654,000 TRW Inc. ....................................................................... 145,638,250
------------
211,391,087
------------
Electrical Products 3.8%
1,863,400 Philips Electronics NV ......................................................... 157,678,790
428,300 Philips Electronics NV (New York shares) ....................................... 35,977,200
1,014,600 Thomas & Betts Corp. ........................................................... 55,422,525
------------
249,078,515
------------
Machinery / Components / Controls 0.4%
925,000 S.K.F. AB "B" (Free) ........................................................... 26,942,339
------------
Office Equipment / Supplies 2.7%
2,152,900 Xerox Corp. .................................................................... 181,247,269
------------
Specialty Chemicals 2.0%
204,800 ARCO Chemical Co. .............................................................. 9,318,400
709,000 BetzDearborn Inc. .............................................................. 48,477,875
1,649,900 Witco Corp. .................................................................... 75,276,688
------------
133,072,963
------------
Technology 0.6%
Electronic Components / Distributors
673,000 AMP Inc. ....................................................................... 36,047,562
------------
Energy 8.6%
Oil Companies 8.0%
494,800 Exxon Corp. .................................................................... 31,698,125
1,254,000 Lyondell Petrochemical Co. ..................................................... 32,839,125
461,000 Pennzoil Co. ................................................................... 36,735,937
1,058,800 Royal Dutch Petroleum Co. (New York shares) .................................... 58,763,400
759,800 Societe Nationale Elf Aquitaine ................................................ 101,417,646
1,620,400 Texaco Inc. .................................................................... 99,553,325
558,448 Total SA "B" ................................................................... 63,905,990
569,496 Total SA (ADR) ................................................................. 32,639,240
1,844,200 YPF S.A. "D" (ADR) ............................................................. 68,004,875
------------
525,557,663
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
81
<PAGE>
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Oil / Gas Transmission 0.6%
899,000 Williams Cos., Inc. ............................................................ 42,084,438
-------------
Metals & Minerals 1.9%
Steel & Metals
2,081,910 Allegheny Teledyne Inc. ........................................................ 59,594,674
579,010 Freeport McMoRan Copper & Gold, Inc. "A" ....................................... 15,958,963
1,879,100 J & L Specialty Steel, Inc. .................................................... 25,250,406
297,500 Phelps Dodge Corp. ............................................................. 23,093,438
-------------
123,897,481
-------------
Construction 2.7%
Building Materials 0.4%
774,955 Martin Marietta Materials, Inc. ................................................ 27,898,380
-------------
Forest Products 2.3%
817,000 Georgia Pacific Corp. .......................................................... 85,274,375
512,200 Louisiana-Pacific Corp. ........................................................ 12,805,000
851,600 Weyerhaeuser Co. ............................................................... 50,563,750
-------------
148,643,125
-------------
Transportation 1.6%
Railroads
1,032,900 CSX Corp. ...................................................................... 60,424,650
295,950 Canadian National Railway Co. .................................................. 15,383,063
141,100 Norfolk Southern Corp. ......................................................... 14,568,575
241,900 Union Pacific Corp. ............................................................ 15,148,988
-------------
105,525,276
-------------
Utilities 6.4%
Electric Utilities
1,241,200 CINergy Corp. .................................................................. 41,502,625
261,200 CMS Energy Corp. ............................................................... 9,664,400
1,819,120 Duke Energy Corp. .............................................................. 89,932,745
1,054,200 Long Island Lighting Co. ....................................................... 27,013,875
1,080,200 PacifiCorp ..................................................................... 24,169,475
1,951,600 PG & E Corporation ............................................................. 45,252,725
5,986,000 PowerGen PLC ................................................................... 73,753,689
670,603 PowerGen PLC (ADR) ............................................................. 33,027,198
2,176,300 Unicom Corp. ................................................................... 50,871,014
952,800 Wisconsin Energy Corp. ......................................................... 24,772,800
-------------
419,960,546
-------------
Total Common Stocks (Cost $3,954,215,554) ...................................... 6,018,434,429
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $4,443,449,857) (a) ...................... 99.5 6,573,981,871
Other Assets and Liabilities, Net ......................................... 0.5 32,031,026
------ --------------
Net Assets ................................................................ 100.0 6,606,012,897
====== ==============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $4,440,901,206 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $2,140,784,862
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... (7,704,197)
--------------
Net unrealized appreciation .............................. $2,133,080,665
==============
(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $56,012,726 (0.85% of net assets). Their values have
been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent uncertainty
of valuation, those estimated values may differ significantly from the
values that would have been used had a ready market for the securities
existed, and the difference could be material. The cost of these
securities at September 30, 1997 was $44,449,203. These securities may
also have certain restrictions as to resale.
(c) Restricted Securities -- securities which have not been registered with
the Securities and Exchange Commission under the Securities Act of 1933.
Information concerning such restricted securities at September 30, 1997 is
as follows:
Security Acquisition Date Cost ($)
-------- ---------------- --------
Security Capital Group, Inc. 4/19/96 18,250,000
Security Capital Group, Inc., 6.5%, 3/29/16 4/19/96 18,250,000
(d) Affiliated Issuer (See Notes to Financial Statements)
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$2,283,895,347 and $1,713,417,767, respectively.
- --------------------------------------------------------------------------------
Transactions in written call options on securities during the year ended
September 30, 1997 were:
Contracts Premiums Received ($)
--------- ---------------------
Outstanding at September 30, 1996 400 19,199
Contracts written -- --
Contracts expired (400) (19,199)
--------------------------------------
Outstanding at September 30, 1997 -- --
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
83
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 3.1%
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
1,179,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $1,179,197 on 10/01/97, collateralized by a $1,150,000
U.S. Treasury Bond, 6.75%, 8/15/26 (Cost $1,179,000) 1,179,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY 0.2%
- -------------------------------------------------------------------------------------------------------------------------------
65,000 U.S. Treasury Bill, 5.12%, 10/02/97 (Cost $64,991) 64,995
-----------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 92.9%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------
Consumer Discretionary 4.9%
Apparel & Shoes 0.1%
100 Fruit of the Loom, Inc. "A"* .............................................................. 2,813
100 Liz Claiborne Inc. ........................................................................ 5,494
200 Nike, Inc. "B" ............................................................................ 10,600
2,000 Stride Rite Corp. ......................................................................... 27,125
-----------
46,032
-----------
Department & Chain Stores 4.1%
600 CVS Corp. ................................................................................. 34,115
100 Charming Shoppes Inc.* .................................................................... 616
1,500 Dayton Hudson Corp. ....................................................................... 89,906
100 Dillard's Inc. ............................................................................ 4,381
100 Federated Department Stores, Inc.* ........................................................ 4,313
1,200 Gap Inc. .................................................................................. 60,075
3,000 Home Depot, Inc. .......................................................................... 156,365
4,300 J.C. Penney Co., Inc. ..................................................................... 250,475
400 K mart Corp. .............................................................................. 5,600
2,500 Limited Inc. .............................................................................. 61,094
300 Longs Drug Stores, Inc. ................................................................... 8,006
200 Lowe's Companies, Inc. .................................................................... 7,775
2,100 May Department Stores ..................................................................... 114,440
100 Mercantile Stores, Inc. ................................................................... 6,294
200 Nordstrom, Inc. ........................................................................... 12,750
500 Costco Companies, Inc. .................................................................... 18,813
1,100 Rite Aid Corp. ............................................................................ 60,981
2,900 Sears, Roebuck & Co. ...................................................................... 165,119
900 TJX Companies, Inc. (New) ................................................................. 27,506
11,300 Wal-Mart Stores Inc. ...................................................................... 413,863
2,700 Walgreen Co. .............................................................................. 69,188
100 Woolworth Corp.* .......................................................................... 2,213
-----------
1,573,888
-----------
Home Furnishings 0.2%
600 Newell Companies Inc. ..................................................................... 24,000
1,300 Rubbermaid, Inc. .......................................................................... 33,231
</TABLE>
The accompanying notes are an integral part of the financial statements
84
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
400 Tupperware Corp. .......................................................................... 11,250
-----------
68,481
-----------
Hotels & Casinos 0.1%
200 HFS, Inc.* ................................................................................ 14,888
100 Harrah's Entertainment, Inc.* ............................................................. 2,244
300 Hilton Hotels Corp. ....................................................................... 10,106
100 ITT Corp.* ................................................................................ 6,775
100 Marriott International, Inc. .............................................................. 7,106
-----------
41,119
-----------
Recreational Products 0.2%
700 Brunswick Corp. ........................................................................... 24,675
250 Hasbro, Inc. .............................................................................. 7,031
1,400 Mattel Inc. ............................................................................... 46,375
-----------
78,081
-----------
Restaurants 0.1%
100 Darden Restaurants Inc. ................................................................... 1,156
900 McDonald's Corp. .......................................................................... 42,863
100 Wendy's International, Inc. ............................................................... 2,125
-----------
46,144
-----------
Specialty Retail 0.1%
100 AutoZone, Inc.* ........................................................................... 3,000
100 Circuit City Stores Inc. .................................................................. 4,031
100 Pep Boys - Manny, Moe & Jack .............................................................. 2,725
800 Tandy Corp. ............................................................................... 26,900
100 Toys "R" Us Inc.* ......................................................................... 3,550
-----------
40,206
-----------
Consumer Staples 8.6%
Alcohol 0.4%
2,400 Anheuser-Busch Companies, Inc. ............................................................ 108,290
800 Seagram Co., Ltd. ......................................................................... 28,200
-----------
136,490
-----------
Consumer Electronic & Photographic Products 0.4%
1,300 Eastman Kodak Co. ......................................................................... 84,419
1,100 Maytag Corp. .............................................................................. 37,538
500 Whirlpool Corp. ........................................................................... 33,156
-----------
155,113
-----------
Consumer Specialties 0.3%
100 American Greeting Corp., "A" .............................................................. 3,688
3,600 Jostens, Inc. ............................................................................. 97,650
-----------
101,338
-----------
Farming 0.0%
105 Archer-Daniels-Midland Co. ................................................................ 2,513
100 Pioneer Hi-Bred International, Inc. ....................................................... 9,100
-----------
11,613
-----------
Food & Beverage 4.3%
100 Albertson's Inc. .......................................................................... 3,488
</TABLE>
The accompanying notes are an integral part of the financial statements
85
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
200 American Stores Co. ....................................................................... 4,875
100 CPC International Inc. .................................................................... 9,263
1,800 Campbell Soup Co. ......................................................................... 88,200
8,100 Coca-Cola Co., Inc. (b) ................................................................... 493,594
600 ConAgra Inc. .............................................................................. 39,600
1,700 General Mills, Inc. ....................................................................... 117,194
100 Giant Food, Inc. "A" ...................................................................... 3,256
2,300 H.J. Heinz Co. ............................................................................ 106,231
100 Hershey Foods Corp. ....................................................................... 5,650
1,700 Kellogg Co. ............................................................................... 71,613
200 Kroger Co. ................................................................................ 6,038
7,400 PepsiCo, Inc. ............................................................................. 300,163
1,300 Quaker Oats Co. ........................................................................... 65,488
200 Ralston Purina Group ...................................................................... 17,700
700 SUPERVALU, Inc. ........................................................................... 27,475
1,000 Unilever NV (New York shares) ............................................................. 212,625
100 William Wrigley Jr. Co. ................................................................... 7,531
1,700 Winn-Dixie Stores, Inc. ................................................................... 60,244
-----------
1,640,228
-----------
Package Goods / Cosmetics 3.0%
1,200 Avon Products Inc. ........................................................................ 74,400
800 Clorox Co. ................................................................................ 59,300
2,100 Colgate-Palmolive Co. ..................................................................... 146,334
2,800 Gillette Co. .............................................................................. 241,675
1,300 International Flavors & Fragrances, Inc. .................................................. 63,700
1,400 Kimberly-Clark Corp. ...................................................................... 68,513
7,400 Procter & Gamble Co. ...................................................................... 511,063
-----------
1,164,985
-----------
Textiles 0.2%
200 Springs Industries, Inc. "A" .............................................................. 10,500
600 VF Corporation ............................................................................ 55,575
-----------
66,075
-----------
Health 10.3%
Biotechnology 0.2%
100 Alza Corp. "A" ............................................................................ 2,900
200 Amgen Inc. ................................................................................ 9,588
1,000 Guidant Corp. ............................................................................. 56,000
-----------
68,488
-----------
Health Industry Services 0.2%
1,300 HEALTHSOUTH Corp. ......................................................................... 34,694
100 Humana, Inc.* ............................................................................. 2,381
200 Shared Medical Systems Corp. .............................................................. 10,575
600 United Healthcare Corp. ................................................................... 30,000
-----------
77,650
-----------
Hospital Management 0.1%
400 Columbia/HCA Healthcare Corp. ............................................................. 11,500
100 Manor Care, Inc. .......................................................................... 3,325
</TABLE>
The accompanying notes are an integral part of the financial statements
86
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
200 Tenet Healthcare Corp.* ................................................................... 5,825
-----------
20,650
-----------
Medical Supply & Specialty 0.7%
1,500 Bausch & Lomb, Inc. ....................................................................... 60,750
200 Becton, Dickinson & Co. ................................................................... 9,575
100 Biomet Inc. ............................................................................... 2,400
900 Boston Scientific Corp.* .................................................................. 49,669
700 C.R. Bard, Inc. ........................................................................... 23,756
100 Mallinckrodt, Inc. ........................................................................ 3,600
2,400 Medtronic Inc. ............................................................................ 112,800
100 St. Jude Medical, Inc.* ................................................................... 3,506
400 U.S. Surgical Corp. ....................................................................... 11,675
-----------
277,731
-----------
Pharmaceuticals 9.1%
4,400 Abbott Laboratories ....................................................................... 281,325
100 Allergan, Inc. ............................................................................ 3,619
3,800 American Home Products Corp. .............................................................. 277,400
3,200 Baxter International Inc. ................................................................. 167,200
5,900 Bristol-Myers Squibb Co. .................................................................. 488,225
3,100 Eli Lilly & Co. ........................................................................... 373,356
4,300 Johnson & Johnson ......................................................................... 247,788
6,600 Merck & Co. Inc. .......................................................................... 659,588
6,400 Pfizer, Inc. .............................................................................. 384,400
3,700 Pharmacia & Upjohn, Inc. .................................................................. 135,050
4,000 Schering-Plough Corp. ..................................................................... 206,000
1,800 Warner-Lambert Co. ........................................................................ 242,888
-----------
3,466,839
-----------
Communications 5.8%
Cellular Telephone 0.0%
100 AirTouch Communications, Inc.* ............................................................ 3,544
-----------
Telephone / Communications 5.8%
1,100 Alltel Corp. .............................................................................. 37,950
10,100 American Telephone & Telegraph Co. ........................................................ 447,556
2,200 Ameritech Corp. ........................................................................... 146,300
5,104 Bell Atlantic Corp. ....................................................................... 410,553
3,500 BellSouth Corp. ........................................................................... 161,875
2,100 Frontier Corp. ............................................................................ 48,300
3,300 GTE Corp. ................................................................................. 149,738
100 MCI Communications Corp. .................................................................. 2,938
3,419 SBC Communicatons, Inc. ................................................................... 209,841
100 Sprint Corp. .............................................................................. 5,000
9,900 US West Inc.* ............................................................................. 381,150
5,500 WorldCom, Inc.* ........................................................................... 194,563
-----------
2,195,764
-----------
Financial 14.0%
Banks 8.2%
3,800 Banc One Corp. ............................................................................ 212,088
1,900 Bank of New York Co., Inc. ................................................................ 91,200
</TABLE>
The accompanying notes are an integral part of the financial statements
87
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3,300 BankAmerica Corp. ......................................................................... 241,931
1,000 BankBoston Corp. .......................................................................... 88,438
900 Barnett Banks, Inc. ....................................................................... 63,675
2,500 Chase Manhattan Corp. ..................................................................... 295,000
2,300 Citicorp .................................................................................. 308,056
500 Comerica Inc. ............................................................................. 39,469
2,200 CoreStates Financial Corp. ................................................................ 145,613
150 Fifth Third Bancorp. ...................................................................... 9,806
1,500 First Chicago NBD Corp. ................................................................... 112,875
3,100 First Union Corp. ......................................................................... 155,194
1,800 Fleet Financial Group, Inc. ............................................................... 118,013
100 H.F. Ahmanson & Co. ....................................................................... 5,681
1,400 J.P. Morgan & Co., Inc. ................................................................... 159,075
1,500 KeyCorp ................................................................................... 95,438
2,300 MBNA Corp. ................................................................................ 93,150
2,600 Mellon Bank Corp. ......................................................................... 142,350
1,900 National City Corp. ....................................................................... 116,969
2,700 NationsBank Corp. ......................................................................... 167,063
1,400 Norwest Corp. ............................................................................. 85,750
3,100 PNC Bank Corp. ............................................................................ 151,319
100 SunTrust Banks, Inc. ...................................................................... 6,794
902 US Bancorp ................................................................................ 87,043
900 Wachovia Corp. ............................................................................ 64,800
460 Washington Mutual, Inc. ................................................................... 32,085
100 Wells Fargo & Co. ......................................................................... 27,500
-----------
3,116,375
-----------
Insurance 3.1%
100 Aetna Inc. ................................................................................ 8,144
1,600 Allstate Corp. ............................................................................ 128,600
1,900 American General Corp. .................................................................... 98,563
2,300 American International Group, Inc. ........................................................ 237,331
1,550 Aon Corp. ................................................................................. 81,956
200 Chubb Corp. ............................................................................... 14,213
300 Cigna Corp. ............................................................................... 55,875
800 Conseco Inc. .............................................................................. 39,050
100 General Re Corp. .......................................................................... 19,850
200 Hartford Financial Services Group Inc. .................................................... 17,213
200 Jefferson Pilot Corp. ..................................................................... 15,800
1,000 Lincoln National Corp. .................................................................... 69,625
200 MGIC Investment Corp. ..................................................................... 11,463
2,400 Marsh & McLennan Companies, Inc. .......................................................... 183,900
1,200 Providian Financial Corp. ................................................................. 47,625
800 Safeco Corp. .............................................................................. 42,400
600 St. Paul Companies, Inc. .................................................................. 48,938
450 SunAmerica, Inc. .......................................................................... 17,634
200 Torchmark Corp. ........................................................................... 7,850
100 Transamerica Corp. ........................................................................ 9,950
200 UNUM Corp. ................................................................................ 9,125
</TABLE>
The accompanying notes are an integral part of the financial statements
88
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
100 USF&G Corp. ............................................................................... 2,294
-----------
1,167,399
-----------
Consumer Finance 0.1%
600 Beneficial Corp. .......................................................................... 45,713
-----------
Other Financial Companies 2.6%
2,600 American Express Credit Corp. ............................................................. 212,875
2,600 Federal Home Loan Mortgage Corp. .......................................................... 91,650
5,300 Federal National Mortgage Association ..................................................... 249,100
100 Green Tree Financial Corp. ................................................................ 4,700
400 Household International, Inc. ............................................................. 45,275
2,895 Morgan Stanley, Dean Witter Discover Co. .................................................. 156,511
100 Salomon Inc. .............................................................................. 7,519
3,400 Travelers Group, Inc. ..................................................................... 232,050
-----------
999,680
-----------
Media 1.5%
Advertising 0.0%
150 Interpublic Group of Companies Inc. ....................................................... 7,697
-----------
Broadcasting & Entertainment 1.0%
100 Clear Channel Communications, Inc.* ....................................................... 6,488
2,700 Time Warner Inc. .......................................................................... 146,306
100 U.S. West Media Group ..................................................................... 2,231
100 Viacom Inc. "B"* .......................................................................... 3,163
3,000 Walt Disney Co. ........................................................................... 241,875
-----------
400,063
-----------
Cable Television 0.2%
1,400 Comcast Corp. "A" ......................................................................... 36,050
1,527 Tele-Communications Inc. "A" (New)* ....................................................... 31,304
-----------
67,354
-----------
Print Media 0.3%
600 Gannett Co., Inc. ......................................................................... 64,763
100 Harcourt General, Inc. .................................................................... 4,956
200 Knight-Ridder, Inc. ....................................................................... 10,925
100 New York Times Co. "A" .................................................................... 5,250
100 Times Mirror Co. "A" ...................................................................... 5,494
300 Tribune Co. ............................................................................... 15,994
-----------
107,382
-----------
Service Industries 3.0%
EDP Services 0.1%
300 Automatic Data Processing, Inc. ........................................................... 15,000
600 First Data Corp. .......................................................................... 22,538
500 NextLevel Systems, Inc. ................................................................... 8,375
-----------
45,913
-----------
Environmental Services 0.6%
2,100 Browning Ferris Industries ................................................................ 79,931
4,000 Waste Management Inc. ..................................................................... 139,750
-----------
219,681
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
89
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Investment 0.5%
1,050 Charles Schwab Corp. ...................................................................... 37,538
1,900 Merrill Lynch & Co., Inc. ................................................................. 140,956
-----------
178,494
-----------
Miscellaneous Commercial Services 0.0%
100 Cognizant Corp. ........................................................................... 4,075
100 Ecolab, Inc. .............................................................................. 4,856
100 Safety-Kleen Corp. ........................................................................ 2,394
100 Sysco Corp. ............................................................................... 3,694
-----------
15,019
-----------
Miscellaneous Consumer Services 0.1%
300 CUC International Inc. .................................................................... 9,300
800 H & R Block Inc. .......................................................................... 30,900
100 Service Corp. International ............................................................... 3,219
-----------
43,419
-----------
Printing / Publishing 1.7%
5,100 Deluxe Corp. .............................................................................. 171,169
300 Dow Jones & Co., Inc. ..................................................................... 14,025
7,500 Dun & Bradstreet Corp. .................................................................... 212,813
400 Equifax Inc. .............................................................................. 12,575
500 John H. Harland Co. ....................................................................... 11,531
1,600 McGraw-Hill Inc. .......................................................................... 108,300
3,300 Moore Corp., Ltd. ......................................................................... 62,700
1,100 R.R. Donnelley & Sons Co. ................................................................. 39,256
-----------
632,369
-----------
Durables 5.9%
Aerospace 1.5%
2,000 AlliedSignal Inc. ......................................................................... 85,000
4,150 Boeing Co. ................................................................................ 225,916
700 Lockheed Martin Corp. ..................................................................... 74,638
300 Northrop Grumman Corp. .................................................................... 36,413
800 Rockwell International Corp. .............................................................. 50,350
1,100 United Technologies Corp. ................................................................. 89,100
-----------
561,417
-----------
Automobiles 2.5%
5,500 Chrysler Corp. ............................................................................ 202,469
200 Cummins Engine Co., Inc. .................................................................. 15,613
600 Dana Corp. ................................................................................ 29,625
400 Eaton Corp. ............................................................................... 36,950
100 Echlin, Inc. .............................................................................. 3,506
7,900 Ford Motor Co. ............................................................................ 357,475
3,700 General Motors Corp. ...................................................................... 247,669
2,100 Genuine Parts Co. ......................................................................... 64,706
100 Navistar International Corp.* ............................................................. 2,763
-----------
960,776
-----------
Construction / Agricultural Equipment 0.5%
100 Case Corp. ................................................................................ 6,663
</TABLE>
The accompanying notes are an integral part of the financial statements
90
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
2,400 Caterpillar Inc. .......................................................................... 129,450
1,300 Deere & Co. ............................................................................... 69,875
-----------
205,988
-----------
Leasing Companies 0.0%
100 Ryder System, Inc. ........................................................................ 3,594
-----------
Telecommunications Equipment 1.3%
250 Andrew Corp. .............................................................................. 6,547
500 DSC Communications Corp.* ................................................................. 13,469
3,200 Lucent Technologies Inc. .................................................................. 260,400
1,700 Northern Telecom Ltd. ..................................................................... 176,694
100 Scientific-Atlanta, Inc. .................................................................. 2,263
1,000 Tellabs, Inc.* ............................................................................ 51,500
-----------
510,873
-----------
Tires 0.1%
100 Cooper Tire & Rubber Co. .................................................................. 2,656
600 Goodyear Tire & Rubber Co. ................................................................ 41,250
-----------
43,906
-----------
Manufacturing 10.4%
Chemicals 2.4%
200 B.F. Goodrich Co., Inc. ................................................................... 9,050
2,700 Dow Chemical Co. .......................................................................... 244,856
6,300 E.I. du Pont de Nemours & Co. ............................................................. 387,844
800 Eastman Chemical Co. ...................................................................... 49,600
100 Engelhard Corp. ........................................................................... 2,156
100 Great Lakes Chemicals Corp. ............................................................... 4,931
500 Hercules, Inc. ............................................................................ 24,875
3,000 Monsanto Co. .............................................................................. 117,000
400 Morton International, Inc. ................................................................ 14,200
100 Praxair Inc. .............................................................................. 5,119
400 Rohm & Haas Co. ........................................................................... 38,375
100 Sigma-Aldrich Corp. ....................................................................... 3,294
100 Union Carbide Corp. ....................................................................... 4,869
100 W.R. Grace & Co. (New) .................................................................... 7,363
-----------
913,532
-----------
Containers & Paper 0.5%
100 Champion International Corp. .............................................................. 6,094
300 Crown Cork & Seal Co. Inc. ................................................................ 13,838
300 Fort James Corp. .......................................................................... 13,744
1,400 International Paper Co. ................................................................... 77,088
200 Stone Container Corp. ..................................................................... 3,113
100 Temple-Inland, Inc. ....................................................................... 6,400
900 Union Camp Corp. .......................................................................... 55,519
400 Westvaco Corp. ............................................................................ 14,425
-----------
190,221
-----------
Diversified Manufacturing 5.1%
200 Aeroquip-Vickers Inc. ..................................................................... 9,800
1,200 Cooper Industries, Inc. ................................................................... 64,875
</TABLE>
The accompanying notes are an integral part of the financial statements
91
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
300 Dover Corp. ............................................................................... 20,363
1,500 Dresser Industries Inc. ................................................................... 64,500
18,000 General Electric Co. ...................................................................... 1,225,125
600 Honeywell, Inc. ........................................................................... 40,313
100 ITT Industries Inc. ....................................................................... 3,319
2,000 Minnesota Mining & Manufacturing Co. ...................................................... 185,000
500 National Service Industries, Inc. ......................................................... 21,969
100 TRW Inc. .................................................................................. 5,488
1,100 Tenneco, Inc. ............................................................................. 52,663
700 Textron, Inc. ............................................................................. 45,500
100 Thermo Electron Corp. ..................................................................... 4,000
1,500 Tyco International Ltd. (New) ............................................................. 123,094
3,000 Westinghouse Electric Corp. ............................................................... 81,188
100 Whitman Corp. ............................................................................. 2,725
-----------
1,949,922
-----------
Electrical Products 0.5%
2,600 Emerson Electric Co. ...................................................................... 149,825
100 Raychem Corp. ............................................................................. 8,450
400 Thomas & Betts Corp. ...................................................................... 21,850
-----------
180,125
-----------
Hand Tools 0.2%
100 Black & Decker Corp. ...................................................................... 3,725
100 Briggs & Stratton Corp. ................................................................... 4,944
300 Snap-On, Inc. ............................................................................. 13,819
900 Stanley Works ............................................................................. 38,700
-----------
61,188
-----------
Industrial Specialty 0.5%
500 Avery Dennison Corp. ...................................................................... 20,000
1,400 Corning Inc. .............................................................................. 66,150
1,000 PPG Industries, Inc. ...................................................................... 62,688
1,200 Pall Corp. ................................................................................ 25,875
200 Sherwin-Williams Co. ...................................................................... 5,888
-----------
180,601
-----------
Machinery / Components / Controls 0.3%
500 General Signal Corp. ...................................................................... 21,625
100 Harnischfeger Industries, Inc. ............................................................ 4,275
800 Illinois Tool Works Inc. .................................................................. 40,000
450 Ingersoll-Rand Co. ........................................................................ 19,378
600 Parker-Hannifin Group ..................................................................... 27,000
400 Timken Co. ................................................................................ 16,025
-----------
128,303
-----------
Office Equipment / Supplies 0.7%
1,300 Pitney Bowes, Inc. ........................................................................ 108,144
1,800 Xerox Corp. ............................................................................... 151,538
-----------
259,682
-----------
Specialty Chemicals 0.2%
500 Air Products & Chemicals, Inc. ............................................................ 41,469
</TABLE>
The accompanying notes are an integral part of the financial statements
92
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
900 Nalco Chemical Co. ........................................................................ 36,056
-----------
77,525
-----------
Technology 12.2%
Computer Software 3.2%
400 Adobe Systems Inc. ........................................................................ 20,150
300 Autodesk, Inc. ............................................................................ 13,613
900 Bay Networks Inc.* ........................................................................ 34,763
1,800 Computer Associates International, Inc. ................................................... 129,263
6,300 Microsoft Corp.* .......................................................................... 833,569
4,500 Oracle Systems Corp. ...................................................................... 163,969
200 Parametric Technology Corp.* .............................................................. 8,825
-----------
1,204,152
-----------
Diverse Electronic Products 0.9%
1,300 Applied Materials, Inc. ................................................................... 123,825
200 Harris Corp. .............................................................................. 9,150
3,100 Motorola Inc. ............................................................................. 222,813
-----------
355,788
-----------
EDP Peripherals 0.2%
1,200 EMC Corp. ................................................................................. 70,050
200 Seagate Technology, Inc.* ................................................................. 7,225
-----------
77,275
-----------
Electronic Components / Distributors 0.2%
1,600 AMP Inc. .................................................................................. 85,700
-----------
Electronic Data Processing 3.9%
100 Apple Computer, Inc.* ..................................................................... 2,169
100 Ceridian Corp.* ........................................................................... 3,700
4,015 Compaq Computer Corp. ..................................................................... 300,121
100 Data General Corp.* ....................................................................... 2,663
2,000 Dell Computer Corp. ....................................................................... 193,750
400 Digital Equipment Corp.* .................................................................. 17,325
5,000 Hewlett-Packard Co. ....................................................................... 347,813
5,100 International Business Machines Corp. ..................................................... 540,281
300 Silicon Graphics Inc.* .................................................................... 7,875
1,300 Sun Microsystems, Inc.* ................................................................... 60,856
100 Unisys Corp.* ............................................................................. 1,531
-----------
1,478,084
-----------
Military Electronics 0.2%
100 Computer Sciences Corp.* .................................................................. 7,075
1,400 EG&G, Inc. ................................................................................ 28,963
100 General Dynamics Corp. .................................................................... 8,713
300 Raytheon Co. .............................................................................. 17,738
-----------
62,489
-----------
Office / Plant Automation 0.9%
1,800 3Com Corp.* ............................................................................... 92,250
400 Cabletron Systems Inc.* ................................................................... 12,800
3,300 Cisco Systems, Inc.* ...................................................................... 241,106
</TABLE>
The accompanying notes are an integral part of the financial statements
93
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
300 Novell Inc.* .............................................................................. 2,691
-----------
348,847
-----------
Precision Instruments 0.0%
200 Perkin-Elmer Corp. ........................................................................ 14,613
-----------
Semiconductors 2.7%
300 Advanced Micro Devices Inc.* .............................................................. 9,769
25 General Semiconductor, Inc. ............................................................... 322
8,400 Intel Corp. ............................................................................... 775,425
800 LSI Logic Corp.* .......................................................................... 25,700
1,200 Micron Technology Inc. .................................................................... 41,625
600 National Semiconductor Corp.* ............................................................. 24,600
1,200 Texas Instruments Inc. .................................................................... 162,150
-----------
1,039,591
-----------
Energy 8.9%
Engineering 0.0%
100 Fluor Corp. ............................................................................... 5,363
100 Foster Wheeler Corp. ...................................................................... 4,394
-----------
9,757
-----------
Oil & Gas Production 0.4%
100 Burlington Resources, Inc. ................................................................ 5,131
100 Coastal Corp. ............................................................................. 6,125
149 Enserch Exploration Partners Ltd.* ........................................................ 1,341
200 Kerr-McGee Corp. .......................................................................... 13,763
44 Monterey Resources, Inc. .................................................................. 924
4,500 Occidental Petroleum Corp. ................................................................ 116,719
100 Oryx Energy Co. ........................................................................... 2,544
100 Santa Fe Energy Resources, Inc. ........................................................... 1,250
100 Union Pacific Resources Group ............................................................. 2,619
-----------
150,416
-----------
Oil Companies 7.4%
100 Amerada Hess Corp. ........................................................................ 6,169
3,100 Amoco Corp. ............................................................................... 298,763
100 Ashland Inc. .............................................................................. 5,438
3,200 Atlantic Richfield Co. .................................................................... 273,400
3,300 Chevron Corp. ............................................................................. 274,519
12,900 Exxon Corp. ............................................................................... 826,406
3,600 Mobil Corp. ............................................................................... 266,400
1,400 Phillips Petroleum Co. .................................................................... 72,275
10,400 Royal Dutch Petroleum Co. (New York shares) ............................................... 577,200
400 Sun Co., Inc. ............................................................................. 17,525
3,200 Texaco Inc. ............................................................................... 196,600
400 USX Marathon Group ........................................................................ 14,875
100 Unocal Corp. .............................................................................. 4,325
-----------
2,833,895
-----------
Oil / Gas Transmission 0.1%
200 Enron Corp. ............................................................................... 7,700
100 Sonat, Inc. ............................................................................... 5,088
</TABLE>
The accompanying notes are an integral part of the financial statements
94
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
100 Williams Cos., Inc. ....................................................................... 4,681
-----------
17,469
-----------
Oilfield Services / Equipment 1.0%
800 Baker Hughes, Inc. ........................................................................ 35,000
1,600 Halliburton Co. ........................................................................... 83,200
300 Rowan Companies, Inc. ..................................................................... 10,688
2,800 Schlumberger Ltd. ......................................................................... 235,725
-----------
364,613
-----------
Metals & Minerals 0.9%
Precious Metals 0.3%
100 Barrick Gold Corp. ........................................................................ 2,475
100 Battle Mountain Gold Co. "A" .............................................................. 719
100 Echo Bay Mines, Ltd. ...................................................................... 569
3,100 Freeport McMoRan Copper & Gold, Inc. "B" .................................................. 89,319
100 Homestake Mining Co. ...................................................................... 1,531
143 Newmont Mining Corp. ...................................................................... 6,426
100 Placer Dome Inc. .......................................................................... 1,913
-----------
102,952
-----------
Steel & Metals 0.6%
100 Alcan Aluminium Ltd. ...................................................................... 3,475
1,500 Allegheny Teledyne Inc. ................................................................... 42,938
400 Aluminum Co. of America ................................................................... 32,800
100 Asarco, Inc. .............................................................................. 3,200
100 Bethlehem Steel Corp. ..................................................................... 1,031
900 Cyprus Amax Minerals Co. .................................................................. 21,600
100 Inco Ltd. ................................................................................. 2,506
100 Nucor Corp. ............................................................................... 5,269
200 Phelps Dodge Corp. ........................................................................ 15,525
800 Reynolds Metals Co. ....................................................................... 56,650
600 USX-US Steel Group, Inc. .................................................................. 20,850
1,000 Worthington Industries, Inc. .............................................................. 20,250
-----------
226,094
-----------
Construction 0.7%
Building Products 0.2%
400 Armstrong World Industries, Inc. .......................................................... 26,825
1,000 Masco Corp. ............................................................................... 45,813
-----------
72,638
-----------
Forest Products 0.5%
400 Georgia Pacific Corp. ..................................................................... 41,750
100 Louisiana-Pacific Corp. ................................................................... 2,500
800 Potlatch Corp. ............................................................................ 40,250
1,500 Weyerhaeuser Co. .......................................................................... 89,063
-----------
173,563
-----------
Homebuilding 0.0%
200 Kaufman & Broad Home Corp. ................................................................ 4,338
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
95
<PAGE>
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Transportation 0.9%
Air Freight 0.0%
100 Federal Express Corp.* .................................................................... 8,000
-----------
Airlines 0.1%
100 AMR Corp.* ................................................................................ 11,069
100 Delta Air Lines, Inc. ..................................................................... 9,419
100 Southwest Airlines Co. .................................................................... 3,194
400 US Airways Group, Inc.* ................................................................... 16,550
-----------
40,232
-----------
Railroads 0.8%
200 Burlington Northern Santa Fe .............................................................. 19,325
1,000 CSX Corp. ................................................................................. 58,500
900 Norfolk Southern Corp. .................................................................... 92,925
1,900 Union Pacific Corp. ....................................................................... 118,988
-----------
289,738
-----------
Trucking 0.0%
200 Caliber System, Inc. ...................................................................... 10,850
-----------
Miscellaneous 0.0%
400 Laidlaw, Inc. ............................................................................. 5,990
-----------
Utilities 4.9%
Electric Utilities 4.4%
300 American Electric Power Co. ............................................................... 13,650
100 Baltimore Gas & Electric Co. .............................................................. 2,775
100 CINergy Corp. ............................................................................. 3,344
100 Carolina Power & Light Co. ................................................................ 3,594
12,400 Central & South West Corp. ................................................................ 275,125
3,700 Consolidated Edison Co. of New York, Inc. ................................................. 125,800
3,400 DTE Energy Co. ............................................................................ 103,488
2,700 Dominion Resources Inc. ................................................................... 102,263
204 Duke Energy Corp. ......................................................................... 10,085
100 Edison International ...................................................................... 2,525
1,400 Entergy Corp. ............................................................................. 36,488
100 FPL Group, Inc. ........................................................................... 5,125
100 GPU, Inc. ................................................................................. 3,588
6,012 Houston Industries Inc. ................................................................... 130,761
100 Niagara Mohawk Power Corp. ................................................................ 956
200 Northern States Power Co. ................................................................. 9,950
1,100 Ohio Edison Co. ........................................................................... 25,781
9,500 PP&L Resources, Inc. ...................................................................... 207,813
100 PacifiCorp ................................................................................ 2,238
100 PG & E Corporation ........................................................................ 2,319
11,300 Peco Energy Co. ........................................................................... 264,844
9,000 Public Service Enterprise Group ........................................................... 231,750
2,000 Southern Company .......................................................................... 45,125
222 Texas Utilities Co., Inc. ................................................................. 7,992
1,600 Unicom Corp. .............................................................................. 37,400
700 Union Electric Co. ........................................................................ 26,906
-----------
1,681,685
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
96
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Natural Gas Distribution 0.5%
200 Consolidated Natural Gas Corp. ............................................................ 11,638
1,300 Eastern Enterprises ....................................................................... 48,506
100 NICOR, Inc. ............................................................................... 3,750
100 ONEOK Inc. ................................................................................ 3,263
1,900 Pacific Enterprises ....................................................................... 64,363
1,600 Peoples Energy Corp. ...................................................................... 60,300
191,820
-----------
Total Common Stocks (Cost $31,668,935) .................................................... 35,405,259
-----------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $32,912,926) (a) 96.2 36,649,254
Other Assets and Liabilities, Net 3.8 1,435,819
------ -----------
Net Assets 100.0 38,085,073
====== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $32,933,269 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $ 3,825,138
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (109,153)
-----------
Net unrealized appreciation ................................. $ 3,715,985
============
(b) At September 30, 1997, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.
At September 30, 1997, open futures contracts purchased were as follows:
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
---------- --------- -------------- ---------
S&P 500 Index ... December, 1997 5 2,377,911 2,387,250
---------
Total net unrealized appreciation on open futures contracts
purchased ................................................... 9,339
=========
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $6,641,537 and $4,263,626, respectively.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of operations)
through September 30, 1997, aggregated $33,666,582 and $2,094,504,
respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
97
<PAGE>
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 4.7%
- -------------------------------------------------------------------------------------------------------------------------------
57,322,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125%
to be repurchased at $57,331,753 on 10/01/97, collateralized by a $44,975,000
U.S. Treasury Bond, 8.75%, 5/15/20 (Cost $57,322,000) .................................. 57,322,000
-----------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 95.2%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------
Consumer Discretionary 9.0%
Apparel & Shoes 1.2%
270,000 Nike, Inc. "B" ............................................................................ 14,310,000
-----------
Department & Chain Stores 5.7%
320,000 Gap Inc. .................................................................................. 16,020,000
540,000 Home Depot, Inc. .......................................................................... 28,147,500
360,000 Costco Companies, Inc. .................................................................... 13,545,000
500,000 Walgreen Co. .............................................................................. 12,812,500
-----------
70,525,000
-----------
Hotels & Casinos 1.0%
400,000 Mirage Resorts Inc.* ...................................................................... 12,050,000
-----------
Specialty Retail 1.1%
320,000 Tiffany & Co. ............................................................................. 13,600,000
-----------
Consumer Staples 3.6%
Alcohol 1.2%
330,000 Anheuser-Busch Companies, Inc. ............................................................ 14,891,250
-----------
Food & Beverage 1.1%
300,000 H.J. Heinz Co. ............................................................................ 13,856,250
-----------
Package Goods / Cosmetics 1.3%
230,000 Procter & Gamble Co. ...................................................................... 15,884,375
-----------
Health 8.8%
Medical Supply & Specialty 1.2%
308,000 Becton, Dickinson & Co. ................................................................... 14,745,500
-----------
Pharmaceuticals 7.6%
140,000 American Home Products Corp. .............................................................. 10,220,000
180,000 Johnson & Johnson ......................................................................... 10,372,500
100,000 Merck & Co. Inc. .......................................................................... 9,993,750
197,100 Novartis AG (ADR) ......................................................................... 15,176,700
278,000 Pfizer, Inc. .............................................................................. 16,697,375
200,000 Schering-Plough Corp. ..................................................................... 10,300,000
150,000 Warner-Lambert Co. ........................................................................ 20,240,625
-----------
93,000,950
-----------
Financial 20.1%
Banks 4.5%
350,600 BankAmerica Corp. ......................................................................... 25,703,363
155,000 Citicorp .................................................................................. 20,760,313
80,000 J.P. Morgan & Co., Inc. ................................................................... 9,090,000
-----------
55,553,676
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
98
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Insurance 8.3%
270,000 American International Group, Inc. ........................................................ 27,860,625
375,000 Conseco Inc. .............................................................................. 18,304,688
520,000 EXEL, Ltd. (ADR) .......................................................................... 30,972,500
331,100 Hartford Life, Inc. "A" ................................................................... 12,726,656
96,000 MBIA Inc. ................................................................................. 12,042,000
-----------
101,906,469
-----------
Consumer Finance 1.5%
301,700 Associates First Capital Corp. ............................................................ 18,780,825
-----------
Other Financial Companies 5.8%
409,900 American Express Credit Corp. ............................................................. 33,560,563
410,000 Federal National Mortgage Association ..................................................... 19,270,000
270,000 Travelers Group, Inc. ..................................................................... 18,427,500
-----------
71,258,063
-----------
Media 2.2%
Advertising 1.2%
200,000 Omnicom Group, Inc. ....................................................................... 14,550,000
-----------
Cable Television 1.0%
420,000 Tele-Comm Liberty Media Group "A"* ........................................................ 12,573,750
-----------
Service Industries 4.6%
Investment 3.7%
294,500 Franklin Resources Inc. ................................................................... 27,425,313
240,000 Merrill Lynch & Co., Inc. ................................................................. 17,805,000
-----------
45,230,313
-----------
Miscellaneous Commercial Services 0.9%
291,000 Manpower, Inc. ............................................................................ 11,494,500
-----------
Durables 3.7%
Aerospace 2.7%
235,000 Rockwell International Corp. (New) ........................................................ 14,790,313
230,000 United Technologies Corp. ................................................................. 18,630,000
-----------
33,420,313
-----------
Telecommunications Equipment 1.0%
365,000 Ascend Communications, Inc.* .............................................................. 11,816,875
-----------
Manufacturing 11.9%
Chemicals 3.0%
280,000 E.I. du Pont de Nemours & Co. ............................................................. 17,237,500
195,700 Praxair Inc. .............................................................................. 10,017,394
290,000 Sigma-Aldrich Corp. ....................................................................... 9,551,875
-----------
36,806,769
-----------
Diversified Manufacturing 4.5%
325,000 Dresser Industries Inc. ................................................................... 13,975,000
190,000 General Electric Co. ...................................................................... 12,931,875
240,000 TRW Inc. .................................................................................. 13,170,000
240,000 Textron, Inc. ............................................................................. 15,600,000
-----------
55,676,875
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
99
<PAGE>
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Electrical Products 1.6%
75,000 ABB AB (ADR) .............................................................................. 10,612,500
166,000 Emerson Electric Co. ...................................................................... 9,565,750
-----------
20,178,250
-----------
Machinery / Components / Controls 2.8%
300,000 Ingersoll-Rand Co. ........................................................................ 12,918,750
475,500 Parker-Hannifin Group ..................................................................... 21,397,500
-----------
34,316,250
-----------
Technology 16.1%
Diverse Electronic Products 6.0%
270,000 Applied Materials, Inc.* .................................................................. 25,717,500
360,000 General Motors Corp. "H" .................................................................. 23,805,000
170,000 KLA Tencor Corp.* ......................................................................... 11,485,625
240,000 Teradyne Inc.* ............................................................................ 12,915,000
-----------
73,923,125
-----------
Electronic Data Processing 7.6%
480,000 Compaq Computer Corp.* .................................................................... 35,880,000
265,000 Hewlett-Packard Co. ....................................................................... 18,434,063
160,000 International Business Machines Corp. ..................................................... 16,950,000
460,000 Sun Microsystems, Inc.* ................................................................... 21,533,750
-----------
92,797,813
-----------
Semiconductors 2.5%
330,000 Intel Corp. ............................................................................... 30,463,125
-----------
Energy 13.4%
Oil Companies 8.5%
125,000 Amoco Corp. ............................................................................... 12,046,875
200,000 Atlantic Richfield Co. .................................................................... 17,087,500
350,000 Exxon Corp. ............................................................................... 22,421,875
180,000 Mobil Corp. ............................................................................... 13,320,000
254,800 Repsol SA (ADR) ........................................................................... 11,051,950
520,000 Royal Dutch Petroleum Co. (New York shares) ............................................... 28,860,000
-----------
104,788,200
-----------
Oil / Gas Transmission 1.2%
220,000 Enron Corp. ............................................................................... 8,470,000
130,000 Williams Cos., Inc. ....................................................................... 6,085,625
-----------
14,555,625
-----------
Oilfield Services / Equipment 3.7%
240,000 Diamond Offshore Drilling, Inc. ........................................................... 13,245,000
280,000 Santa Fe International Corp. .............................................................. 13,020,000
225,000 Schlumberger Ltd. ......................................................................... 18,942,188
-----------
45,207,188
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
100
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Transportation 1.3%
Airlines 0.9%
100,000 AMR Corp.* ................................................................................ 11,068,750
--------------
Railroads 0.4%
146,900 Wisconsin Central Transportation Co.* ..................................................... 4,673,256
--------------
Utilities 0.5%
Electric Utilities
350,000 Eastern Utilities Association ............................................................. 6,978,121
--------------
Total Common Stocks (Cost $717,371,809) ................................................... 1,170,881,456
--------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $774,693,809) (a) ....................... 99.9 1,228,203,456
Other Assets and Liabilities, Net ........................................ 0.1 176,498
------ --------------
Net Assets ............................................................... 100.0 1,228,379,954
====== ==============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $774,693,809 was as
follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $464,300,492
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (10,790,845)
------------
Net unrealized appreciation ................................. $453,509,647
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$376,002,590 and $394,567,870, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
101
<PAGE>
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 5.8%
- -------------------------------------------------------------------------------------------------------------------------------
2,911,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at
6.02% to be repurchased at $2,911,487 on 10/01/97, collateralized by a $2,753,000
U.S. Treasury Note, 8.5%, 2/15/00 (Cost $2,911,000) ............................. 2,911,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 96.5%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -------------
<C> <S> <C>
Consumer Discretionary 7.2%
Apparel & Shoes 0.6%
17,600 Brown Group, Inc. .................................................................. 320,100
-------------
Home Furnishings 5.5%
6,900 Bush Industries, Inc. "A" .......................................................... 191,044
7,200 Ethan Allen Interiors Inc. ......................................................... 223,200
11,100 Interface, Inc. .................................................................... 323,288
11,800 La-Z-Boy Inc. ...................................................................... 436,600
17,900 Mikasa, Inc. ....................................................................... 248,363
15,800 Oneida Ltd. ........................................................................ 560,900
7,500 Thomas Industries, Inc. ............................................................ 225,000
14,200 Toro Co. ........................................................................... 562,675
-------------
2,771,070
-------------
Hotels & Casinos 0.4%
8,100 Prime Hospitality Corp.* ........................................................... 182,756
Specialty Retail 0.7% -------------
2,600 Eagle Hardware & Garden, Inc.* ..................................................... 51,188
2,300 Getty Petroleum Marketing Co.* ..................................................... 12,506
2,400 Inacom Corp.* ...................................................................... 89,250
7,400 Zale Corp.* ........................................................................ 191,938
-------------
344,882
-------------
Consumer Staples 4.4%
Consumer Electronic & Photographic Products 0.2%
2,700 Harman International Industries, Inc. .............................................. 135,169
Food & Beverage 2.1% -------------
11,400 Michael Foods, Inc. ................................................................ 292,125
19,700 Nash-Finch Co. ..................................................................... 467,875
18,000 Ruddick Corp. ...................................................................... 290,250
-------------
1,050,250
-------------
Textiles 2.1%
22,950 Guilford Mills, Inc. ............................................................... 596,700
12,800 Kellwood Company ................................................................... 453,600
-------------
1,050,300
-------------
Health 2.3%
Health Industry Services 0.3%
8,900 Rotech Medical Corp.* .............................................................. 171,325
-------------
Medical Supply & Specialty 2.0%
19,000 Bindley Western Industries, Inc. ................................................... 530,812
</TABLE>
The accompanying notes are an integral part of the financial statements
102
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,000 West Co., Inc. ..................................................................... 462,000
-------------
992,812
-------------
Financial 17.1%
Banks 9.3%
11,000 ALBANK Financial Corp. ............................................................. 464,750
10,200 Banknorth Group, Inc. .............................................................. 557,175
15,100 Chittenden Corp. ................................................................... 581,350
200 Colonial BancGroup, Inc. ........................................................... 5,750
4,100 Commerce Bancorp, Inc. ............................................................. 159,387
900 Community First Bankshares, Inc. ................................................... 43,650
8,000 FirstBank Puerto Rico .............................................................. 260,000
13,600 Heritage Financial Services, Inc. .................................................. 273,700
2,305 Provident Bankshares Corp. ......................................................... 131,385
4,500 RCSB Financial, Inc. ............................................................... 245,250
12,600 Riggs National Corp. ............................................................... 296,888
12,900 Susquehanna Bancshares, Inc. ....................................................... 396,675
6,300 US Bancorp, Inc. ................................................................... 406,350
16,900 UST Corporation .................................................................... 430,950
7,500 Vermont Financial Services Corp. ................................................... 405,000
-------------
4,658,260
-------------
Insurance 6.8%
800 Allied Group, Inc. ................................................................. 40,650
9,200 American Annuity Group, Inc. ....................................................... 197,800
14,700 American Heritage Life Investment Corp. ............................................ 588,000
600 First American Financial Co. ....................................................... 36,000
16,400 Guaranty National Corp. ............................................................ 556,575
12,600 Harleysville Group, Inc. ........................................................... 529,200
32,300 Hilb, Rogal & Hamilton Co. ......................................................... 593,513
3,100 Life Re Corp. ...................................................................... 163,525
2,300 MMI Companies, Inc. ................................................................ 60,663
7,200 Nymagic, Inc. ...................................................................... 187,200
9,400 Selective Insurance Group, Inc. .................................................... 484,100
-------------
3,437,226
-------------
Consumer Finance 0.3%
9,100 Aames Financial Corp. .............................................................. 147,306
-------------
Other Financial Companies 0.7%
30,300 Cash America International, Inc. ................................................... 340,875
-------------
Media 1.5%
Advertising
1,110 Grey Advertising, Inc. ............................................................. 381,840
14,700 True North Communications, Inc. .................................................... 364,744
-------------
746,584
-------------
Service Industries 7.3%
Environmental Services 1.7%
21,700 Dames & Moore, Inc. ................................................................ 284,812
8,300 Mine Safety Appliance Co. .......................................................... 581,000
-------------
865,812
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
103
<PAGE>
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Investment 2.4%
7,100 Interra Financial, Inc. ............................................................ 426,444
8,000 Jefferies Group, Inc. .............................................................. 584,000
23,400 Phoenix Duff & Phelps Corp. ........................................................ 181,350
-------------
1,191,794
-------------
Miscellaneous Commercial Services 1.6%
16,200 ABM Industries, Inc. ............................................................... 428,287
15,600 McGrath Rentcorp ................................................................... 356,850
-------------
785,137
-------------
Printing / Publishing 1.6%
9,200 Bowne & Co., Inc. .................................................................. 323,150
10,900 Merrill Corp. ...................................................................... 501,400
-------------
824,550
-------------
Durables 5.3%
Aerospace 1.6%
7,100 AAR Corp. .......................................................................... 236,962
31,400 Kaman Corp. "A" .................................................................... 576,975
-------------
813,937
-------------
Automobiles 3.1%
4,000 A.O. Smith Corp. ................................................................... 158,500
5,500 Coachmen Industries, Inc. .......................................................... 104,500
20,400 Excel Industries Inc. .............................................................. 406,725
10,300 Exide Corp. ........................................................................ 233,681
26,500 Intermet Corp. ..................................................................... 463,750
15,700 Simpson Industries, Inc. ........................................................... 181,531
-------------
1,548,687
-------------
Construction / Agricultural Equipment 0.6%
8,400 The Manitowoc Company, Inc. ........................................................ 299,775
-------------
Manufacturing 21.1%
Chemicals 1.8%
900 Mississippi Chemical Corp. ......................................................... 17,550
7,600 NCH Corp. .......................................................................... 539,600
13,200 Stepan Co. ......................................................................... 352,275
-------------
909,425
-------------
Containers & Paper 0.5%
2,000 Chesapeake Corp. ................................................................... 72,500
2,100 Clarcor, Inc. ...................................................................... 60,112
3,550 Mosinee Paper Corp. ................................................................ 120,256
-------------
252,868
-------------
Diversified Manufacturing 2.9%
23,500 Cascade Corp. ...................................................................... 464,125
10,200 Robbins & Myers, Inc. .............................................................. 392,700
9,000 Scotsman Industries, Inc. .......................................................... 231,750
4,400 Tredegar Industries, Inc. .......................................................... 309,100
3,100 Valmont Industries ................................................................. 66,069
-------------
1,463,744
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
104
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Electrical Products 0.8%
8,300 C&D Technologies, Inc. ............................................................. 380,762
-------------
Hand Tools 1.0%
13,300 L.S. Starrett Corp. ................................................................ 488,775
-------------
Industrial Specialty 6.6%
14,000 Albany International Corp. "A" ..................................................... 351,750
9,600 Apogee Enterprises, Inc. ........................................................... 235,200
5,500 Applied Power, Inc. "A" ............................................................ 346,156
20,300 Barnes Group, Inc. ................................................................. 574,744
3,500 Electro Scientific Industries, Inc.* ............................................... 213,500
9,200 FSI International, Inc.* ........................................................... 192,050
5,300 Flowserve Corp. .................................................................... 158,337
17,700 Lawson Products, Inc. .............................................................. 522,150
25,300 Spartech Corp. ..................................................................... 379,500
11,800 W.H. Brady Co. "A" ................................................................. 368,750
-------------
3,342,137
-------------
Machinery / Components / Controls 4.3%
22,600 Amcast Industrial Corp. ............................................................ 553,700
14,100 Columbus McKinnon Corp. ............................................................ 370,125
6,200 DT Industries, Inc. ................................................................ 204,600
15,700 Graco, Inc. ........................................................................ 561,275
12,200 Tennant Company .................................................................... 451,400
-------------
2,141,100
-------------
Office Equipment / Supplies 0.6%
13,300 Hunt Manufacturing Co. ............................................................. 304,238
-------------
Wholesale Distributors 2.6%
13,900 A.M. Castle & Co. .................................................................. 361,400
18,400 Applied Industrial Technology, Inc. ................................................ 633,650
10,250 Hughes Supply, Inc. ................................................................ 309,422
-------------
1,304,472
-------------
Technology 10.2%
Computer Software 0.7%
10,000 MTS Systems Corp. .................................................................. 365,000
-------------
Diverse Electronic Products 1.4%
5,500 Cohu, Inc. ......................................................................... 295,625
10,700 Cubic Corp. ........................................................................ 403,925
-------------
699,550
-------------
Edp Peripherals 1.7%
5,400 Black Box Corp.* ................................................................... 236,250
25,100 Gerber Scientific, Inc. ............................................................ 607,106
-------------
843,356
-------------
Electronic Components / Distributors 4.0%
5,500 CTS Corp. .......................................................................... 522,500
8,700 Hutchinson Technology, Inc.* ....................................................... 291,994
6,962 MicroAge Inc.* ..................................................................... 201,898
15,600 Park Electrochemical Corp. ......................................................... 452,400
</TABLE>
The accompanying notes are an integral part of the financial statements
105
<PAGE>
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,200 Technitrol, Inc. ................................................................... 565,338
-------------
2,034,130
-------------
Military Electronics 0.7%
10,500 Watkins-Johnson Co. ................................................................ 351,750
-------------
Precision Instruments 1.0%
15,900 Innovex, Inc. ...................................................................... 512,775
-------------
Semiconductors 0.7%
1,800 Burr-Brown Corp.* .................................................................. 60,075
16,900 Chips & Technologies, Inc.* ........................................................ 270,400
-------------
330,475
-------------
Energy 1.7%
Oil & Gas Production 1.2%
12,700 Lomak Petroleum, Inc. .............................................................. 245,269
19,700 Plains Resources, Inc.* ............................................................ 354,600
-------------
599,869
-------------
Oil Companies 0.3%
5,500 Holly Corp. ........................................................................ 143,000
-------------
Oilfield Services / Equipment 0.2%
5,600 Getty Realty Corp. ................................................................. 98,350
-------------
Metals & Minerals 5.3%
Steel & Metals
21,400 Brush Wellman, Inc. ................................................................ 549,712
10,400 Chaparral Steel Co. ................................................................ 159,250
13,200 Cleveland-Cliffs, Inc. ............................................................. 575,850
6,700 Commercial Metals Co. .............................................................. 213,981
14,400 Oregon Metallurgical Corp. ......................................................... 360,900
15,100 Quanex Corp. ....................................................................... 529,444
10,400 RMI Titanium Co.* .................................................................. 260,000
-------------
2,649,137
-------------
Construction 6.5%
Building Materials 4.5%
8,100 Ameron International Corp. ......................................................... 528,525
65,800 Fedders Corp. ...................................................................... 394,800
6,400 Florida Rock Industries, Inc. ...................................................... 380,800
11,000 Lone Star Industries, Inc. ......................................................... 594,000
4,400 Medusa Corp. ....................................................................... 209,550
3,300 Southdown, Inc. .................................................................... 180,263
-------------
2,287,938
-------------
Building Products 0.8%
11,000 Zurn Industries, Inc. .............................................................. 380,875
-------------
Homebuilding 0.2%
2,800 Skyline Corp. ...................................................................... 83,650
-------------
Miscellaneous 1.0%
22,400 Granite Construction, Inc. ......................................................... 518,000
-------------
Transportation 1.1%
Airlines 0.6%
9,600 Alaska Air Group Inc.* ............................................................. 315,600
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
106
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Trucking 0.5%
8,000 USFreightways Corp. ................................................................ 269,000
-------------
Utilities 5.5%
Electric Utilities 2.1%
10,400 Black Hills Corp. .................................................................. 304,850
21,100 Northwestern Public Service Co. .................................................... 389,031
19,700 Public Service Co. of New Mexico ................................................... 380,456
-------------
1,074,337
-------------
Natural Gas Distribution 3.0%
7,700 Eastern Enterprises ................................................................ 287,306
12,400 Energen Corp. ...................................................................... 440,975
21,500 Laclede Gas Co. .................................................................... 524,063
7,100 Northwest Natural Gas Co. .......................................................... 182,825
2,400 ONEOK Inc. ......................................................................... 78,300
-------------
1,513,469
-------------
Water Supply 0.4%
3,600 California Water Service Co. ....................................................... 177,975
-------------
Total Common Stocks (Cost $40,880,238) ............................................. 48,514,364
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $43,791,238) (a) ....................... 102.3 51,425,364
Other Assets and Liabilities, Net ....................................... (2.3) (1,153,891)
------ -------------
Net Assets .............................................................. 100.0 50,271,473
====== =============
</TABLE>
* Non-income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $43,791,238 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................ $ 7,693,178
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value .......................................... (59,052)
-------------
Net unrealized appreciation ......................... $ 7,634,126
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of
operations) through September 30, 1997, aggregated $41,389,500 and
$752,516, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
107
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) (c) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 11.1%
- -------------------------------------------------------------------------------------------------------------------------------
UNITED STATES
16,489,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02% to be
repurchased at $16,491,757 on 10/01/97, collateralized by a $11,868,000 U.S. Treasury
Bond 9.875%, 11/15/15 (Cost $16,489,000) ........................................ 16,489,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
BONDS 5.8%
- -------------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 2.0%
GBP 1,627,000 United Kingdom Treasury Bond, 8.5%, 7/16/07 ........................................ 2,995,714
-------------
UNITED STATES 3.8%
5,600,000 U.S. Treasury Bond, 6.375%, 8/15/27 ................................................ 5,575,472
-------------
Total Bonds (Cost $8,261,551) ...................................................... 8,571,186
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 0.0%
- -------------------------------------------------------------------------------------------------------------------------------
GHANA
13,000 Ashanti Capital Corp., 5.5%, 3/15/03 (Cost $13,000) ................................ 10,465
-------------
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK 0.3%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- -------------
KOREA
7,919 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (b)
(Cost $294,732) ................................................................. 324,463
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 85.0%
- -------------------------------------------------------------------------------------------------------------------------------
ARGENTINA 0.9%
34,800 YPF S.A. "D" (ADR) (Petroleum company) ............................................. 1,283,250
-------------
AUSTRALIA 2.3%
68,600 Broken Hill Proprietary Co. Ltd. (Petroleum, minerals and steel) ................... 800,235
493,058 Foster's Brewing Group Ltd. (Leading brewery) ...................................... 1,040,875
166,200 Woodside Petroleum Ltd. (Major oil and gas producer) ............................... 1,588,145
-------------
3,429,255
-------------
AUSTRIA 0.4%
14,100 Flughafen Wien AG (Operator of terminals and facilities at Vienna
International Airport) .......................................................... 582,950
-------------
BERMUDA 1.4%
30,520 EXEL Ltd. (ADR) (Provider of liability insurance) .................................. 1,817,848
3,450 Mid Ocean Limited (Property and casualty insurance company) ........................ 218,644
-------------
2,036,492
-------------
BRAZIL 3.1%
38,650 Aracruz Celulose S.A. (ADR) (Producer of eucalyptus kraft pulp) .................... 794,741
1,410,000 Companhia Cervejaria Brahma (pfd.) (Leading beer producer and distributor) ......... 1,087,536
55,200 Companhia Vale do Rio Doce (pfd.) (Diverse mining and industrial complex) .......... 1,345,297
</TABLE>
The accompanying notes are an integral part of the financial statements
108
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
25,800 Unibanco Uniao de Bancos Brasileiros SA (ADR) (Major bank) ......................... 944,925
42,140 Usinas Siderurgicas de Minas Gerais S/A (pfd.) (Non-coated flat products and
electrolyte galvanized products) ................................................ 460,422
-------------
4,632,921
-------------
CANADA 1.3%
16,200 Canadian National Railway Co. (Operator of one of Canada's two
principal railroads) ............................................................ 842,053
35,850 Canadian Pacific Ltd. (Ord.) (Transportation and natural resource conglomerate) .... 1,062,040
-------------
1,904,093
-------------
FRANCE 4.2%
17,830 AXA SA (Insurance group providing insurance, finance and real estate services) ..... 1,195,979
41,897 Assurances Generales de France (Health, life, fire, accident and special risk
insurance) ...................................................................... 1,659,357
29,607 Michelin "B" (Leading tire manufacturer) ........................................... 1,681,564
25,766 Schneider SA (Manufacturer of electronic components and automated
manufacturing systems) .......................................................... 1,626,252
-------------
6,163,152
-------------
GERMANY 16.8%
6,206 Allianz AG (Multi-line insurance company) .......................................... 1,497,272
40,107 BASF AG (Leading international chemical producer) .................................. 1,448,160
43,320 Bayer AG (Leading chemical producer) ............................................... 1,724,758
38,346 Bayerische Vereinsbank AG (Commercial bank) ........................................ 2,230,945
40,686 Commerzbank AG (Worldwide multi-service bank) ...................................... 1,466,764
17,300 Daimler-Benz AG (Automobile and truck manufacturer) ................................ 1,427,511
23,505 Deutsche Telekom AG (Telecommunication services) ................................... 454,948
20,566 Deutsche Telekom AG (ADR) .......................................................... 392,039
56,300 Hoechst AG (Chemical producer) ..................................................... 2,498,045
4,286 Mannesmann AG (Bearer) (Diversified construction and technology company) ........... 2,042,396
5,250 Munich Reinsurance AG (Insurance company) .......................................... 1,173,633
1,730 Munich Reinsurance AG (Registered) ................................................. 582,558
56,882 RWE AG (pfd.) (Producer and marketer of petroleum and chemical products) ........... 2,313,009
4,455 SAP AG (pfd.) (Computer software manufacturer) ..................................... 1,190,051
8,860 Schering AG (Pharmaceutical and chemical producer) ................................. 929,900
12,350 Siemens AG (Leading electrical engineering and electronics company) ................ 834,190
30,723 VEBA AG (Electric utility, distributor of oil and chemicals) ....................... 1,795,269
2,060 VIAG AG (Provider of electrical power and natural gas services, aluminum
products, chemicals, ceramics and glass) ........................................ 921,955
-------------
24,923,403
-------------
GHANA 0.4%
52,418 Ashanti Goldfields Co., Ltd. (ADS) (Leading gold producer) ......................... 576,598
-------------
HONG KONG 1.5%
136,000 Hutchison Whampoa, Ltd. (Container terminal and real estate company) ............... 1,335,746
351,000 Kerry Properties, Ltd. (Real estate company) ....................................... 830,098
-------------
2,165,844
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
109
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
JAPAN 8.7%
56,000 Bridgestone Corp. (Leading automobile tire manufacturer) ........................... 1,345,095
46,000 Canon Inc. (Leading producer of visual image and information equipment) ............ 1,344,929
144,000 Daiwa Securities Co., Ltd. (Brokerage and other financial services) ................ 882,594
6,000 Jafco Co. Ltd. (Venture capital company) ........................................... 263,387
68,000 Matsushita Electric Industrial Co., Ltd. (Leading manufacturer of consumer
electronic products) ............................................................ 1,227,813
95,000 Minebea Co., Ltd. (Manufacturer of bearings, electronic equipment,
machinery parts) ................................................................ 1,054,375
3,400 Nichiei Co., Ltd. (Finance company for small- and medium-sized firms) .............. 323,850
105,000 Nomura Securities Co., Ltd. (Financial advisor, securities broker and underwriter) . 1,365,387
10,300 SMC Corp. (Leading maker of pneumatic equipment) ................................... 981,074
2,700 Shohkoh Fund & Co., Ltd. (Finance company for small- and medium-sized firms) ....... 753,634
10,000 Sony Corp. (Consumer electronic products manufacturer) ............................. 944,217
128,000 Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) .......... 266,103
101,000 Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and copper
mining company) ................................................................. 540,407
99,000 The Nichido Fire & Marine Insurance Co., Ltd. (Property and casualty insurance
company) ........................................................................ 647,782
83,000 Tokio Marine & Fire Insurance Co., Ltd. (Property and casualty insurance
company) ........................................................................ 996,811
-------------
12,937,458
-------------
KOREA 0.3%
6,190 Samsung Display Devices Company (Leading manufacturer of CRT and
picture tubes) .................................................................. 299,691
131 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (b) ................. 12,663
7,970 Yukong, Ltd. (Korea's leading oil refiner) ......................................... 148,077
-------------
460,431
-------------
NETHERLANDS 2.7%
19,599 AEGON Insurance Group NV (Insurance company) ....................................... 1,569,811
32,107 ING Groep NV (Insurance and financial services) .................................... 1,474,589
11,800 Philips Electronics NV (Leading manufacturer of electrical equipment) .............. 998,503
-------------
4,042,903
-------------
NEW ZEALAND 0.4%
108,700 Telecom Corp. of New Zealand (Telecommunication services) .......................... 551,538
-------------
SOUTH AFRICA 1.4%
24,465 Anglo American Platinum Corp. Ltd. (ADR) (Leading platinum producer) ............... 425,079
82,460 Sasol Ltd. (Coal mining and processing, crude oil exploration and refining,
petrochemical production) ....................................................... 1,136,800
16,577 South African Breweries (Brewery) .................................................. 481,073
-------------
2,042,952
-------------
SWEDEN 3.4%
54,600 AGA AB "B" (Free) (Producer and distributor of industrial and medical gases) ....... 877,918
54,626 Astra AB "A" (Free) (Pharmaceutical company) ....................................... 1,007,926
58,965 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ............................. 1,717,465
33,252 Skandia Foersaekrings AB (Free) (Financial conglomerate) ........................... 1,485,658
-------------
5,088,967
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
110
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND 10.3%
1,132 ABB AG (Manufacturer of electrical equipment) ...................................... 1,667,064
10,877 Ciba Specialty Chemical (Registered)* (Manufacturer of chemical products for
plastics, coatings, fibers and fabrics) ......................................... 1,050,683
1,865 Clariant AG (Registered) (Manufacturer of color chemicals) ......................... 1,500,206
14,558 Credit Suisse Group (Registered} (Provider of bank services, management services
and life insurance) ............................................................. 1,966,756
1,605 Holderbank Financiere Glaris AG (Bearer) (Cement producer) ......................... 1,522,791
1,257 Nestle SA (Registered) (Food manufacturer) ......................................... 1,750,899
727 Novartis AG (Bearer) (Pharmaceutical company) ...................................... 1,119,615
702 Novartis AG (Registered) ........................................................... 1,076,287
886 Swiss Reinsurance (Registered) (Life, accident and health insurance company) ....... 1,328,543
5,154 Zurich Group (Registered) (Insurance) .............................................. 2,243,026
-------------
15,225,870
-------------
UNITED KINGDOM 9.5%
95,476 BOC Group PLC (Producer of industrial gases) ....................................... 1,707,682
228,933 Carlton Communications PLC (Television post production products and services) ...... 1,894,736
276,300 General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) .............................. 1,737,798
224,915 Lonrho PLC (Widely diversified industrial holding company) ......................... 418,942
164,400 National Grid Group PLC* (Electric transmission system in England and Wales) ....... 752,698
38,900 Norwich Union PLC* (Multi-line insurance company) .................................. 210,786
77,602 PowerGen PLC (Electric utility) .................................................... 956,137
110,454 Rio Tinto PLC (Mining and finance company) ......................................... 1,763,479
57,941 Reuters Holdings PLC (International news agency) ................................... 686,795
228,900 Shell Transport & Trading PLC (Part owner of Royal Dutch Shell Co.) ................ 1,674,082
105,820 SmithKline Beecham PLC (Manufacturer of ethical drugs and healthcare products) ..... 1,032,469
41,800 Unilever PLC (Manufacturer of consumer goods, food and personal care
products) ....................................................................... 1,220,811
-------------
14,056,415
-------------
UNITED STATES 16.0%
25,800 Advanced Micro Devices Inc.* (Manufacturer of semiconductors and
integrated circuits) ............................................................ 840,113
22,000 Autoliv Inc. (Manufacturer of automobile safety bags) .............................. 935,000
5,600 Biogen Inc.* (Biotechnology research and development) .............................. 181,650
26,900 Boeing Co. (Manufacturer of jet airplanes) ......................................... 1,464,369
10,200 Boston Scientific Corp.* (Developer and producer of medical devices) ............... 562,913
16,750 Charles Schwab Corp. (Discount brokerage services.) ................................ 598,813
11,000 Chiron Corp. (Developer of therapeutic and diagnostic products) .................... 248,875
46,700 Electronic Data Systems Corp. (Provider of information technology services) ........ 1,657,850
29,410 Enron Corp. (Major natural gas pipeline system) .................................... 1,132,285
23,300 First Data Corp. (Credit-card processing services) ................................. 875,206
15,200 Guidant Corp. (Developer and manufacturer of products used in minimally
invasive surgery) ............................................................... 851,200
23,500 International Business Machines Corp. (Principal manufacturer and servicer of
business and computing machines) ................................................ 2,489,531
18,110 MBIA Inc. (Insurer of municipal bonds) ............................................. 2,271,673
31,100 National Semiconductor Corp. (Manufacturer of integrated circuits and transistors).. 1,275,100
</TABLE>
The accompanying notes are an integral part of the financial statements
111
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,200 Newmont Mining Corp. (International gold exploration and mining company) ........... 638,113
22,200 Parametric Technology Corp.* (Mechanical design software producer) ................. 979,575
19,500 Praxair Inc. (Producer of industrial gases and specialized coatings) ............... 998,156
28,300 Sabre Group Holdings Inc.* (Travel reservation system provider) .................... 1,013,494
32,400 Stillwater Mining Co.* (Exploration and development of mines in Montana
producing platinum, palladium and associated metals) ............................ 690,525
21,500 Tele-Communications International, Inc. "A"* (Telecommunication and broadband
cable television services) 352,063
17,200 Toys "R" Us Inc.* (Discount toy supermarts) ........................................ 610,600
29,800 UNUM Corp. (Provider of disability, health and life insurance and group pension
products) ....................................................................... 1,359,625
43,800 US Airways Group, Inc.* (Major airline) ............................................ 1,812,225
-------------
23,838,954
-------------
Total Common Stocks (Cost $103,984,653) ............................................ 125,943,446
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $129,042,936) (a) ...................... 102.2 151,338,560
Other Assets and Liabilities, Net ....................................... (2.2) (3,309,187)
------ -------------
Net Assets .............................................................. 100.0 148,029,373
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $129,256,538 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................. $ 25,789,866
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (3,707,844)
-------------
Net unrealized appreciation .......................... $ 22,082,022
=============
(b) Securities valued in good faith by the Valuation Committee of the Board
of Trustees amounted to $337,126 (0.23% of net assets). Their values
have been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready
market for the securities existed, and the difference could be material.
The cost of these securities at September 30, 1997 was $301,565. These
securities may also have certain restrictions as to resale.
(c) Principal amount is stated U.S. Dollars, unless otherwise specificed.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997 aggregated
$69,664,433 and $31,753,087, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
Currency Abbreviations
GBP British Pound
The accompanying notes are an integral part of the financial statements
112
<PAGE>
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount ($) (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 6.9%
- -------------------------------------------------------------------------------------------------------------------------------
1,404,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/97 at 6.02% to be repurchased at $1,404,235 on
10/01/97, collateralized by a $1,446,000
U.S. Treasury Bond, 6.25%, 8/15/23 (Cost $1,404,000) ............................ 1,404,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 3.4%
- -------------------------------------------------------------------------------------------------------------------------------
HONG KONG 1.4%
250,000 Hysan Development Finance Co., Ltd., 6.75%, 6/01/00 ................................ 282,500
-------------
JAPAN 1.3%
250,000 MBL International Finance Bermuda, 3%, 11/30/02 .................................... 272,500
-------------
UNITED KINGDOM 0.7%
GBP 60,000 Royal & Sun Alliance Insurance Group PLC, 7.25%, 11/30/08 .......................... 146,353
-------------
Total Convertible Bonds (Cost $678,726) ............................................ 701,353
-------------
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK 2.2%
- -------------------------------------------------------------------------------------------------------------------------------
Shares
- -------------
AUSTRIA
11,070 Bank Austria AG (Commercial and corporate banking and financial services)
(Cost $362,988) ................................................................. 441,607
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 88.8%
- -------------------------------------------------------------------------------------------------------------------------------
AUSTRALIA 2.8%
22,342 Commonwealth Bank of Australia (Bank) .............................................. 276,184
135,122 Foster's Brewing Group, Ltd. (Leading brewery) ..................................... 285,251
-------------
561,435
-------------
CANADA 3.3%
9,500 BCE, Inc. (Telecommunication services) ............................................. 284,182
20,200 Moore Corp. Ltd. (Manufacturer of business communication products) ................. 381,408
-------------
665,590
-------------
FINLAND 3.9%
81,040 Merita Ltd. "B" (Financial services group) ......................................... 376,791
44,130 Metsa-Serla Oy "B" (Manufacturer of papers, corrugated and paper board, soft and
hardwood pulp) .................................................................. 406,190
-------------
782,981
-------------
FRANCE 10.2%
745 Bongrain SA (Manufacturer of cheese and other dairy products) ...................... 278,739
3,590 Dexia France (Municipal and local development financing) ........................... 340,032
5,076 Havas SA (Advertising, publishing and broadcasting conglomerate) ................... 344,502
7,830 Scor SA (Property, casualty and life reinsurance company) .......................... 338,220
2,615 Societe Nationale Elf Aquitaine (Petroleum company) ................................ 349,049
11,212 Sommer-Allibert (Manufacturer of plastic products for automotive industry) ......... 425,162
-------------
2,075,704
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
113
<PAGE>
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
GERMANY 10.6%
12,098 BHF-Bank AG (Universal banking services) ........................................... 392,323
6,520 Bayer AG (Leading chemical producer) ............................................... 259,590
200 Dyckerhoff AG (Producer of cement, ready-mixed concrete and
finishing products) ............................................................. 71,309
852 Dyckerhoff AG (pfd.) ............................................................... 304,260
6,220 Hochtief AG (Construction and civil engineering services) .......................... 284,079
5,715 Moebel Walther AG (pfd) (Furniture retailer) ....................................... 283,009
6,500 RWE AG (Producer and marketer of petroleum and chemical products) .................. 314,709
1,056 Thyssen AG (Manufacturer of capital goods and steel products) ...................... 246,228
-------------
2,155,507
-------------
IRELAND 2.3%
52,536 Allied Irish Bank PLC (Bank) ....................................................... 462,874
-------------
ITALY 4.3%
54,000 Banca Commerciale Italiana SpA (Commercial bank) ................................... 155,128
11,400 La Rinascente SpA (Department store chain) ......................................... 87,419
89,000 La Rinascente SpA di Risparmio ..................................................... 323,716
78,000 Telecom Italia SpA (Telecommunications, electronics, network construction) ......... 303,358
-------------
869,621
-------------
JAPAN 9.3%
83 East Japan Railway Co. (Railroad operator) ......................................... 389,100
30,000 Matsushita Electric Works, Inc. (Leading maker of building materials and
lighting equipment) ............................................................. 313,082
71,000 Mitsubishi Rayon Co., Ltd. (Producer of acrylic and polyester fibers) .............. 228,757
4,400 Nintendo Co., Ltd. (Game equipment manufacturer) ................................... 411,811
27,000 Nippon Meat Packers, Inc. (Leading meat processor) ................................. 357,808
91,000 Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) .......... 189,183
-------------
1,889,741
-------------
MALAYSIA 0.8%
102,000 Guinness Anchor (Brewery) .......................................................... 157,201
-------------
NETHERLANDS 7.5%
2,900 DSM NV (Plastics producer) ......................................................... 283,282
9,530 KLM Royal Dutch Air Lines NV (World-wide full service airline) ..................... 332,815
9,510 Koninklijke Nedlloyd Groep NV (Container shipping and transportation) .............. 318,736
7,100 Koninklijke PTT Nederland (Telecommunication services) ............................. 278,991
5,480 Royal Dutch Petroleum Co. (Owner of 6% of Royal Dutch/Shell Group) ................. 306,754
-------------
1,520,578
-------------
NEW ZEALAND 2.2%
87,800 Air New Zealand Ltd. "B" (Scheduled commercial airline) ............................ 226,121
43,300 Telecom Corp. of New Zealand (Telecommunication services) .......................... 219,701
-------------
445,822
-------------
SPAIN 6.0%
17,200 Autopistas del Mare Nostrum SA (Builder and operator of toll motorways) ............ 278,850
13,100 Banco Bilbao Vizcaya SA (Commercial bank) .......................................... 403,259
8,900 Compania Telefonica Nacional de Espana S.A. (Telecommunication services) ........... 279,634
20,000 Iberdrola SA (Electric utility) .................................................... 245,863
-------------
1,207,606
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
114
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SWEDEN 6.9%
10,050 AssiDoman AB (Forestry group) ...................................................... 343,058
9,740 OM Gruppen AB (Free) (Operator of financial exchanges and
clearing organizations) ......................................................... 331,834
12,540 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ............................. 365,251
15,250 Svedala Industri AB (Manufacturer of machinery for construction, mineral processing
and materials handling) ......................................................... 355,750
-------------
1,395,893
-------------
SWITZERLAND 6.7%
255 Clariant AG (Registered) (Manufacturer of color chemicals) ......................... 205,122
236 Georg Fischer AG (Bearer) (Manufacturer of automotive products and piping
systems) ........................................................................ 363,451
7,413 Sika Finanz AG (Manufacturer of water management products and systems) ............. 394,986
412 Winterthur Schweizerische Versicherungs-Gesellschaft "B"(Multi-line insurance
company) ........................................................................... 402,511
-------------
1,366,070
-------------
UNITED KINGDOM 12.0%
94,780 Albright & Wilson PLC (Manufacturer of phosphates,susrfactants and
specialty chemicals) ............................................................ 254,498
57,010 Courtaulds Textiles PLC (Producer of clothing, fabrics and home furnishings) ....... 329,145
74,610 Dorling Kindersley Holdings PLC (Book publisher) ................................... 347,735
31,229 Energy Group PLC (Electricity generation and distribution) ......................... 327,863
49,480 General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) .............................. 311,206
32,100 Harrisons & Crosfield PLC (Manufacturer of chemicals, timber products, pet food,
flour, breakfast cereals and other consumer products) ........................... 63,674
581 Railtrack Group PLC (Operator of most of British railway infrastructure) ........... 8,412
31,300 Rank Group PLC (Diversified leisure services: hotels, amusement machines,
restaurants, film and television) ............................................... 183,738
23,629 Royal & Sun Alliance Insurance Group PLC (Multi-line insurance
holding company) ................................................................ 222,777
68,250 Tomkins PLC (Manufacturer of fluid controls, industrial products, garden
and leisure products) ........................................................... 383,120
-------------
2,432,168
-------------
Total Common Stocks (Cost $16,657,754) ............................................. 17,988,791
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PURCHASED OPTIONS 0.4%
- -------------------------------------------------------------------------------------------------------------------------------
Principal
Amount
- -------------
<S> <C> <C>
FRF 1,719,000 Put on French Francs, strike price 5.73 FRF, expires 12/18/97 ...................... 10,366
FRF 6,515,000 Put on French Francs, strike price 6.07 FRF, expires 12/16/97 ...................... 8,144
DEM 510,000 Put on Deutsche Marks, strike price 1.7 DEM, expires 12/18/97 ...................... 11,189
DEM 1,930,000 Put on Deutsche Marks, strike price 1.81 DEM, expires 12/16/97 ..................... 7,720
JPY 92,800,000 Put on Japanese Yen, strike price 116 JPY, expires 11/20/97 ........................ 29,527
GBP 651,466 Put on British Pounds, strike price .6515 GBP, expires 2/11/98 ..................... 7,622
GBP 194,805 Put on British Pounds, strike price .6494 GBP, expires 12/18/97 .................... 1,116
-------------
Total Purchased Options (Cost $69,986) ............................................. 75,684
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
115
<PAGE>
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $19,173,454) (a) ....................... 101.7 20,611,435
Other Assets and Liabilities, Net ....................................... (1.7) (352,373)
------ -------------
Net Assets .............................................................. 100.0 20,259,062
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $19,189,089 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................. $ 1,772,122
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (349,776)
-------------
Net unrealized appreciation .......................... $ 1,422,346
=============
(b) Principal amount is stated U.S. Dollars, unless otherwise specificed.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of
operations) through September 30, 1997, aggregated $20,963,300 and
$3,455,984, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
Currency Abbreviations
FRF French Francs
DEM Deutsche Marks
GBP British Pound
JPY Japanese Yen
The accompanying notes are an integral part of the financial statements
116
<PAGE>
AARP DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Money Market 13.6%
- -------------------------------------------------------------------------------------------------------------------------------
5,904,485 AARP High Quality Money Fund (Cost $5,904,485) ..................................... 5,904,485
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income 60.9%
- -------------------------------------------------------------------------------------------------------------------------------
858,612 AARP Bond Fund for Income .......................................................... 13,050,907
883,992 AARP GNMA and U.S. Treasury Fund ................................................... 13,401,317
-------------
Total Fixed Income (Cost $26,016,430) .............................................. 26,452,224
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Equity 25.6%
- -------------------------------------------------------------------------------------------------------------------------------
205,649 AARP Global Growth Fund ............................................................ 3,956,680
85,076 AARP Growth and Income Fund ........................................................ 4,953,126
122,492 AARP U.S. Stock Index Fund ......................................................... 2,203,628
-------------
Total Equity (Cost $9,714,654) ..................................................... 11,113,434
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $41,635,569) (a) ....................... 100.1 43,470,143
Other Assets and Liabilities, Net ....................................... (0.1) (23,725)
------ -------------
Net Assets .............................................................. 100.0 43,446,418
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $41,635,569 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost .............................................. $1,834,574
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ --
-------------
Net unrealized appreciation ........................... $1,834,574
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the period February 1, 1997 (commencement of operations)
to September 30, 1997, aggregated $36,584,675 and $897,867, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
117
<PAGE>
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Money Market 1.0%
- -------------------------------------------------------------------------------------------------------------------------------
603,912 AARP High Quality Money Fund (Cost $603,912) ....................................... 603,912
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income 35.5%
- -------------------------------------------------------------------------------------------------------------------------------
722,677 AARP Bond Fund for Income .......................................................... 10,984,684
723,016 AARP GNMA and U.S. Treasury Fund ................................................... 10,960,917
-------------
Total Fixed Income (Cost $21,691,978) .............................................. 21,945,601
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Equity 63.6%
- -------------------------------------------------------------------------------------------------------------------------------
42,447 AARP Capital Growth Fund ........................................................... 2,455,106
322,951 AARP Global Growth Fund ............................................................ 6,213,584
257,671 AARP Growth and Income Fund ........................................................ 15,001,622
254,687 AARP International Stock Fund ...................................................... 4,421,367
221,737 AARP Small Company Stock Fund ...................................................... 4,441,387
375,938 AARP U.S. Stock Index Fund ......................................................... 6,763,123
-------------
Total Equity (Cost $35,603,426) .................................................... 39,296,189
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $57,899,316) (a) ....................... 100.1 61,845,702
Other Assets and Liabilities, Net ....................................... (0.1) (48,884)
------ -------------
Net Assets .............................................................. 100.0 61,796,818
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $57,900,360 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................... $3,945,342
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................. --
-------------
Net unrealized appreciation ............................ $3,945,342
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the period beginning February 1, 1997 (commencement of
operations) to September 30, 1997, aggregated $58,780,646 and $1,567,375,
respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
118
<PAGE>
F I N A N C I A L S T A T E M E N T S
Financial Statements are records of the financial status
of an organization. They are prepared by management and
must conform to Generally Accepted Accounting Principles
(GAAP), which are standards established by the Financial
Accounting Standards Board (FASB), the Securities and
Exchange Commission (SEC), and various committees of the
American Institute of Certified Public Accountants
(AICPA).
The AARP Investment Program's Financial Statements
consist of three different financial statements for each
AARP Mutual Fund: Statements of Assets and Liabilities,
Statements of Operations, and Statements of Changes in
Net Assets. The Notes to Financial Statements explain
the significant accounting policies that financial
statements reflect.
119
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
The Statements of Assets and Liabilities show the AARP
Investment Program's assets.
Assets include:
o Investments at value: The market value of the AARP
Mutual Fund's holdings on the last day of the
fiscal year;
o Cash: The actual amount of the uninvested assets
held in each AARP Mutual Fund;
o Receivables: Money owed to an AARP Mutual Fund.
Sources of receivables include:
o Investments sold: For which the cash will be
paid to the Fund on a later settlement date;
o Fund shares sold: Proceeds that the Fund will
receive from shares sold to shareholders;
o Dividends and interest earned on the AARP
Mutual Funds securities but not yet paid to
the Fund;
o Expense reimbursements due from the Fund
manager.
o Daily variation margin on open futures contract:
Payments due to/from the broker that reflect the
change in value from the previous day of any
futures contract held in an AARP Mutual Fund's
portfolio (this figure could show up as an asset or
a liability).
Liabilities include amounts owed for:
o Investments purchased for the AARP Mutual Fund's
portfolio but that are not yet paid for;
o Fund shares redeemed but not yet paid to
shareholders;
o Dividends declared but not yet paid to
shareholders;
o Management fees and shareholder servicing fees
incurred but unpaid at fiscal year end;
o Administrative expenses incurred but unpaid at
fiscal year end;
o Other accrued expenses incurred but unpaid at
fiscal year end.
The section Net Assets Consist Of includes the
following:
o Undistributed (overdistributed) net investment
income: An AARP Mutual Fund's accumulated
investment income less expenses and less
distributions paid from net investment income;
120
<PAGE>
o Unrealized appreciation (or depreciation) on
investments: Represents the current value of
investments held less their cost;
o Accumulated net realized capital gain (loss): An
AARP Mutual Fund's accumulated realized gains and
losses from sales of investments, minus
distributions paid from net realized gains;
o Paid-in capital: Represents the dollars invested by
shareholders, minus the amount of money redeemed
since each fund began operations.
The Statement of Assets and Liabilities also shows the
net asset value (NAV) for each AARP Mutual Fund. Net
asset value is calculated by taking a fund's total
assets (securities, cash, etc.), deducting liabilities,
and then dividing this amount by the total number of
shares outstanding.
STATEMENTS OF OPERATIONS
The Statements of Operations includes investment income
from interest and dividends and the various expenses
associated with the operation of the AARP Mutual Funds
for the period ended September 30, 1997. The Statements
of Operations also shows net gains and losses for
various categories of investments, both realized and
unrealized gains and losses for securities sold and in
each AARP Mutual Fund's portfolio. The bottom line tells
you whether each AARP Mutual Fund's net assets have
increased or decreased as a result of fund operations.
STATEMENTS OF CHANGES
The Statements of Changes compares increases and
decreases from each AARP Mutual Fund's operations and
shareholder transactions with those of the previous
year. Most of the terms used in the Statements of
Changes are identical to those that are used in the
other two statements. The categories in the sections
Fund Shares Transaction include:
o Proceeds from the sale of shares: The amount
received by selling new shares to shareholders;
o Net asset value of shares issued due to reinvested
dividends and distributions;
o Cost of shares redeemed (or sold): The amount paid
to shareholders from the exchange or redemption of
shares.
121
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP High AARP High AARP GNMA AARP High
Quality Quality Tax Free and U.S. Quality
September 30, 1997 Money Fund Money Fund Treasury Fund Bond Fund
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
Investments, at value (for cost, see accom-
panying lists of investment portfolios) .. $ 469,756,371 $ 103,670,313 $ 4,748,261,020 $ 448,865,382
Cash ........................................ 244 123,586 651 479
Receivable on investments sold .............. -- -- -- 256,069
Investment income receivable ................ 3,373,222 562,596 36,836,345 6,866,968
Receivable on Fund shares sold .............. 899,351 109,045 713,650 53,672
Daily variation margin on futures
contracts ................................ -- -- -- --
Reimbursement from Fund Manager ............. -- -- -- --
Deferred organization expenses .............. -- -- -- --
Other assets ................................ 10,193 2,858 120,992 39,230
------------- -------------- --------------- --------------
Total assets ................................ 474,039,381 104,468,398 4,785,932,658 456,081,800
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------------------------------------------------------------
Investments purchased ....................... -- 1,509,060 187,140,625 --
Fund shares redeemed ........................ 2,239,130 214,719 1,696,937 191,278
Dividends payable ........................... 144,537 48,414 10,425,046 669,462
Unrealized depreciation on forward
currency exchange contracts .............. -- -- -- --
Management fee payable ...................... 149,303 32,489 1,517,280 176,377
Other payables and accrued expenses ......... 195,544 49,823 1,172,310 175,165
------------- -------------- --------------- --------------
Total liabilities ........................... 2,728,514 1,854,505 201,952,198 1,212,282
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................... $ 471,310,867 $ 102,613,893 $ 4,583,980,460 $ 454,869,518
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed)
net investment income .................... $ -- $ -- $ -- $ 176,290
Net unrealized appreciation (depreciation) on:
Investments .............................. (120,463) -- 83,544,632 6,424,227
Futures contracts ........................ -- -- -- --
Written options .......................... -- -- -- --
Foreign currency related transactions .... -- -- -- --
Accumulated net realized capital gain (loss) (136,136) (836,922) (323,254,674) (10,524,044)
Paid-in capital ............................. 471,567,466 103,450,815 4,823,690,502 458,793,045
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................... $ 471,310,867 $ 102,613,893 $ 4,583,980,460 $ 454,869,518
- -----------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding* .. 471,432,488 102,619,379 302,304,535 28,196,489
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and
redemption price per share ............... $1.00 $1.00 $15.16 $16.13
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unlimited number of shares authorized, $.01 par value, except the AARP
High Quality Tax Free Money Fund, which has a $.001 par value.
The accompanying notes are an integral part of the financial statements
122
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP Insured AARP Bond AARP Balanced AARP Growth AARP U.S.
Tax Free General Fund for Stock and Bond and Income Stock Index
Bond Fund Income Fund Fund Fund
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
$ 1,683,454,483 $ 57,495,943 $ 634,477,699 $ 6,573,981,871 $ 36,649,254
218,560 1,429 7,264 1,690 122
12,980,844 25,607 1,418,573 27,239,065 1,291,793
20,297,706 575,279 3,527,445 18,166,923 57,781
280,081 244,005 593,571 2,741,932 68,509
324,844 -- -- -- 1,271
-- 111,787 -- -- 86,150
-- 12,137 11,890 -- 14,743
31,162 -- 6,720 74,337 --
---------------- -------------- -------------- ---------------- -------------
1,717,587,680 58,466,187 640,043,162 6,622,205,818 38,169,623
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
1,424,850 -- 858,877 10,271,423 --
484,021 10,676 312,782 1,779,871 7,145
2,722,669 76,713 -- -- --
-- -- -- -- --
664,141 -- 257,599 2,495,173 --
283,831 54,652 257,647 1,646,454 77,405
---------------- -------------- -------------- ---------------- -------------
5,579,512 142,041 1,686,905 16,192,921 84,550
- --------------------------------------------------------------------------------------------------------------------------
$ 1,712,008,168 $ 58,324,146 $ 638,356,257 $ 6,606,012,897 $ 38,085,073
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $ 225,657 $ 3,321,388 $ 6,274
141,004,771 855,121 121,203,720 2,130,532,014 3,736,328
(2,274,896) -- -- -- 9,339
-- -- -- -- --
-- -- 131 12,921 --
(23,167,336) 39,320 25,974,502 517,023,954 208,407
1,596,445,629 57,429,705 490,952,247 3,955,122,620 34,124,725
- --------------------------------------------------------------------------------------------------------------------------
$ 1,712,008,168 $ 58,324,146 $ 638,356,257 $ 6,606,012,897 $ 38,085,073
- --------------------------------------------------------------------------------------------------------------------------
92,944,577 3,836,332 29,829,626 113,474,683 2,117,187
- --------------------------------------------------------------------------------------------------------------------------
$18.42 $15.20 $21.40 $58.22 $17.99
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
123
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
AARP Capital AARP Small
Growth Company
September 30, 1997 Fund Stock Fund
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investments, at value (for cost, see accompanying
lists of investment portfolios) .............. $1,228,203,456 $51,425,364
Cash ............................................ 363 42,863
Receivable on investments sold .................. -- --
Investment income receivable .................... 1,137,338 39,250
Receivable on Fund shares sold .................. 234,479 581,717
Daily variation margin on futures
contracts .................................... -- --
Reimbursement from Fund Manager ................. -- --
Deferred organization expenses .................. -- 11,291
Other assets .................................... 13,675 --
-------------- -----------
Total assets .................................... 1,229,589,311 52,100,485
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Investments purchased ........................... -- 1,648,527
Fund shares redeemed ............................ 255,633 14,414
Dividends payable ............................... -- --
Unrealized depreciation on forward currency
exchange contracts ........................... -- --
Management fee payable .......................... 600,966 --
Other payables and accrued expenses ............. 352,758 166,071
-------------- -----------
Total liabilities ............................... 1,209,357 1,829,012
- --------------------------------------------------------------------------------
Net assets at value ............................. $1,228,379,954 $50,271,473
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Undistributed (overdistributed)
net investment income ........................ $ 6,420,037 $ 71,236
Net unrealized appreciation (depreciation) on:
Investments .................................. 453,509,647 7,634,126
Futures contracts ............................ -- --
Written options .............................. -- --
Foreign currency related transactions ........ -- --
Accumulated net realized capital gain (loss) .... 90,878,235 243,255
Paid-in capital ................................. 677,572,035 42,322,856
- --------------------------------------------------------------------------------
Net assets at value ............................. $1,228,379,954 $50,271,473
- --------------------------------------------------------------------------------
Shares of beneficial interest outstanding* ...... 21,237,515 2,510,889
- --------------------------------------------------------------------------------
Net asset value, offering and redemption
price per share .............................. $57.84 $20.02
- --------------------------------------------------------------------------------
* Unlimited number of shares authorized, $.01 par value, except the AARP
High Quality Tax Free Money Fund, which has a $.001 par value.
The accompanying notes are an integral part of the financial statements
124
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AARP Global AARP AARP Diversified AARP Diversified
Growth International Income Growth
Fund Stock Fund Portfolio Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 151,338,560 $ 20,611,435 $43,470,143 $61,845,702
851 101,747 -- --
192,871 -- 143,860 209,786
395,359 70,659 163,695 115,643
103,204 34,586 41,640 42,023
-- -- -- --
-- 21,309 -- --
9,150 11,291 -- --
1,366 -- -- --
------------- ------------ ----------- -----------
152,041,361 20,851,027 43,819,338 62,213,154
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,511,603 476,638 307,431 325,338
5,759 35,068 23,188 90,998
-- -- 42,301
248,684 -- -- --
81,713 -- -- --
164,229 80,259 -- --
------------- ------------ ----------- -----------
4,011,988 591,965 372,920 416,336
- --------------------------------------------------------------------------------
$ 148,029,373 $ 20,259,062 $43,446,418 $61,796,818
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 1,144,886 $ 155,031 $ 10,717 $ 645,438
22,295,624 1,437,981 1,834,574 3,946,386
-- -- -- --
-- -- -- --
(263,417) (650) -- --
2,678,448 192,102 44,276 82,133
122,173,832 18,474,598 41,556,851 57,122,861
- --------------------------------------------------------------------------------
$ 148,029,373 $ 20,259,062 $43,446,418 $61,796,818
- --------------------------------------------------------------------------------
7,693,438 1,166,775 2,721,909 3,551,018
- --------------------------------------------------------------------------------
$19.24 $17.36 $15.96 $17.40
- --------------------------------------------------------------------------------
<PAGE>
The accompanying notes are an integral part of the financial statements
125
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP High AARP High AARP GNMA AARP High
Quality Quality Tax Free and U.S. Quality
Year Ended September 30, 1997 Money Fund Money Fund Treasury Fund Bond Fund
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------------------
Income:
Interest ............................................. $25,123,665 $ 3,832,142 $ 336,987,461 $ 32,421,813
Dividends ............................................ -- -- -- --
----------- ------------ ------------- ------------
25,123,665 3,832,142 336,987,461 32,421,813
Less foreign taxes withheld .......................... -- -- -- --
----------- ------------ ------------- ------------
25,123,665 3,832,142 336,987,461 32,421,813
- ------------------------------------------------------------------------------------------------------------------------
Expenses:
Management fee ....................................... 1,760,550 410,859 19,228,620 2,287,683
Services to shareholders ............................. 1,901,981 303,908 8,799,290 1,710,593
Trustees' fees and expenses .......................... 26,370 26,792 27,352 27,329
Shareholder communications ........................... 210,593 47,166 1,206,689 230,319
Legal ................................................ 6,018 5,608 6,468 4,737
Auditing ............................................. 27,600 27,300 67,550 50,450
Custodian and accounting fees ........................ 90,351 49,951 926,047 117,428
Registration expenses ................................ 89,506 20,781 48,002 22,583
Amortization of organization expenses ................ -- -- -- --
Other ................................................ 19,775 12,699 94,621 12,545
----------- ------------ ------------- ------------
Total expenses before reductions ........................ 4,132,744 905,064 30,404,639 4,463,667
Expense reductions ...................................... -- -- -- --
----------- ------------ ------------- ------------
Expenses, net ........................................... 4,132,744 905,064 30,404,639 4,463,667
- ------------------------------------------------------------------------------------------------------------------------
Net investment income ................................... 20,990,921 2,927,078 306,582,822 27,958,146
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ........................................ -- -- (7,559,113) (1,765,263)
Futures contracts .................................. -- -- -- 87,958
Written options .................................... -- -- -- --
Foreign currency related transactions .............. -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ........................................ 14,657 -- 85,972,174 10,994,171
Futures contracts .................................. -- -- -- --
Written options .................................... -- -- -- --
Foreign currency related transactions .............. -- -- -- --
----------- ------------ ------------- ------------
Net gain (loss) on investments .......................... 14,657 -- 78,413,061 9,316,866
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............................ $21,005,578 $ 2,927,078 $ 384,995,883 $ 37,275,012
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) These Funds commenced operations on February 1, 1997.
The accompanying notes are an integral part of the financial statements
126
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AARP Insured AARP Bond AARP Balanced AARP Growth AARP U.S.
Tax Free General Fund for Stock and Bond and Income Stock Index
Bond Fund Income (a) Fund Fund Fund (a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 95,025,384 $ 1,266,014 $ 14,345,542 $ 13,747,932 $ 42,549
-- -- 9,426,256 151,415,232 293,963
- ------------- ----------- ------------- --------------- -----------
95,025,384 1,266,014 23,771,798 165,163,164 336,512
-- -- (144,958) (2,846,162) (2,256)
- ------------- ----------- ------------- --------------- -----------
95,025,384 1,266,014 23,626,840 162,317,002 334,256
- --------------------------------------------------------------------------------
8,224,295 97,012 2,455,813 25,101,044 38,841
2,183,399 62,868 1,686,291 9,412,190 88,085
26,678 16,790 26,346 26,366 16,790
361,629 4,299 204,092 1,102,590 3,232
6,256 5,051 5,124 5,842 5,805
60,000 1,250 35,265 49,000 850
365,524 36,507 159,277 1,096,126 140,260
42,435 48,110 81,464 487,327 29,371
-- 1,709 8,895 -- 2,105
36,514 1,109 10,277 81,869 773
- ------------- ----------- ------------- --------------- -----------
11,306,730 274,705 4,672,844 37,362,354 326,112
-- (274,705) -- -- (258,156)
- ------------- ----------- ------------- --------------- -----------
11,306,730 -- 4,672,844 37,362,354 67,956
- --------------------------------------------------------------------------------
83,718,654 1,266,014 18,953,996 124,954,648 266,300
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,742,633 32,537 27,061,995 533,200,232 96,857
(7,405,850) -- -- -- 111,552
-- -- -- 19,199 --
-- -- 3,212 (401,887) --
62,123,142 855,121 79,619,157 1,168,998,909 3,736,328
(382,821) -- -- -- 9,339
-- -- -- 801 --
-- -- (32) 23,307 --
- ------------- ----------- ------------- --------------- -----------
58,077,104 887,658 106,684,332 1,701,840,561 3,954,076
- --------------------------------------------------------------------------------
$ 141,795,758 $ 2,153,672 $ 125,638,328 $ 1,826,795,209 $ 4,220,376
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
127
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP Capital AARP Small
Growth Company
Year Ended September 30, 1997 Fund Stock Fund(a)
<S> <C> <C>
- ----------------------------------------------------------------------------------------
INVESTMENT INCOME
- ----------------------------------------------------------------------------------------
Income:
Interest ............................................. $ 1,668,235 $ 65,563
Dividends ............................................ 14,708,887 229,959
Income distributions from Underlying Funds ........... -- --
------------- -----------
16,377,122 295,522
Less foreign taxes withheld .......................... (233,281) --
------------- -----------
16,143,841 295,522
- ----------------------------------------------------------------------------------------
Expenses:
Management fee ....................................... 6,053,108 111,376
Services to shareholders ............................. 2,380,402 140,358
Trustees' fees and expenses .......................... 26,349 18,680
Shareholder communications ........................... 316,503 6,111
Legal ................................................ 4,220 5,082
Auditing ............................................. 46,700 850
Custodian and accounting fees ........................ 183,513 66,854
Registration expenses ................................ 97,064 32,127
Amortization of organization expenses ................ -- 1,709
Other ................................................ 19,841 1,017
------------- -----------
Total expenses before reductions ........................ 9,127,700 384,164
Expense reductions ...................................... -- (143,398)
------------- -----------
Expenses, net ........................................... 9,127,700 240,766
- ----------------------------------------------------------------------------------------
Net investment income ................................... 7,016,141 54,756
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ........................................ 100,378,671 243,254
Futures contracts .................................. -- --
Written options .................................... -- --
Foreign currency related transactions .............. 603 --
Net unrealized appreciation (depreciation) on:
Investments ........................................ 279,281,659 7,634,126
Futures contracts .................................. -- --
Written options .................................... -- --
Foreign currency related transactions .............. (74) --
------------- -----------
Net gain (loss) on investments .......................... 379,660,859 7,877,380
- ----------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... $ 386,677,000 $ 7,932,136
- ----------------------------------------------------------------------------------------
</TABLE>
(a) These Funds commenced operations on February 1, 1997.
The accompanying notes are an integral part of the financial statements
128
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AARP Global AARP AARP Diversified AARP Diversified
Growth International Income Growth
Fund Stock Fund (a) Portfolio (a) Portfolio (a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 736,082 $ 54,626 $ -- $ --
1,997,850 241,257 -- --
-- -- 880,498 645,438
------------- ------------ ----------- -----------
2,733,932 295,883 880,498 645,438
(177,801) (23,212) -- --
------------- ------------ ----------- -----------
2,556,131 272,671 880,498 645,438
- --------------------------------------------------------------------------------
932,182 59,143 -- --
711,119 69,681 -- --
26,344 16,790 -- --
74,352 5,674 -- --
5,845 5,382 -- --
29,700 2,250 -- --
191,931 99,557 -- --
43,416 22,796 -- --
2,571 1,709 -- --
3,826 1,676 -- --
------------- ------------ ----------- -----------
2,021,286 284,658 -- --
(74,953) (168,204) -- --
------------- ------------ ----------- -----------
1,946,333 116,454 -- --
- --------------------------------------------------------------------------------
609,798 156,217 880,498 645,438
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,609,572 176,596 44,276 82,133
-- -- -- --
-- -- -- --
672,452 (1,496) -- --
21,313,398 1,437,981 1,834,574 3,946,386
-- -- -- --
-- -- -- --
(250,944) (650) -- --
------------- ------------ ----------- -----------
24,344,478 1,612,431 1,878,850 4,028,519
- --------------------------------------------------------------------------------
$ 24,954,276 $ 1,768,648 $ 2,759,348 $ 4,673,957
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
129
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP High AARP High
Quality Quality Tax Free
Money Fund Money Fund
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------------------------
Years Ended Years Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 20,990,921 $ 17,543,476 $ 2,927,078 $ 3,191,255
Net realized gain (loss) from:
Investments ................................ -- 2,595 -- 1,553
Futures contracts .......................... -- -- -- --
Written options ............................ -- -- -- --
Foreign currency related transactions ...... -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ................................ 14,657 355,595 -- --
Futures contracts .......................... -- -- -- --
Written options ............................ -- -- -- --
Foreign currency related transactions ........ -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations ............................. 21,005,578 17,901,666 2,927,078 3,192,808
------------- ------------- ------------- -------------
Distributions to shareholders:
Net investment income ........................ (20,990,921) (17,543,476) (2,927,078) (3,191,255)
Net realized gains ............................. -- -- -- --
------------- ------------- ------------- -------------
Total distributions ............................ (20,990,921) (17,543,476) (2,927,078) (3,191,255)
------------- ------------- ------------- -------------
Fund share transactions:
Proceeds from sale of shares ................. 586,180,766 370,605,211 28,579,750 30,976,787
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 18,980,197 15,692,224 2,345,700 2,545,162
Cost of shares redeemed ........................ (545,990,946) (358,425,484) (39,576,285) (42,004,745)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from Fund
share transactions .......................... 59,170,017 27,871,951 (8,650,835) (8,482,796)
------------- ------------- ------------- -------------
Increase (decrease) in net assets .............. 59,184,674 28,230,141 (8,650,835) (8,481,243)
Net assets at beginning of period .............. 412,126,193 383,896,052 111,264,728 119,745,971
- -----------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 471,310,867 $ 412,126,193 $ 102,613,893 $ 111,264,728
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- -----------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 412,261,312 384,389,361 111,270,214 119,753,010
------------- ------------- ------------- -------------
Shares sold .................................. 586,181,925 370,605,211 28,579,750 30,976,787
Shares issued to shareholders in
reinvestment of distributions .............. 18,980,197 15,692,224 2,345,700 2,545,162
Shares redeemed .............................. (545,990,946) (358,425,484) (39,576,285) (42,004,745)
------------- ------------- ------------- -------------
Net increase (decrease) in Fund shares ......... 59,171,176 27,871,951 (8,650,835) (8,482,796)
------------- ------------- ------------- -------------
Shares outstanding at end of period ............ 471,432,488 412,261,312 102,619,379 111,270,214
- -----------------------------------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on
February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ -- $ -- $ -- $ --
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
130
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
AARP GNMA AARP High AARP Insured AARP Bond
and U.S. Quality Tax Free General Fund for
Treasury Fund Bond Fund Bond Fund Income
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended Years Ended Period Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996 1997(a)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
<C> <C> <C> <C> <C> <C> <C>
$ 306,582,822 $ 334,151,619 $ 27,958,146 $ 30,375,516 $ 83,718,654 $ 86,584,408 $ 1,266,014
(7,559,113) 23,690,016 (1,765,263) (2,756,840) 3,742,633 15,073,015 32,537
-- -- 87,958 4,190,615 (7,405,850) 3,404,797 --
-- -- -- (214,688) -- -- --
-- -- -- -- -- -- --
85,972,174 (117,084,004) 10,994,171 (7,844,325) 62,123,142 (1,155,352) 855,121
-- -- -- -- (382,821) (1,262,186) --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
384,995,883 240,757,631 37,275,012 23,750,278 141,795,758 102,644,682 2,153,672
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(306,582,822) (334,151,619) (27,958,146) (30,375,516) (83,718,654) (86,584,408) (1,266,014)
-- -- -- -- (8,693,174) -- --
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(306,582,822) (334,151,619) (27,958,146) (30,375,516) (92,411,828) (86,584,408) (1,266,014)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
305,492,609 346,027,868 38,051,215 64,115,868 103,693,632 124,978,818 59,830,356
175,180,674 193,739,502 19,402,825 21,458,457 55,906,529 52,441,004 959,174
(879,545,728) (793,984,012) (123,806,554) (100,466,218) (252,388,145) (245,115,196) (3,354,542)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(398,872,445) (254,216,642) (66,352,514) (14,891,893) (92,787,984) (67,695,374) 57,434,988
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(320,459,384) (347,610,630) (57,035,648) (21,517,131) (43,404,054) (51,635,100) 58,322,646
4,904,439,844 5,252,050,474 511,905,166 533,422,297 1,755,412,222 1,807,047,322 1,500
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,583,980,460 $ 4,904,439,844 $ 454,869,518 $ 511,905,166 $ 1,712,008,168 $ 1,755,412,222 $ 58,324,146
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
328,879,292 345,829,087 32,366,706 33,312,382 98,088,821 101,872,699 100
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
20,334,844 22,947,708 2,386,782 4,006,214 5,746,587 6,963,608 3,995,177
11,645,941 12,859,585 1,215,401 1,341,850 3,094,529 2,918,782 63,663
(58,555,542) (52,757,088) (7,772,400) (6,293,740) (13,985,360) (13,666,268) (222,608)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(26,574,757) (16,949,795) (4,170,217) (945,676) (5,144,244) (3,783,878) 3,836,232
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
302,304,535 328,879,292 28,196,489 32,366,706 92,944,577 98,088,821 3,836,332
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
$ -- $ -- $ 176,290 $ 176,290 $ -- $ -- $ --
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
131
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP Balanced AARP Growth AARP U.S.
Stock and Bond and Income Stock Index
Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended Period Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 (a)
------------- ------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 18,953,996 $ 13,198,291 $ 124,954,648 $ 105,747,332 $ 266,300
Net realized gain (loss) from:
Investments ................................ 27,061,995 4,984,143 533,200,232 161,815,047 96,857
Futures contracts .......................... -- 34,436 -- -- 111,552
Written options ............................ -- -- 19,199 -- --
Foreign currency related transactions ...... 3,212 334,451 (401,887) (411,014) --
Net unrealized appreciation (depreciation) on:
Investments ................................ 79,619,157 20,509,469 1,168,998,909 381,330,506 3,736,328
Futures contracts .......................... -- 3,391 -- -- 9,339
Written options ............................ -- -- 801 (801) --
Foreign currency related transactions ...... (32) (159,786) 23,307 (16,214) --
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in net assets
resulting from operations ................... 125,638,328 38,904,395 1,826,795,209 648,464,856 4,220,376
------------- ------------- --------------- --------------- ------------
Distributions to shareholders:
Net investment income ........................ (19,390,434) (12,975,460) (126,615,982) (102,016,492) (277,755)
Net realized gains ........................... (5,003,640) (3,378,368) (167,523,016) (67,064,704) --
------------- ------------- --------------- --------------- ------------
Total distributions ............................ (24,394,074) (16,353,828) (294,138,998) (169,081,196) (277,755)
------------- ------------- --------------- --------------- ------------
Fund share transactions:
Proceeds from sale of shares ................. 193,384,596 164,077,214 1,183,350,802 960,952,133 36,277,789
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 22,371,689 14,941,233 268,600,153 153,099,566 242,587
Cost of shares redeemed ...................... (81,824,221) (45,596,030) (597,577,667) (380,970,538) (2,379,424)
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in net assets from
Fund share transactions ..................... 133,932,064 133,422,417 854,373,288 733,081,161 34,140,952
------------- ------------- --------------- --------------- ------------
Increase (decrease) in net assets .............. 235,176,318 155,972,984 2,387,029,499 1,212,464,821 38,083,573
Net assets at beginning of period .............. 403,179,939 247,206,955 4,218,983,398 3,006,518,577 1,500
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 638,356,257 $ 403,179,939 $ 6,606,012,897 $ 4,218,983,398 $ 38,085,073
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 22,865,594 15,074,610 96,018,596 78,371,684 100
------------- ------------- --------------- --------------- ------------
Shares sold .................................. 10,047,891 9,582,056 23,887,562 23,131,229 2,243,958
Shares issued to shareholders in
reinvestment of distributions .............. 1,156,073 873,110 5,612,664 3,734,230 14,065
Shares redeemed .............................. (4,239,932) (2,664,182) (12,044,139) (9,218,547) (140,936)
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in Fund shares ......... 6,964,032 7,790,984 17,456,087 17,646,912 2,117,087
------------- ------------- --------------- --------------- ------------
Shares outstanding at end of period ............ 29,829,626 22,865,594 113,474,683 96,018,596 2,117,187
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ 225,657 $ 535,899 $ 3,321,388 $ 7,239,912 $ 6,274
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
132
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
AARP Capital AARP Small AARP Global AARP
Growth Company Growth International
Fund Stock Fund Fund Stock Fund
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Years Ended Period Ended Years Ended Period Ended
September 30, September 30, September 30, September 30,
1997 1996 1997(a) 1997 1996 1997 (a)
- --------------- ------------- ------------ ------------- ------------ ------------
<C> <C> <C> <C> <C> <C>
$ 7,016,141 $ 7,892,107 $ 54,756 $ 609,798 $ 325,474 $ 156,217
100,378,671 71,644,200 243,254 2,609,572 (33,467) 176,596
-- -- -- -- -- --
-- -- -- -- -- --
603 (38,602) -- 672,452 (36,843) (1,496)
279,281,659 32,512,381 7,634,126 21,313,398 982,226 1,437,981
-- -- -- -- -- --
-- -- -- -- -- --
(74) 4,863 -- (250,944) (336) (650)
- --------------- ------------- ------------ ------------- ------------ ------------
386,677,000 112,014,949 7,932,136 24,954,276 1,237,054 1,768,648
- --------------- ------------- ------------ ------------- ------------ ------------
(7,776,073) (7,038,882) -- (336,444) -- --
(75,674,469) (9,204,690) -- -- -- --
- --------------- ------------- ------------ ------------- ------------ ------------
(83,450,542) (16,243,572) -- (336,444) -- --
- --------------- ------------- ------------ ------------- ------------ ------------
155,757,996 133,269,510 45,455,488 67,490,929 82,274,150 20,394,042
79,684,673 15,425,567 -- 321,411 -- --
(136,425,886) (110,338,687) (3,117,651) (22,052,777) (5,860,726) (1,905,128)
- --------------- ------------- ------------ ------------- ------------ ------------
99,016,783 38,356,390 42,337,837 45,759,563 76,413,424 18,488,914
- --------------- ------------- ------------ ------------- ------------ ------------
402,243,241 134,127,767 50,269,973 70,377,395 77,650,478 20,257,562
826,136,713 692,008,946 1,500 77,651,978 1,500 1,500
- ---------------------------------------------------------------------------------------------
$ 1,228,379,954 $ 826,136,713 $ 50,271,473 $ 148,029,373 $ 77,651,978 $ 20,259,062
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
19,005,749 18,041,977 100 5,012,508 100 100
- --------------- ------------- ------------ ------------- ------------ ------------
3,214,860 3,299,011 2,689,583 3,954,573 5,395,570 1,283,093
1,860,053 400,664 -- 19,853 -- --
(2,843,147) (2,735,903) (178,794) (1,293,496) (383,162) (116,418)
- --------------- ------------- ------------ ------------- ------------ ------------
2,231,766 963,772 2,510,789 2,680,930 5,012,408 1,166,675
- --------------- ------------- ------------ ------------- ------------ ------------
21,237,515 19,005,749 2,510,889 7,693,438 5,012,508 1,166,775
- ---------------------------------------------------------------------------------------------
<FN>
$ 6,420,037 $ 7,179,969 $ 71,236 $ 1,144,886 $ 288,631 $ 155,031
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
133
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AARP AARP
Diversified Diversified
Income Portfolio Growth Portfolio
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------
Period Ended Period Ended
September 30, September 30,
1997(a) 1997(a)
------------ ------------
<S> <C> <C>
Operations:
Net investment income ........................ $ 880,498 $ 645,438
Net realized gain (loss) from:
Investments ................................ 44,276 82,133
Futures contracts .......................... -- --
Written options ............................ -- --
Foreign currency related transactions ...... -- --
Net unrealized appreciation (depreciation) on:
Investments ................................ 1,834,574 3,946,386
Futures contracts .......................... -- --
Written options ............................ -- --
Foreign currency related transactions ........ -- --
------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. 2,759,348 4,673,957
------------ ------------
Distributions to shareholders:
Net investment income ........................ (869,781) --
Net realized gains ........................... -- --
------------ ------------
Total distributions ............................ (869,781) --
------------ ------------
Fund share transactions:
Proceeds from sale of shares ................. 45,476,743 60,765,788
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 671,013 --
Cost of shares redeemed ........................ (4,640,905) (3,692,927)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions .......................... 41,506,851 57,072,861
------------ ------------
Increase (decrease) in net assets .............. 43,396,418 61,746,818
Net assets at beginning of period .............. 50,000 50,000
- ------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 43,446,418 $ 61,796,818
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 3,333 3,333
------------ ------------
Shares sold .................................. 2,973,907 3,770,457
Shares issued to shareholders in
reinvestment of distributions ............. 42,898 --
Shares redeemed .............................. (298,229) (222,772)
------------ ------------
Net increase (decrease) in Fund shares ......... 2,718,576 3,547,685
------------ ------------
Shares outstanding at end of period ............ 2,721,909 3,551,018
- ------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on
February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ 10,717 $ 645,438
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
134
<PAGE>
F I N A N C I A L H I G H L I G H T S
This section shows you the statistical per share income
and ratio(s) information from operations dividends paid
to shareholders, total returns, expense ratios of the
AARP Mutual Funds, and other information. It is designed
to help you understand how the fund performed and allows
you to compare this year's performance and expenses to
those of prior years.
135
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $1.000 $1.000 $1.000 $1.000 $1.000
------------------------------------------
Net investment income ................................... .046 .045 .049 .028 .021
Distributions from net investment income ................ (.046) (.045) (.049) (.028) (.021)
------------------------------------------
Net asset value, end of period ............................. $1.000 $1.000 $1.000 $1.000 $1.000
------------------------------------------
Total Return (%) ........................................... 4.72 4.62 4.99 2.84 2.13
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 471 412 384 333 254
Ratio of operating expenses to average net assets (%) ...... .91 .96 .98 1.13 1.31
Ratio of net investment income to average net assets (%) ... 4.63 4.54 4.89 2.89 2.12
</TABLE>
- --------------------------------------------------------------------------------
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------
Net investment income ................................... .028 .028 .029 .017 .016
Distributions from net investment income ................ (.028) (.028) (.029) (.017) (.016)
--------------------------------------------
Net asset value, end of period ............................. $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------
Total Return (%) ........................................... 2.80 2.80 2.99 1.76(a) 1.62(a)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 103 111 120 129 134
Ratio of operating expenses, net to average net assets (%) . .85 .85 .87 .90 .93
Ratio of operating expenses before expense reductions,
to average net assets (%) ............................... .85 .85 .87 .91 1.15
Ratio of net investment income to average net assets (%) ... 2.76 2.77 2.94 1.75 1.60
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
136
<PAGE>
- --------------------------------------------------------------------------------
AARP GNMA AND U.S. TREASURY FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $14.91 $15.19 $14.73 $15.96 $16.19
------------------------------------------
Income from investment operations:
Net investment income ................................... .98 .99 1.01 .93 1.15
Net realized and unrealized gain (loss) on investments .. .25 (.28) .46 (1.23) (.23)
------------------------------------------
Total from investment operations ........................... 1.23 .71 1.47 (.30) .92
------------------------------------------
Less distributions:
Net investment income ................................... (.98) (.99) (.98) (.93) (1.15)
Tax return of capital ................................... -- -- (.03) -- --
------------------------------------------
Total distributions ........................................ (.98) (.99) (1.01) (.93) (1.15)
------------------------------------------
Net asset value, end of period ............................. $15.16 $14.91 $15.19 $14.73 $15.96
------------------------------------------
Total Return (%) ........................................... 8.49 4.79 10.31 (1.90) 5.89
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 4,584 4,904 5,252 5,585 6,712
Ratio of operating expenses to average net assets (%) ...... .65 .64 .67 .66 .70
Ratio of net investment income to average net assets (%) ... 6.51 6.55 6.77 6.09 7.15
Portfolio turnover rate (%) ................................ 86.76 83.44 70.35 114.54 105.49
</TABLE>
- --------------------------------------------------------------------------------
AARP HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $15.82 $16.01 $15.05 $17.19 $16.44
------------------------------------------
Income from investment operations:
Net investment income ................................... .93 .92 .94 .85 .93
Net realized and unrealized gain (loss) on investments .. .31 (.19) .95 (1.76) .93
------------------------------------------
Total from investment operations ........................... 1.24 .73 1.89 (.91) 1.86
------------------------------------------
Less distributions:
Net investment income ................................... (.93) (.92) (.93) (.85) (.93)
Net realized gains on investments ....................... -- -- -- -- (.18)
In excess of net realized gains on investments .......... -- -- -- (.38) --
------------------------------------------
Total distributions ........................................ (.93) (.92) (.93) (1.23) (1.11)
------------------------------------------
Net asset value, end of period ............................. $16.13 $15.82 $16.01 $15.05 $17.19
------------------------------------------
Total Return (%) ........................................... 8.15 4.59 12.98 (5.55) 11.88
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 455 512 533 568 604
Ratio of operating expenses to average net assets (%) ...... .93 .91 .95 .95 1.01
Ratio of net investment income to average net assets (%) ... 5.84 5.76 6.13 5.31 5.64
Portfolio turnover rate (%) ................................ 83.26 169.96 201.07 63.75 100.98
</TABLE>
137
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $17.90 $17.74 $16.93 $19.00 $17.88
------------------------------------------
Income from investment operations:
Net investment income ................................... .88 .87 .87 .86 .90
Net realized and unrealized gain (loss) on investments .. .61 .16 .81 (1.67) 1.55
------------------------------------------
Total from investment operations ........................... 1.49 1.03 1.68 (.81) 2.45
------------------------------------------
Less distributions:
Net investment income ................................... (.88) (.87) (.87) (.86) (.90)
Net realized gains on investments ....................... (.09) -- -- (.34) (.43)
In excess of net realized gains on investments .......... -- -- -- (.06) --
------------------------------------------
Total distributions ........................................ (.97) (.87) (.87) (1.26) (1.33)
------------------------------------------
Net asset value, end of period ............................. $18.42 $17.90 $17.74 $16.93 $19.00
------------------------------------------
Total Return (%) ........................................... 8.57 5.88 10.21 (4.48) 14.31
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 1,712 1,755 1,807 1,914 2,087
Ratio of operating expenses to average net assets (%) ...... .66 .66 .69 .68 .72
Ratio of net investment income to average net assets (%) ... 4.87 4.83 5.06 4.80 4.90
Portfolio turnover rate (%) ................................ 7.61 18.69 17.45 38.39 47.96
</TABLE>
- --------------------------------------------------------------------------------
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ................................... $15.00
------
Income from investment operations:
Net investment income ............................................... .69
Net realized and unrealized gain (loss) on investments .............. .20
------
Total from investment operations ....................................... .89
------
Less distributions from net investment income .......................... (.69)
------
Net asset value, end of period ......................................... $15.20
------
Total Return (%) (b) ................................................... 6.06(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................................. 58
Ratio of operating expenses, net to average net assets (%) ............. -- (d)
Ratio of operating expenses before expense reductions, to average
net assets (%) ...................................................... 1.53(d)
Ratio of net investment income to average net assets (%) ............... 7.03(d)
Portfolio turnover rate (%) ............................................ 13.69(d)
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized
(d) Annualized
138
<PAGE>
- --------------------------------------------------------------------------------
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
Years Ended September 30, February 1, 1994(b)
-------------------------- To September 30,
1997(a) 1996 1995 1994
-------------------------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $17.63 $16.40 $14.64 $15.00
-----------------------------------------------
Income from investment operations:
Net investment income ................................... .72 .66 .61 .25
Net realized and unrealized gain (loss) on investments .. 3.98 1.44 1.79 (.37)(c)
-----------------------------------------------
Total from investment operations ........................... 4.70 2.10 2.40 (.12)
-----------------------------------------------
Less distributions:
Net investment income ................................... (.72) (.66) (.60) (.24)
Net realized gains on investments ....................... (.21) (.21) (.04) --
-----------------------------------------------
Total distributions ........................................ (.93) (.87) (.64) (.24)
-----------------------------------------------
Net asset value, end of period ............................. $21.40 $17.63 $16.40 $14.64
-----------------------------------------------
Total Return (%) ........................................... 27.34 13.08 16.80 (.78)(e)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 638 403 247 175
Ratio of operating expenses to average net assets (%) ...... .91 .88 1.01 1.31(f)
Ratio of net investment income to average net assets (%) ... 3.71 4.09 4.12 3.58(f)
Portfolio turnover rate (%) ................................ 26.79 35.22 63.77 49.32(f)
Average commission rate paid (d) ........................... $.0547 $.0549 $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and
repurchases of Fund shares in relation to fluctuating market values during
the period.
(d) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
(e) Not Annualized (f) Annualized
- --------------------------------------------------------------------------------
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997(a) 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $43.94 $38.36 $34.13 $32.91 $28.67
------------------------------------------
Income from investment operations:
Net investment income ................................... 1.19 1.17 1.11 .94 .83
Net realized and unrealized gain (loss) on investments .. 16.00 6.40 5.44 1.62 4.58
------------------------------------------
Total from investment operations ........................... 17.19 7.57 6.55 2.56 5.41
------------------------------------------
Less distributions from:
Net investment income ................................... (1.19) (1.15) (1.09) (1.13) (.87)
Net realized gains on investments ....................... (1.72) (.84) (1.23) (.21) (.30)
------------------------------------------
Total distributions ........................................ (2.91) (1.99) (2.32) (1.34) (1.17)
------------------------------------------
Net asset value, end of period ............................. $58.22 $43.94 $38.36 $34.13 $32.91
------------------------------------------
Total Return (%) ........................................... 40.70 20.20 20.43 7.99 19.38
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 6,606 4,219 3,007 2,312 1,560
Ratio of operating expenses to average net assets (%) ...... .71 .69 .72 .76 .84
Ratio of net investment income to average net assets (%) ... 2.38 2.94 3.28 3.00 3.08
Portfolio turnover rate (%) ................................ 33.4 25.02 31.26 31.82 17.44
Average commission rate paid (b) ........................... $.0619 $.0542 $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
139
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .20
Net realized and unrealized gain (loss) on investment ........... 2.97
------
Total from investment operations ................................... 3.17
------
Less distributions from net investment income ...................... (.18)
------
Net asset value, end of period ..................................... $17.99
------
Total Return (%) (b) ............................................... 21.22(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 38
Ratio of operating expenses, net to average net assets (%) ......... .50(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 2.38(d)
Ratio of net investment income to average net assets (%) ........... 1.94(d)
Portfolio turnover rate (%) ........................................ 14.52(d)
Average commission rate paid ....................................... $.0288
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.
- --------------------------------------------------------------------------------
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended September 30,
1997(a) 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $43.47 $38.36 $31.74 $36.20 $30.30
------------------------------------------
Income from investment operations:
Net investment income ................................... .34 .42 .36 .00 .06
Net realized and unrealized gain (loss) on investments .. 18.43 5.59 6.91 (1.51) 7.19
------------------------------------------
Total from investment operations ........................... 18.77 6.01 7.27 (1.51) 7.25
------------------------------------------
Less distributions from:
Net investment income ................................... (.41) (.39) (.01) (.05) (.14)
Net realized gains on investments ....................... (3.99) (.51) (.64) (2.90) (1.21)
------------------------------------------
Total distributions ........................................ (4.40) (.90) (.65) (2.95) (1.35)
------------------------------------------
Net asset value, end of period ............................. $57.84 $43.47 $38.36 $31.74 $36.20
------------------------------------------
Total Return (%) ........................................... 46.72 15.97 23.47 (4.70) 24.53
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 1,228 826 692 683 607
Ratio of operating expenses, to average net assets (%) ..... .92 .90 .95 .97 1.05
Ratio of net investment income to average net assets (%) ... .70 1.05 1.00 .02 .22
Portfolio turnover rate (%) ................................ 39.04 64.84 98.44 79.65 100.63
Average commission rate paid (b) ........................... $.0576 $.0614 $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
140
<PAGE>
- --------------------------------------------------------------------------------
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .04
Net realized and unrealized gain (loss) on investments .......... 4.98
------
Total from investment operations ................................... 5.02
------
Net asset value, end of period ..................................... $20.02
------
Total Return (%) (b) ............................................... 33.53(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 50
Ratio of operating expenses, net to average net assets (%) ......... 1.75(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 2.79(d)
Ratio of net investment income to average net assets (%) ........... 0.40(d)
Portfolio turnover rate (%) ........................................ 5.01(d)
Average commission rate paid ....................................... $.0274
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.
- --------------------------------------------------------------------------------
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(a) and other performance information derived from the financial
statements.
<TABLE>
Year Ended For the Period
September 30, February 1, 1996(b)
1997 to September 30, 1996
------------- ---------------------
<S> <C> <C>
Net asset value, beginning of period ........................................... $15.49 $15.00
----------------------------
Income from investment operations:
Net investment income ....................................................... .09 .06
Net realized and unrealized gain (loss) on investments ...................... 3.72 .43
----------------------------
Total from investment operations ............................................... 3.81 .49
----------------------------
Less distributions from net investment income .................................. (.06) --
----------------------------
Net asset value, end of period ................................................. $19.24 $15.49
----------------------------
Total Return (%) (c) ........................................................... 24.67 3.27(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ......................................... 148 78
Ratio of operating expenses, net to average net assets (%) ..................... 1.75 1.75(e)
Ratio of operating expenses before expense reductions, to average
net assets (%) .............................................................. 1.82 2.31(e)
Ratio of net investment income to average net assets (%) ....................... .55 1.03(e)
Portfolio turnover rate (%) .................................................... 31.34 12.56(e)
Average commission rate paid ................................................... $.0004 $.0150
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations
(c) Total returns would have been lower had certain expenses not been reduced.
(d) Not Annualized (e) Annualized
141
<PAGE>
- --------------------------------------------------------------------------------
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .23
Net realized and unrealized gain (loss) on investments .......... 2.13
------
Total from investment operations ................................... 2.36
------
Net asset value, end of period ..................................... $17.36
------
Total Return (%) (b) ............................................... 15.73(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 20
Ratio of operating expenses, net to average net assets (%) ......... 1.75(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 4.28(d)
Ratio of net investment income to average net assets (%) ........... 2.35(d)
Portfolio turnover rate (%) ........................................ 50.73(d)
Average commission rate paid ....................................... $.0309
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.
- --------------------------------------------------------------------------------
AARP DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .43
Net realized and unrealized gain (loss) on investments .......... .96
------
Total from investment operations ................................... 1.39
------
Less distribution from net investment income ....................... (.43)
------
Net asset value, end of period ..................................... $15.96
------
Total Return (%) (e) ............................................... 9.35(b)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 43
Ratio of operating expenses, net to average net assets (%) ......... --(d)
Ratio of net investment income to average net assets (%) ........... 5.13(c)
Portfolio turnover rate (%) ........................................ 5.57(c)
</TABLE>
(a) Commencement of operations
(b) Not Annualized (c) Annualized
(d) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the period, the Portfolio did bear its
share of the operating, administrative and advisory expenses of the
Underlying AARP Funds.
(e) If the Fund Manager had not maintained some of the underlying AARP Funds'
expenses, the total return for this Fund would have been lower.
142
<PAGE>
- --------------------------------------------------------------------------------
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .34
Net realized and unrealized gain (loss) on investments .......... 2.06
------
Total from investment operations ................................... 2.40
------
Net asset value, end of period ..................................... $17.40
------
Total Return (%) (f) ............................................... 16.00(b)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 62
Ratio of operating expenses to average net assets (%) .............. --(d)
Ratio of net investment income to average net assets (%) ........... 3.52(c)
Portfolio turnover rate (%) ........................................ 7.67(c)
</TABLE>
(a) Commencement of operations
(b) Not Annualized
(c) Annualized
(d) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the period, the Portfolio did bear its
share of the operating, administrative and advisory expenses of the
Underlying AARP Funds.
(e) Based on monthly average shares outstanding during the period.
(f) If the Fund Manager had not maintained some of the underlying AARP Funds'
expenses, the total return for this Fund would have been lower.
143
<PAGE>
This page
intentionally
left blank.
144
<PAGE>
N O T E S T O
F I N A N C I A L S T A T E M E N T S
More definitive information about the Financial
Statements is found in the Notes section. This
information includes further elaboration on Expenses,
Organization Cost, Portfolio Insurance, and
Transactions, including Management fees and Commitments.
Tax Information and Program Services: Provides you with
toll-free numbers and several addresses where you can
get answers to questions regarding your holdings in the
AARP Investment Program. In addition, tax information
that may be of interest to you can be found in the
section.
Report of Independent Accountants: A letter from Price
Waterhouse LLP, a leading accounting firm, opining that
all the "Financial Statements" are fairly presented in
all material respects, based upon their audits.
Officers and Trustees: Identifies the various members of
the AARP Board of Trustees and the Officers from
Scudder, Stevens & Clark, Inc. responsible for
overseeing the growth and strategic direction of the
AARP Investment Program.
145
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies.
The following AARP Mutual Funds from Scudder (the "AARP Funds" or the
"Funds") are organized as Massachusetts business trusts and are registered under
the Investment Company Act of 1940, as amended, (the "1940 Act") as open-end
management investment companies.
Trust name: Series name:
--------------------------------------------------------------------------
AARP Cash Investment Funds:
AARP High Quality Money Fund
AARP Income Trust:
AARP GNMA and U.S. Treasury Fund
AARP High Quality Bond Fund
AARP Bond Fund for Income
AARP Tax Free Income Trust:
AARP High Quality Tax Free Money Fund
AARP Insured Tax Free General Bond Fund
AARP Growth Trust:
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP Global Growth Fund
AARP Capital Growth Fund
AARP U.S. Stock Index Fund
AARP Small Company Stock Fund
AARP International Stock Fund
AARP Managed Investment
Portfolios Trust:
AARP Diversified Income Portfolio
AARP Diversified Growth Portfolio
All Funds are diversified. The Declaration of Trust of each Trust permits
its Trustees to create an unlimited number of series and to issue an unlimited
number of full and fractional shares of each separate series. The Portfolios
within the AARP Managed Investment Portfolios Trust invest primarily in existing
AARP Mutual Funds from Scudder (the "Underlying AARP Funds").
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Funds in
preparation of their financial statements.
A. Security Valuation. The AARP High Quality Money Fund uses the penny
rounding method of security valuation as permitted under Rule 2a-7 of the 1940
Act. Under this method, securities for which market quotations are readily
available and securities purchased with original maturities of 61 days or more
are valued at market. Securities purchased with an original maturity of 60 days
or less are valued at amortized cost. The AARP High Quality Tax Free Money Fund
uses the amortized cost method of security valuation as permitted under Rule
2a-7 of the 1940 Act. Under this method, the value of a security is determined
by adjusting its original cost to face value through the amortization of any
acquisition discount or premium at a constant rate until maturity, which
approximates market. Security valuation with respect to each of the remaining
Funds is performed in the following manner:
Common and preferred stocks traded on U.S. or foreign securities exchanges
are valued at the most recent sale price on such exchange where the security is
principally traded. If no sale occurred, the security is valued at the mean
between the most recent bid and asked quotations on such exchanges. If there is
no such bid and asked quotations the most recent bid quotation is used. Unlisted
securities quoted on the Nasdaq System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are no
such sales, the value is the high or "inside" bid quotation. Unlisted securities
which are not quoted on the Nasdaq System but are traded in another
146
<PAGE>
over-the-counter market are valued at the most recent sale price on such market.
If there are no such sales, the value is the most recent bid quotation.
Portfolio debt securities other than money market securities are valued by
pricing agents approved by the Trustees, which prices reflect broker/dealer
supplied valuations and electronic data processing techniques. If the pricing
agents are unable to provide such quotations, the most recent bid quotation
supplied by a bona fide market maker shall be used.
Money market instruments purchased with an original maturity of sixty days
or less are valued at amortized cost. Variable rate demand notes are carried at
cost which together with accrued interest approximates market.
Investments of the AARP Diversified Income Portfolio and AARP Diversified
Growth Portfolio are valued at the net asset value per share of each Underlying
AARP Fund as of the close of regular trading on the New York Stock Exchange.
The value of all other securities is determined in good faith under the
direction of the Board of Trustees.
B. Repurchase Agreements. Each of the AARP Funds may enter into repurchase
agreements with selected banks and broker/dealers whereby each Fund, through its
custodian, receives delivery of the securities collateralizing repurchase
agreements, the amount of which at the time of purchase and each subsequent
business day is required to be maintained at such a level that the market value,
depending on the maturity of the underlying collateral, is at least equal to the
repurchase price.
C. Futures Contracts. The Funds in the AARP Income Trust, the AARP Insured
Tax Free General Bond Fund, the AARP Balanced Stock and Bond Fund, the AARP
Global Growth Fund, the AARP International Stock Fund, the AARP U.S. Stock Index
Fund, and the AARP Small Company Stock Fund may enter into futures contracts. A
futures contract is an agreement between a buyer or seller and an established
futures exchange or its clearinghouse in which the buyer or seller agrees to
take or make a delivery of a specific amount of an item at a specified price on
a specific date (settlement date). During the period, the AARP High Quality Bond
Fund and the AARP Insured Tax Free General Bond Fund sold interest rate futures
to hedge against declines in the value of portfolio securities and the AARP High
Quality Bond Fund purchased interest rate futures to manage the duration of the
portfolio. Also, during the period, the AARP U.S. Stock Index Fund purchased
index futures as a temporary substitute for purchasing selected investments.
Upon entering into a futures contract, the Fund is required to deposit
with a financial intermediary an amount equal to a certain percentage of the
face value indicated in the futures contract ("initial margin"). Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the
risk that an illiquid secondary market will limit the Fund's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge, the Fund gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.
D. Options. In an option contract, the writer of the option grants the
buyer of the option the right to purchase from (call option), or sell to (put
option), the writer a designated instrument at a specified price within a
specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised.
147
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The Funds in the AARP Income Trust, the AARP Insured Tax Free General Bond
Fund, the AARP Balanced Stock and Bond Fund, the AARP Global Growth Fund, the
AARP International Stock Fund, and the AARP Small Company Stock Fund may enter
into purchased and written options on futures contracts. The Funds in the AARP
Growth Trust and the AARP Income Trust may write covered call options. The Funds
in the AARP Growth Trust may purchase put and call options on stock indices.
During the period, the AARP International Stock Fund purchased put options
on currencies as a hedge against potential adverse price movements in the value
of portfolio assets. Also, during the period, the AARP High Quality Bond Fund
purchased call options on futures as a temporary substitute for purchasing
selected investments.
If the Fund writes an option and the option expires unexercised, the Fund
will realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written
call or purchased put option is adjusted for the amount of option premium. If a
written put or purchased call option is exercised the Fund's cost basis of the
acquired security or currency would be the exercise price adjusted for the
amount of the option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange
for the premium, the opportunity to profit during the option period from an
increase in the market value of the underlying security or currency above the
exercise price. When the Fund writes a put option it accepts the risk of a
decline in the market value of the underlying security or currency below the
exercise price. Over-the-counter options have the risk of the potential
inability of counterparties to meet the terms of their contracts. The Fund's
maximum exposure to purchased options is limited to the premium initially paid.
In addition, certain risks may arise upon entering into option contracts
including the risk that an illiquid secondary market will limit the Fund's
ability to close out an option contract prior to the expiration date and, that a
change in the value of the option contract may not correlate exactly with
changes in the value of the securities or currencies hedged.
E. Securities Purchased on a Forward Delivery or When-Issued Basis. The
AARP High Quality Money Fund, the Funds in the AARP Income Trust and in the AARP
Tax Free Income Trust, and the AARP Balanced Stock and Bond Fund may purchase
securities on a forward delivery or when-issued basis. Municipal, corporate and
government securities are frequently offered on a forward delivery or
when-issued basis. At the time the Fund makes the commitment to purchase a
security on a forward delivery or when-issued basis, the price of the underlying
security is fixed. The Fund will record the transaction at the time of the
commitment and reflect the value of the security in determining its net asset
value. The settlement date of the transaction can occur within one month or more
after the date the commitment was made. During the period between purchase and
settlement date, no payment is made on behalf of the Fund and no interest
accrues to the Fund. The AARP GNMA and U.S. Treasury Fund had an outstanding
commitment to purchase forward delivery securities as of September 30, 1997
F. Forward Currency Exchange Contracts. The Funds in the AARP Growth
Trust, the AARP High Quality Bond Fund and the AARP Bond Fund for Income may, in
connection with portfolio purchases and sales of securities denominated in a
foreign currency, enter into forward currency exchange contracts ("forward
contracts"). Additionally, from time to time, each Fund may enter into contracts
to hedge certain foreign currency denominated assets. A forward contract is a
commitment to purchase or sell a foreign currency at the settlement date at a
negotiated
148
<PAGE>
rate. During the period, the AARP Balanced Stock and Bond Fund, the AARP Growth
and Income Fund, and the AARP Global Growth Fund utilized forward contracts as a
hedge against changes in exchange rates relating to foreign currency denominated
assets, and as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. Also, during the period, the AARP
International Stock Fund utilized forward contracts as a hedge in connection
with portfolio purchases and sales of securities denominated in foreign
currencies.
Forward contracts are valued at the prevailing forward exchange rate of
the underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of their contracts.
Additionally, when utilizing forward contracts to hedge, the Fund gives up the
opportunity to profit from favorable exchange rate movements during the term of
the contract.
G. Foreign Currency Translations. Foreign currency transactions from
foreign investment activity are translated into U.S. dollars on the following
basis:
(i) market value of investment securities, other assets and liabilities at the
daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest income
and certain expenses at the rates of exchange prevailing on the respective
dates of such transactions.
The Funds do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
H. Securities Transactions and Related Investment Income. Securities
transactions are accounted for on the trade date basis and dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Original issue discount on securities purchased is accreted on an
effective yield basis over the life of the security. Acquisition discount is
accreted on taxable securities purchased with original maturity dates of one
year or less. Premium on securities purchased by the AARP Tax Free Income Trust
is amortized on an effective yield basis over the life of the security.
Distributions of income and capital gains earned by the Diversified Growth and
Diversified Income Portfolios from the Underlying AARP Funds are recorded on the
ex-dividend date.
Each Fund uses the specific identification method for determining the
realized gain or loss on investments sold for both financial and federal income
tax reporting purposes.
I. Federal Income Taxes. Each of the Funds is treated as a single entity
for federal income tax purposes. It is the policy of each Fund to comply with
the requirements of the Internal Revenue Code of 1986, as amended, which are
applicable to regulated investment companies, and to distribute all of its
taxable and tax exempt income to its shareholders. Accordingly, the Funds paid
no U.S. federal income taxes, and no provisions for federal income taxes were
required.
J. Distribution of Income and Gains. Each AARP Fund intends to follow the
practice of distributing all of its net investment income to shareholders.
Dividends from the AARP High Quality Money Fund and the Funds in the AARP Income
Trust and the AARP Tax Free Income Trust are declared daily and distributed
monthly. Dividends from the AARP Diversified Income Portfolio are declared and
paid monthly. Dividends from the AARP Balanced Stock and
149
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Bond Fund, the AARP U.S. Stock Index Fund, and the AARP Growth and Income Fund
are declared and paid quarterly. Dividends from the AARP Global Growth Fund, the
AARP Small Company Stock Fund, the AARP International Stock Fund, the AARP
Diversified Growth Portfolio, and the AARP Capital Growth Fund are declared and
paid annually. During any particular year, net realized gains for each Fund
which are in excess of any available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders in the following fiscal year. The AARP High Quality Money Fund may
take into account realized gains and losses on the sales of securities in its
daily distributions. Additional distributions may be made by each Fund if
necessary.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal income tax
rules and regulations which may differ from generally accepted accounting
principles. These differences relate primarily to investments in options,
futures, forward contracts, foreign denominated investments, mortgage backed
securities, REITs and certain securities sold at a loss. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ from distributions during such period. Accordingly,
the Funds may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Fund.
K. Expenses. Each Fund (except for the AARP Diversified Income and
Diversified Growth Portfolios) is charged for those expenses that are directly
attributable to it, such as management, custodian, audit, and certain
shareholder service fees. Expenses that are not directly attributable to a Fund,
such as reports to shareholders, portions of Trustees' and legal fees, are
allocated among all the Funds.
The AARP Diversified Income and Diversified Growth Portfolios ("the
Portfolios") have entered into a Special Servicing Agreement with Scudder,
Stevens & Clark, Inc. (the "Fund Manager"), the Underlying AARP Funds, Scudder
Service Corporation, Scudder Fund Accounting Corporation and Scudder Investor
Services, whereby the Fund Manager arranges for all services pertaining to the
operations of the Portfolios. If the aggregate expenses of the Portfolios are
less than the estimated savings to the Underlying AARP Funds from the operation
of each Portfolio, each of the Underlying AARP Funds will bear those expenses in
proportion to the average daily value of its shares owned by the respective
Portfolio. Consequently, no Underlying AARP Fund will be expected to carry
expenses that are in excess of the estimate of savings to the respective
Underlying AARP Fund. These estimated savings result from the reduction in
shareholder servicing costs due to the elimination of separate shareholder
accounts which either currently are or have potential to be invested in the
Underlying AARP Funds. In the event that the financial benefits to the
Underlying AARP Funds do not exceed aggregate expenses of any Portfolio, the
Fund Manager will pay certain costs on behalf of the respective Portfolio. In
accordance with the Special Servicing Agreement, as discussed above, no expenses
were charged to the AARP Diversified Income and Diversified Growth Portfolios
during the period. For the period February 1, 1997 (commencement of operations)
to September 30, 1997, the Fund Manager paid expenses in the amount $43,964 and
$69,567, on behalf of the Diversified Income and Diversified Growth Portfolios,
respectively. Additionally, the Fund Manager has assumed the organization costs
of each Portfolio.
For the period ended September 30, 1997, the amounts charged and unpaid to
the Underlying AARP Funds under the Special Servicing Agreement, as shown in the
Statement of Operations as part of the Shareholder Services, were as follows:
AARP High Quality Money Fund $ 32,616
AARP Growth and Income Fund $ 58,770
AARP GNMA and U.S. Treasury Fund $ 97,381
AARP International Stock Fund $ 6,683
AARP Bond Fund for Income $ 17,015
AARP Global Growth Fund $ 38,619
AARP Capital Growth Fund $ 6,549
AARP Small Company Stock Fund $ 5,312
AARP U.S. Stock Index Fund $ 17,515
The AARP High Quality Tax Free Money Fund, the AARP High Quality Bond
Fund, the AARP Insured Tax Free General Bond Fund, and the AARP Balanced
Stock and Bond Fund are not subject to the Special Servicing Agreement.
150
<PAGE>
L. Organization Cost. Costs incurred by the AARP Balanced Stock and Bond
Fund, the AARP Global Growth Fund, the AARP U.S. Stock Index Fund, the AARP Bond
Fund for Income, the AARP International Stock Fund, and the AARP Small Company
Stock Fund in connection with their organization and initial registration of
shares have been deferred and are being amortized on a straight-line basis over
a five-year period. The Fund Manager has assumed the organization costs of the
AARP Diversified Growth and the AARP Diversified Income Portfolios.
M. Portfolio Insurance. The cost of premiums paid by the AARP Insured Tax
Free General Bond Fund for insurance on individual securities is
non-cancellable, runs the life of such securities, and is added to the cost
basis of such securities. This insurance provides for the timely payment of
principal and interest on these securities when due and protects the Fund
against loss from default by the Municipal issuer. It does not protect the
investor from losses due to changes in market values.
N. Transactions in Securities of Affiliated Issuers. The AARP Growth and
Income Fund had transactions in securities of affiliated issuers. An affiliated
issuer is a company in which the Fund has ownership of at least 5% of the voting
securities. A summary of the Fund's transactions with companies which are or
were affiliates for the year ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Beginning Purchases Sales
Affiliate Cost ($) Cost ($) Cost ($) Ending Cost ($) Market Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Growth Properties, Inc. 39,388,655 9,946,350 -- 49,335,005 74,181,300
=========================================================================================
<CAPTION>
Realized Gain/Loss ($) Dividend Income ($)
----------------------------------------------------------------------
<S> <C> <C>
Affiliated Issuers -- 3,021,216
Unaffiliated Issuers 533,200,232 148,394,016
----------------------------------------------------------------------
Total 533,200,232 151,415,232
======================================================================
</TABLE>
Note 2. Management Fee and other Related Transactions.
Under the investment management and advisory agreement (the "Management
Agreement") between each Trust (excluding the AARP Managed Investment Portfolios
Trust) and the Fund Manager, the management fee consists of two elements: a Base
Fee and an Individual Fund Fee. The Base Fee is calculated as a percentage of
the combined net assets of all of the AARP Funds ("Program Assets") except the
AARP Diversified Income and the Diversified Growth Portfolios, and each AARP
Fund pays, as its portion of the Base Fee, an amount equal to the ratio of its
daily net assets to the daily net assets of all of the AARP Funds (excluding the
AARP Diversified Income and the Diversified Growth Portfolios).
The Annual Base Fee is calculated as follows:
.35% of the first $2.0 billion of such assets
.33% of the next $2.0 billion of such assets
.30% of the next $2.0 billion of such assets
.28% of the next $2.0 billion of such assets
.26% of the next $3.0 billion of such assets
.25% of the next $3.0 billion of such assets
.24% of such assets thereafter
In addition to the Base Fee, each Fund (excluding the AARP Diversified
Income and the AARP Diversified Growth Portfolios) agrees to pay the Fund
Manager a flat Individual Fund Fee based on the average daily net assets of that
Fund. The Individual Fund Fee Rate recognizes the different characteristics of
each Fund, the varying levels of complexity of investment research and
securities trading required to manage each Fund. The Fund Manager has retained
Bankers Trust Company as Subadviser to the AARP U.S. Stock Index Fund; under the
Subadvisory Agreement, the Fund Manager pays a quarterly fee to the Subadviser,
which amounted to $42,323 for the period ended September 30, 1997.
151
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The Individual Fund Fee Rate is calculated at the following percentages of
the average daily net assets of each Fund:
Fund Rate
- --------------------------------------------- --------------
AARP High Quality Money Fund ............... .10%
AARP High Quality Tax Free Money Fund ...... .10%
AARP GNMA and U.S. Treasury Fund ........... .12%
AARP High Quality Bond Fund ................ .19%
AARP Insured Tax Free General Bond Fund .... .19%
AARP Bond Fund for Income .................. .28%
AARP Balanced Stock and Bond Fund .......... .19%
AARP Growth and Income Fund ................ .19%
AARP U.S. Stock Index Fund ................. 0%
AARP Capital Growth Fund ................... .32%
AARP Small Company Stock Fund .............. .55%
AARP Global Growth Fund .................... .55%
AARP International Stock Fund .............. .60%
The total amount of management fees for each Fund is shown in the
Statement of Operations as Management Fee.
As manager of the assets of each Fund, the Fund Manager directs the
investments of each Fund in accordance with its investment objectives, policies
and restrictions. In addition to portfolio management services, the Fund Manager
under the Management Agreement will provide certain administrative services in
accordance with such Agreement. The Fund Manager has also entered into a Member
Services Agreement with AARP Financial Services Corp. ("AFSC"), a subsidiary of
AARP, and pays portions of its investment management and advisory fee to AFSC.
The Fund Manager agreed to waive a portion of its management fee and
reimburse a portion of expenses in order to maintain the annualized expenses of
the AARP Global Growth Fund at no more than 1.75% of average daily net assets
until January 31, 1998. Effective February 1, 1997, the Fund Manager has agreed
to waive all or a portion of its management fee and reimburse all or a portion
of expenses in order to maintain the following annualized expense ratios until
January 31, 1998: AARP U.S. Stock Index Fund, 0.50% of average daily net assets;
AARP Bond Fund for Income, 0.00% of average daily net assets; AARP International
Stock Fund, 1.75% of average daily net assets; and AARP Small Company Stock
Fund, 1.75% of average daily net assets. The amount of expenses waived and/or
reimbursed by the Fund Manager, if any, for each Fund has been shown in the
Statement of Operations as Expense Reductions.
The Fund Manager did not impose any or a portion of its Management Fee for
certain Funds during the period ended September 30, 1997, as follows: AARP Bond
Fund for Income $97,012; AARP Global Growth Fund $74,953; AARP International
Stock Fund $59,143; AARP Small Company Stock Fund $111,376; and the AARP U.S.
Stock Index Fund $38,841.
On June 26, 1997, the Fund Manager entered into an agreement with The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, pursuant to which Zurich will acquire a majority interest
in the Fund Manager, and the Fund Manager will form a new global investment
organization by combining with Zurich's subsidiary, Zurich Kemper Investments,
Inc. and change its name to Scudder Kemper Investments, Inc. Subject to the
receipt of the required regulatory and shareholder approvals, the transaction is
expected to close in the fourth quarter of 1997.
These Trusts also have a shareholder servicing agreement with Scudder
Service Corporation ("SSC"), a subsidiary of the Fund Manager. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount for each Fund is shown in the
table below, and is included in Services to shareholders in the Statements of
Operations.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Fund
Manager, is responsible for determining the daily net asset value per share and
maintaining the portfolio and general accounting records of the Funds. The
amount for each Fund is shown in the table below, and is included in Custodian
and accounting fees in the Statements of Operations.
152
<PAGE>
For the period ended September 30, 1997 the amounts charged by SSC and
SFAC to the Funds were as follows:
<TABLE>
<CAPTION>
Total SSC Total SFAC
Amount Unpaid at Amount Unpaid at
Charged To September 30, Charged To September 30,
Fund Fund by SSC(a) 1997* Fund by SFAC(b) 1997*
- ------------------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $1,505,677 $ 121,984 $ 54,052 $ 4,588
AARP High Quality Tax Free Money Fund 256,965 20,052 30,023 2,500
AARP GNMA and U.S. Treasury Fund 6,732,169 539,940 480,845 38,769
AARP High Quality Bond Fund 1,455,652 114,310 82,859 5,606
AARP Insured Tax Free General Bond Fund 1,741,482 138,720 162,915 13,903
AARP Bond Fund for Income -- -- -- --
AARP Balanced Stock and Bond Fund 1,357,972 132,955 95,386 8,862
AARP Growth and Income Fund 6,853,761 672,527 323,033 31,430
AARP U.S. Stock Index Fund -- -- -- --
AARP Capital Growth Fund 1,889,072 180,473 110,317 10,035
AARP Small Company Stock Fund 93,491 93,491 25,445 25,445
AARP Global Growth Fund 558,504 51,344 95,221 9,698
AARP International Stock Fund -- -- -- --
</TABLE>
* Total unpaid amounts are included in Other payables and accrued expenses
in the Statements of Assets and Liabilities.
(a) SSC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and
AARP International Stock Fund amounting to $40,906, $60,094, $25,298, and
$54,419, respectively.
(b) SFAC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and
AARP International Stock Fund amounting to $25,000, $73,071, $6,725, and
$33,333, respectively.
The AARP Investment Program pays each Trustee unaffiliated with Scudder or
AARP an annual retainer of $10,000; additionally, specified amounts are paid by
each Fund for board and committee meetings attended. The amounts for each Fund
have been shown in the Statement of Operations as Trustees' fees and expenses.
The Diversified Portfolios do not invest in the Underlying AARP Funds for
the purpose of exercising management or control, however, investments within the
set limits may represent a significant portion of an Underlying AARP Fund's net
assets. At September 30, 1997, the Diversified Income Portfolio held the
following Underlying AARP Funds' outstanding shares: approximately 22% of the
AARP Bond Fund for Income; and 6% of the AARP U.S. Stock Index Fund. The
Diversified Growth Portfolio held the following Underlying AARP Funds'
outstanding shares at September 30, 1997: approximately 22% of the AARP
International Stock Fund; 19% of the AARP Bond Fund for Income; 18% of the U.S.
Stock Index Fund; and 9% of the AARP Small Company Stock Fund.
Note 3. Commitments.
As of September 30, 1997, the AARP Global Growth Fund had entered into the
following forward currency exchange contracts resulting in net unrealized
depreciation of $248,684.
Net Unrealized
Appreciation
(Depreciation)
Contracts to Deliver In Exchange For Settlement Date (U.S.$)
- -------------------- ------------------ --------------- -------------------
DEM 7,903,094 USD 4,351,924 1/30/98 $ (155,565)
DEM 3,337,679 USD 1,812,577 2/17/98 (93,119)
-----------
$ (248,684)
===========
153
<PAGE>
Report of Independent Accountants
[PRICE WATERHOUSE LOGO]
To the Trustees and Shareholders of
AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust
and AARP Managed Investment Portfolios Trust
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of each
of the series constituting AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust and AARP Managed Investment
Portfolios Trust (hereafter referred to as the "Trusts") at September 30,
1997, the results of each of their operations, the changes in each of
their net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trusts' management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at September 30,
1997 by correspondence with the custodian and the application of
alternative auditing procedures where securities purchased had not been
received, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
November 12, 1997
154
<PAGE>
O F F I C E R S A N D T R U S T E E S
155
<PAGE>
OFFICERS AND TRUSTEES
CAROLE LEWIS ANDERSON
Trustee of AARP Funds; President, MASDUN Capital Advisors; Formerly
Principal, Suburban Capital Markets; Director, VICORP Restaurants, Inc.;
Member of the Board, Association for Corporate Growth of Washington,
D.C.; Trustee, Hasbro Children's Foundation and Mary Baldwin College.
ADELAIDE ATTARD
Trustee of AARP Funds; Member, New York City Department of Aging
Advisory Council--Appointed by Mayor (1995-Present); Consultant,
Gerontology; Commissioner, County of Nassau, NY, Department of Senior
Citizen Affairs (1971-1991); Board Member, American Association of
International Aging (1981 to 1996); Member, NYS Community Services for
the Elderly Advisory Council--Appointed by Governor (1987-1991);
Chairperson, Federal Council on Aging (1981-1986); U.S. Delegate to 1982
United Nations World Assembly on Aging.
ROBERT N. BUTLER, M.D.
Trustee of AARP Funds; Director, International Longevity Center and
Professor of Geriatrics and Adult Development; Chairman, Henry L.
Schwartz Department of Geriatrics and Adult Development, Mount Sinai
Medical Center; Formerly Director, National Institute on Aging, National
Institute of Health (1976-1982).
ESTHER CANJA
Trustee of AARP Funds; Vice President, American Association of Retired
Persons; Trustee and Chair, AARP Group Health Insurance Plan; Board
Liaison, National Volunteer Leadership Network Advisory Committee;
Chair, Board Operations Committee; AARP State Director of Florida
(1990-1992).
LINDA C. COUGHLIN*
Chairperson and Trustee of AARP Funds; Managing Director and Member,
Board of Directors of Scudder, Stevens & Clark, Inc.
HORACE B. DEETS
Vice Chairman and Trustee of AARP Funds; Executive Director,
American Association of Retired Persons; Member, Board of
Councilors, Andrus Gerontology Center; Member of the Board,
HelpAge International.
EDGAR R. FIEDLER
Trustee of AARP Funds; Senior Fellow and Economic Counselor, The
Conference Board, Inc.; Director: The Stanley Works, HT Insight Funds,
and Emerging Mexico Fund.
EUGENE P. FORRESTER
Trustee of AARP Funds; Consultant; International Trade Counselor; Lt.
General (Retired), U.S. Army; Command General, U.S. Army Western
Command, Honolulu; Consultant: Digital Equipment Corp., DHI, Philip
Morris, PICS Previews, and Whittle Communications.
GEORGE L. MADDOX, JR.
Trustee of AARP Funds; Professor Emeritus and Director, Long Term Care
Resources Program, Duke University Medical Center; Senior Fellow, Center
for the Study of Aging and Human Development, Duke University; Professor
Emeritus of Sociology, Departments of Sociology and Psychiatry, Duke
University.
156
<PAGE>
ROBERT J. MYERS
Trustee of AARP Funds; Actuarial Consultant; Formerly Executive
Director, National Commission on Social Security Reform; Director: NASL
Series Trust, Inc. and North American Funds, Inc.; Formerly Director,
Board of Pensions, Evangelical Lutheran Church in America; Formerly
Chairman, Commission on Railroad Retirement Reform; Member, U.S.
Office of Technology Assessment, Prospective Payment Assessment
Commission.
JAMES H. SCHULZ
Trustee of AARP Funds; Professor of Economics and Kirstein
Professor of Aging Policy, Policy Center of Aging, Florence
Heller School, Brandeis University.
GORDON SHILLINGLAW
Trustee of AARP Funds; Professor Emeritus of Accounting, Columbia
University Graduate School of Business; Formerly Director and Treasurer,
FERIS Foundation of America.
THOMAS W. JOSEPH* JAMES W. PASMAN*
Vice President Vice President
DAVID S. LEE* KATHRYN L. QUIRK*
Vice President and Assistant Treasurer Vice President and Secretary
THOMAS F. MCDONOUGH* HOWARD SCHNEIDER*
Vice President and Assistant Secretary Vice President
PAMELA A. MCGRATH* CORNELIA SMALL*
Vice President and Treasurer President
EDWARD J. O'CONNELL*
Vice President and Assistant Treasurer
*Scudder, Stevens & Clark, Inc.
Effective January 1, 1995, each member of and nominee for the Board of
Trustees must own shares of one or more of the Funds within the AARP
Investment Program of which he/she serves as Trustee.
157
<PAGE>
SERVICE INFORMATION
SHAREHOLDER Our knowledgeable AARP Mutual Fund Representatives
SERVICE LINE are available to answer questions about the
Program or your account Monday through Friday,
1-800-253-2277 between 8:00 a.m. and 8:00 p.m., Eastern time.
Transactions can be made Monday through Friday
between 8:00 a.m. and 4:00 p.m., Eastern time.
Write: AARP Investment Program from Scudder
P.O. Box 2540
Boston, MA 02208-2540
For overnight AARP Investment Program from Scudder
and certified 42 Longwater Drive
mail: Norwell, MA 02061-1612
EASY-ACCESS LINE Shareholders with a touch-tone telephone may call
this automated line to obtain AARP Fund
1-800-631-4636 performance and account information, or to
exchange or sell (redeem) AARP Mutual Fund shares.
This service is available 24 hours a day, 7 days a
week.
TRANSACTIONS If you have access to a fax machine, you can fax
BY FAX transaction requests. Any exchange or redemption
request received after 4:00 p.m. business days or
1-800-821-6234 on weekends will be processed the next business
day. All faxes are kept confidential.
TDD (TELECOMMUNICATIONS AARP members with hearing or speech impairments
DEVICE FOR THE DEAF AND and access to TDD equipment can communicate with
SPEECH?IMPAIRED) the AARP Investment Program Monday through Friday
between 8:00 a.m. and 5:00 p.m., Eastern time.
1-800-634-9454 Transactions can be made between 8:00 a.m. and
4:00 p.m., Eastern time.
158
<PAGE>
TAX INFORMATION (UNAUDITED)
Of the dividends paid from net investment income by the AARP High Quality
Tax Free Money Fund and the AARP Insured Tax Free General Bond Fund for
the Funds' fiscal years ending September 30, 1997, 100% constituted
exempt-interest dividends for regular federal income tax purposes.
Pursuant to Section 852 of the Internal Revenue Code, the AARP Balanced
Stock and Bond Fund, the AARP Growth and Income Fund, the AARP U.S. Stock
Index Fund, the AARP Capital Growth Fund, the AARP Global Growth Fund, and
the AARP Insured Tax Free General Bond Fund designate $22,565,952,
$503,261,408, $72,533, $71,098,608, $1,636,598, and $2,583,310,
respectively, as capital gain dividends for their fiscal years ended
September 30, 1997.
Pursuant to Section 853 of the Internal Revenue code, the AARP Global
Growth Fund and the AARP International Stock Index Fund designate $0.023
and $0.020 per share (representing a total of $177,801 and $23,212) of
foreign taxes and $0.097 and $0.126 per share (representing a total of
$743,398 and $147,497) of foreign source income as having been paid in the
fiscal year ended September 30, 1997, respectively.
Pursuant to Section 854 of the Internal Revenue Code, the percentages of
ordinary income dividends paid qualify for the dividends received
deduction for corporations are as follow: AARP Balanced Stock and Bond
Fund 41.32%, AARP Capital Growth Fund 100%, AARP U.S. Stock Index Fund
100%, and AARP Growth and Income Fund 96.36%.
In January 1998 you will receive federal tax information on all
distributions paid to your account in calendar year 1997.
159
<PAGE>
GLOSSARY
AVERAGE ANNUALIZED The one-year return of an investment based on its
TOTAL RETURN compounded total return. The annualized return
gives the investor an idea of the performance
during each year of a listed period, such as 3
years, 5 years or 10 years.
BARBELL STRATEGY An investment strategy where the portfolio manager
holds bonds with short maturities and long
maturities that would give the impression of a bar
bell if the clusters of bonds on either end were
illustrated.
COUPON The name given to the interest payments that could
be clipped and sent to the issuer for payment. The
average coupon rate would be the expected interest
rates of all the bonds held in a portfolio.
QUALITY Quality is a measure of a bond issuer's ability to
repay interest and principal in a timely manner.
The average quality is a designation of all the
bonds held in the portfolio.
DURATION Duration is a mathematical calculation of the
average life of a bond (or bonds in a bond fund)
that serves as a useful measure of its price risk.
Each year of duration represents an expected 1%
change in the price of a bond for every 1% change
in interest rates. For example, if a bond fund has
an average duration of two years, its price will
fall about 2% when interest rates rise by one
percentage point. Conversely, the bond fund's
price will rise about 2% when interest rates fall
by one percentage point.
MATURITY The date upon which bonds mature, that is, the
date when the issuer must pay back the face amount
of the bond. An investor who buys $10,000 worth of
25-year bonds will receive $10,000 at the end of
25 years, after having received interest payments
(coupons) over the 25-year period.
PREPAYMENT RISK The possibility that, as interest rates fall,
homeowners will refinance their home mortgages,
resulting in the prepayment of GNMA securities.
TOTAL RETURN A measure of an investment's performance that
takes into account income paid, other
distributions, and any increase or decline in the
value of the principal over a given period of
time.
VALUATION The process in which the value of a security is
assessed or determined.
YIELD The income per share paid to mutual fund
shareholders from the dividends and interest of
that fund, expressed as a percentage for a stated
period of time. It is based on past performance
and measured in time increments.
YIELD TO MATURITY Concept used to determine the rate of return an
investor will receive if a long-term,
interest-bearing investment, such as a bond, is
held until its maturity date.
160
<PAGE>
The paper used for the cover and internal pages of this
report incorporates recycled corrugated containers. The
"Crystal Recycling Process" which created this paper saved
four and one half truck-loads of boxes from being placed in
landfills. When you are finished with the report, please
continue the process and recycle it.
(logo) Printed on recycled paper
<PAGE>
Exhibit 1(a)
AARP INCOME TRUST
DECLARATION OF TRUST
DATED JUNE 8, 1984
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I -- Name and Definitions
Section 1.1 Name .....................................................
Section 1.2 Definitions ..............................................
ARTICLE II -- Trustees
Section 2.1 General Powers ...........................................
Section 2.2 Investments ..............................................
Section 2.3 Legal Title ..............................................
Section 2.4 Insurance and Repurchase of Securities ...................
Section 2.5 Delegation; Committee ....................................
Section 2.6 Collection and Payment ...................................
Section 2.7 Expenses .................................................
Section 2.8 Manner of Acting; By-Laws ................................
Section 2.9 Miscellaneous Powers .....................................
Section 2.10 Principal Transactions ..................................
Section 2.11 Number of Trustees ......................................
Section 2.12 Election and Term .......................................
Section 2.13 Resignation and Term ....................................
Section 2.14 Vacancies ...............................................
Section 2.15 Delegation of Power to Other Trustees ...................
ARTICLE III -- Contracts
Section 3.1 Underwriting Contract ....................................
Section 3.2 Advisory or Management Contract ..........................
Section 3.3 Affiliations of Trustees or Officers, Etc. ...............
Section 3.4 Compliance with 1940 Act ..................................
ARTICLE IV -- Limitations of Liability of Shareholders, Trustees and Others
Section 4.1 No Personal Liability of Shareholders, Trustees, Etc. ....
Section 4.2 Non-Liability of Trustees, Etc. ..........................
Section 4.3 Mandatory Indemnification ................................
Section 4.4 No Bond Required of Trustees .............................
Section 4.5 No Duty of Investigation; Notice in Trust
Instruments, Etc. ..................................
Section 4.6 Reliance on Experts, Etc. ................................
ARTICLE V -- Shares of Beneficial Interest
Section 5.1 Beneficial Interest ......................................
Section 5.2 Rights of Shareholders ...................................
Section 5.3 Trust Only ...............................................
-ii-
<PAGE>
Page
----
Section 5.4 Issuance of Shares .......................................
Section 5.5 Register of Shares .......................................
Section 5.6 Transfer of Shares .......................................
Section 5.7 Notices ..................................................
Section 5.8 Treasury Shares ..........................................
Section 5.9 Voting Powers ............................................
Section 5.10 Meetings of Shareholders ................................
Section 5.11 Series Designation ......................................
ARTICLE VI -- Redemption and Repurchase of Shares
Section 6.1 Redemption of Shares .....................................
Section 6.2 Price ....................................................
Section 6.3 Payment ..................................................
Section 6.4 Effect of Suspension of Determination of
Net Asset Value ....................................
Section 6.5 Repurchase by Agreement ..................................
Section 6.6 Redemption of Shareholder's Interest .....................
Section 6.7 Redemption of Shares in Order to Qualify
as Regulated Investment Company;
Disclosure of Holding ..............................
Section 6.8 Reductions in Number of Outstanding Shares
Pursuant to Net Asset Value Formula ................
Section 6.9 Suspension of Right of Redemption ........................
ARTICLE VII -- Determination of Net Asset Value, Net Income and Distributions
Section 7.1 Net Asset Value ..........................................
Section 7.2 Distributions to Shareholders ............................
Section 7.3 Determination of Net Income ..............................
Section 7.4 Power to Modify Foregoing Procedures .....................
ARTICLE VIII -- Duration, Termination of Trust; Amendment; Mergers, Etc.
Section 8.1 Duration .................................................
Section 8.2 Termination of Trust .....................................
Section 8.3 Amendment Procedure ......................................
Section 8.4 Merger, Consolidation and Sale of Assets .................
Section 8.5 Incorporation ............................................
-iii-
<PAGE>
Page
----
ARTICLE IX -- Reports to Shareholders
ARTICLE X -- Miscellaneous
Section 10.1 Filing ..................................................
Section 10.2 Governing Law ...........................................
Section 10.3 Counterparts ............................................
Section 10.4 Reliance by Third Parties ...............................
Section 10.5 Provisions in Conflict with Law or Regulations ..........
Section 10.6 Name Reservations .......................................
-iv-
<PAGE>
DECLARATION OF TRUST
OF
AARP INCOME TRUST
Dated June ____, 1984,
As Amended October ____, 1984
DECLARATION OF TRUST made June , 1984 by David S. Lee (together with
all other persons from time to time duly elected, qualified and serving as
Trustees in accordance with the provisions of Article II hereof, the
"Trustees");
WHEREAS, the Trustees desire to establish a trust for the investment
and reinvestment of funds contributed thereto; and
WHEREAS, the Trustees desire that the beneficial interest in the
trust assets be divided into transferable shares of beneficial interest, as
hereinafter provided;
NOW, THEREFORE, the Trustees declare that all money and property
contributed to the trust established hereunder shall be held and managed in
trust for the benefit of the holders, from time to time, of the shares of
beneficial interest issued hereunder and subject to the provisions hereof.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby, until and
unless changed by the Trustees as provided in Section 8.3(a) hereof, is the
"AARP Income Trust."
Section 1.2. Definitions. Wherever they are used herein, the
following terms have the following respective meanings.
<PAGE>
-2-
(a) "By-laws" means the By-laws referred to in Section 2.8
hereof, as from time to time amended.
(b) The terms Commission" and "Interested Person," have the
meanings given them in the 1940 Act. Except as otherwise defined by the Trustees
in conjunction with the establishment of any series of Shares, the term "vote of
a majority of the Shares outstanding and entitled to vote" shall have the same
meaning as the term "vote of a majority of the outstanding voting securities"
given it in the 1940 Act.
(c) "Custodian" means any Person other than the Trust who has
custody of any Trust Property as required by ss. 17(f) of the 1940 Act, but does
not include a system for the central handling of securities described in said
ss. 17(f).
(d) "Declaration" means this Declaration of Trust as amended
from time to time. Reference in this Declaration of Trust to "Declaration",
"hereof," and "hereunder" shall be deemed to refer to this Declaration rather
than exclusively to the article or section in which such words appear.
(e) "Distributor" means the party, other than the Trust, to
the contract described in Section 3.1 hereof.
(f) "His" shall include the feminine and neuter, as well as
the masculine, genders.
<PAGE>
-3-
(g) "Municipal Bonds" means obligations issued by or on behalf
of states, territories and of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest from
which is exempt from Federal income tax.
(i) The "1940 Act" means the Investment Company Act of 1940,
as amended from time to time.
(j) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
(k) "Shareholder" means a record owner of Outstanding Shares.
(l) "Shares" means the equal proportionate units of interest
into which the beneficial interest in the Trust shall be divided from time to
time, including the Shares of any and all series which may be established by the
Trustees, and includes fractions of Shares as well as whole Shares.
"Outstanding" Shares means those Shares shown from time to time on the books of
the Trust or its Transfer Agent as then issued and outstanding, but shall not
include Shares which have been redeemed or repurchased by the Trust and which
are at the time held in the Treasury of the Trust.
(m) "Transfer Agent" means any Person other than the Trust who
maintains the Shareholder records of the
<PAGE>
-4-
Trust, such as the list of Shareholders, the number of Shares credited to each
account, and the like.
(n) The "Trust" means the AARP Income Trust.
(o) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust or the Trustees.
(p) The "Trustees" means the Person who has signed this
Declaration, so long as he shall continue in office in accordance with the terms
hereof, and all other Persons who may from time to time be duly elected,
qualified and serving as Trustees in accordance with the provisions of Article
II hereof, and reference herein to a Trustee or the Trustees shall refer to such
Person or Persons in this capacity or their capacities as trustees hereunder.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and
<PAGE>
-5-
carry on its operations in any and all of its branches and maintain offices both
within and without the Commonwealth of Massachusetts, in any and all states of
the United States of America, in the District of Columbia, and in any and all
commonwealths, territories, dependencies, colonies, possessions, agencies or
instrumentalities of the United States of America and of foreign governments,
and to do all such other things and execute all such instruments as they may
deem necessary, proper or desirable in order to promote the interests of the
Trust although such things are not herein specifically mentioned. Any
determination as to what is in the interests of the Trust made by the Trustees
in good faith shall be conclusive. In construing the provisions of this
Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
The enumeration of any specific power herein shall not be construed
as limiting the aforesaid power. Such powers of the Trustees may be executed
without order of or resort to any court.
Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment
company, and exercise all the powers necessary and appropriate to the conduct of
such operations.
(b) To invest in, hold for investment, or reinvest in,
securities, including common and preferred
<PAGE>
-6-
stocks; warrants; bonds, debentures, bills, time notes and all other evidences
of indebtedness; negotiable or non-negotiable instruments; government
securities, including securities of any state, municipality or other political
subdivision thereof, or any government or quasi-governmental agency or
instrumentality; and money market instruments including bank certificates of
deposit, finance paper, commercial paper, bankers acceptances and all kinds of
repurchase agreements, of any corporation, company, trust, association, firm or
other business organization however established, and of any country, state,
municipality or other political subdivision, or any governmental or
quasi-governmental agency or instrumentality.
(c) To acquire (by purchase, subscription or otherwise), to
hold, to trade in and deal in, to acquire or write any rights or options to
purchase or sell, to sell or otherwise dispose of, to lend, and to pledge any
such securities and repurchase agreements.
(d) To exercise all rights, powers and privileges of ownership
or interest in all securities and repurchase agreements included in the Trust
Property, including the right to vote thereon and otherwise act with respect
thereto and to do all acts for the preservation, protection, improvement and
enhancement in value of all such securities and repurchase agreements.
<PAGE>
-7-
(e) To acquire (by purchase, lease or otherwise) and to hold,
use, maintain, develop and dispose of (by sale or otherwise) any property, real
or personal, including cash, and any interest therein.
(f) To borrow money and in this connection issue notes or
other evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee, or
undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.
(g) To aid by further investment any corporation, company,
trust, association or firm, any obligation of or interest in which is included
in the Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest: to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm.
(h) In general to carry on any other business in connection
with or incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the attainment of
any object or the furtherance of any power hereinbefore set forth, either alone
or in association with others, and to do
<PAGE>
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every other act or thing incidental or appurtenant to or growing out of or
connected with the aforesaid business or purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations
maturing before the possible termination of the Trust, nor shall the Trustees be
limited by any law limiting the investments which may be made by fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property,
including the property of any series of the Trust, shall be vested in the
Trustees as joint tenants except that the Trustees shall have power to cause
legal title to any Trust Property to be held by or in the name of one or more of
the Trustees, or in the name of the Trust, or in the name of any other Person as
nominee, on such terms as the Trustees may determine, provided that the interest
of the Trust therein is deemed appropriately protected. The right, title and
interest of the Trustees in the Trust Property and the property of each series
of the Trust shall vest automatically in each Person who may hereafter become a
Trustee. Upon the termination of the term of office, resignation, removal or
death of a Trustee he shall automatically cease to have any right, title or
interest in any of the Trust Property or the property of any series of the
Trust,
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and the right, title and interest of such Trustee in all such property shall
vest automatically in the remaining Trustees. Such vesting and cessation of
title shall be effective whether or not conveying documents have been executed
and delivered.
Section 2.4. Issuance and Repurchase of Securities. The Trustees
shall have the power to issue, sell, repurchase, redeem, retire, cancel,
acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in
Shares and, subject to the provisions set forth in Articles VI and VII and
Section 5.11 hereof, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds or property of the particular
series of the Trust with respect to which such Shares are issued, whether
capital or surplus or otherwise, to the full extent now or hereafter permitted
by the laws of the Commonwealth of Massachusetts governing business
corporations.
Section 2.5. Delegation; Committees. The Trustees shall have power
to delegate from time to time to such of their number or to officers, employees
or agents of the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient, to the same extent as such
delegation is permitted by the 1940 Act.
Section 2.6. Collection and Payment. The Trustees shall have power
to collect all property due to the Trust; to pay all claims, including taxes,
against the Trust
<PAGE>
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property; to prosecute, defend, compromise or abandon any claims relating to the
Trust Property; to foreclose any security interest securing any obligations, by
virtue of which any property interest securing any obligations, by virtue of
which any property is owed to the Trust; and to enter into releases, agreements
and other instruments.
Section 2.7. Expenses. The Trustees shall have the power to incur
and pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of this Declaration, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
Section 2.8. Manner of Acting; By-laws. Except as otherwise provided
herein or in the By-laws, any action to be taken by the Trustees may be taken by
a majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of the entire number
of Trustees then in office. The Trustees may adopt By-laws not inconsistent
with this Declaration to provide for the conduct of the business of the Trust
and may amend or repeal such By-laws to the extent such power is not reserved to
the Shareholders.
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Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
Section 2.9. Miscellaneous Powers. The Trustees shall have the power
to: (a) employ or contract with such Persons as the Trustees may deem desirable
for the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations; (c) remove Trustees or
fill vacancies in or add to their number, elect and remove such officers and
appoint and terminate such agents or employees as they consider appropriate, and
appoint from their own number, and terminate, any one or more committees which
may exercise some or all of the power and authority of the Trustees as the
Trustees may determine; (d) purchase, and pay for out of Trust Property,
insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, distributors, selected dealers or independent
contractors of the Trust
<PAGE>
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against all claims arising by reason of holding any such position or by reason
of any action taken or omitted by any such Person in such capacity, whether or
not constituting negligence, or whether or not the Trust would have the power to
indemnify such Person against such liability; (e) establish pension,
profit-sharing, Share purchase, and other retirement, incentive and benefit
plans for any Trustees, officers, employees and agents of the Trust; (f) to the
extent permitted by law, indemnify any person with whom the Trust has dealings,
including the Investment Adviser, Distributor, Transfer Agent and selected
dealers, to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
fiscal year of the Trust and the method by which its accounts shall be kept; and
(i) adopt a seal for the Trust, but the absence of such seal shall not impair
the validity of any instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions. Except in transactions not
permitted by the 1940 Act or rules and regulations adopted by the Commission,
the Trustees may, on behalf of the Trust, buy any securities from or sell any
securities to, or lend any assets of the Trust to, any Trustee or officer of the
Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with the Investment Adviser, Distributor or
transfer agent or with any Interested Person of such Person; and the Trust may
employ any such Person, or firm or
<PAGE>
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company in which such Person is an Interested Person, as broker, legal counsel,
registrar, transfer agent, dividend disbursing agent or custodian upon customary
terms.
Section 2.11. Number of Trustees. The number of Trustees shall
initially be one (1), and thereafter shall be such number as shall be fixed from
time to time by a written instrument signed by a majority of the Trustees,
provided, however, that the number of Trustees shall in no event be less than
one (1) nor more than fifteen (15).
Section 2.12. Election and Term. Except for the Trustees named
herein, designated by such Trustees prior to the issuance of Shares, or
appointed to fill vacancies pursuant to Section 2.14 hereof, the Trustees shall
be elected by the Shareholders owning of record a plurality of the Shares voting
at a meeting of Shareholders called for that purpose. Except in the event of
resignation or removals pursuant to Section 2.13 hereof, each Trustee shall hold
office until the next such meeting of Shareholders and until his successor is
duly elected and qualified.
Section 2.13. Resignation and Removal. Any Trustee may resign his
trust (without need for prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided the aggregate
number of
<PAGE>
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Trustees after such removal shall not be less than three) with cause, by the
action of two-thirds of the remaining Trustees. Upon the resignation or removal
of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property or
property of any series of the Trust held in the name of the resigning or removed
Trustee. Upon the incapacity or death of any Trustee, his legal representative
shall execute and deliver on his behalf such documents as the remaining Trustee
shall require as provided in the preceding sentence.
Section 2.14. Vacancies. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of the death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform the
duties of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing vacancy, including a vacancy existing by
reason of an increase in the number of Trustees. Subject to the provisions of
Section 16(a) of the 1940 Act, the remaining Trustees shall fill such vacancy by
the appointment of such other person as they in their discretion shall see fit,
made by a written instrument signed by a majority of the Trustees then in
office. Any such appointment shall not become effective, however, until the
person named in the written instrument of appointment shall have accepted in
writing such appointment
<PAGE>
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and agreed in writing to be bound by the terms of the Declaration. An
appointment of a Trustee may be made in anticipation of a vacancy to occur at a
later date by reason of retirement, resignation or increase in the number of
Trustees, provided that such appointment shall not become effective prior to
such retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.14, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by the Declaration. A written
instrument certifying the existence of such vacancy signed by a majority of the
Trustees in office shall be conclusive evidence of the existence of such
vacancy.
Section 2.15. Delegation of Power to Other Trustees. Any Trustee
may, by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall less than two (2) Trustees personally exercise the powers granted to
the Trustees under this Declaration, except as herein otherwise expressly
provided.
ARTICLE III
CONTRACTS
Section 3.1. Underwriting Contract. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
underwriting contract or contracts
<PAGE>
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providing for the sale of the Shares to net the Trust not less than the amount
provided for in Section 7.1. of Article VII hereof, whereby the Trustees may
either agree to sell the Shares to the other party to the contract or appoint
such other party their sales agent for the Shares, and in either case on such
terms and conditions as may be prescribed in the By-laws, if any, and such
further terms and conditions as the Trustees may in their discretion determine
not inconsistent with the provisions of this Article III or of the By-laws; and
such contract may also provide for the repurchase of the Shares by such other
party as agent of the Trustees.
Section 3.2. Advisory or Management Contract. The Trustees may in
their discretion from time to time enter into an investment advisory or
management contract whereby the other party to such contract shall undertake to
furnish to the Trust such management, investment advisory, statistical and
research facilities and services and such other facilities and services, if any,
and all upon such terms and conditions as the Trustees may in their discretion
determine, including the grant of authority to such other party to determine
what securities shall be purchased or sold by the Trust and what portion of its
assets shall be uninvested, which authority shall include the power to make
changes in the Trust's investments.
<PAGE>
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Section 3.3. Affiliations of Trustees or Officers, Etc. The fact
that:
(i) any of the Shareholders, Trustees or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
manager, adviser or distributor of or for any partnership,
corporation, trust, association or other organization or of or for
any parent or affiliate of any organization, with which a contract
of the character described in Sections 3.1 or 3.2 above or for
services as Custodian, Transfer Agent or disbursing agent or for
related services may have been or may hereafter be made, or that any
such organization, or any parent or affiliate thereof, is a
Shareholder of or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract or the character described in
Sections 3.1 or 3.2 above or for services as Custodian, Transfer
Agent or disbursing agent or for related services may have been or
may hereafter be made also has any one or more of such contracts
with one or more other partnerships, corporations, trusts,
associations or other organizations, or has other business or
interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust
<PAGE>
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from voting upon or executing the same or create any liability or accountability
to this Trust or its Shareholders.
Section 3.4. Compliance with 1940 Act. Any contract entered into
pursuant to Sections 3.1 or 3.2 shall be consistent with and subject to the
requirements of Section 15 of the Investment Company Act of 1940 (including any
amendment thereof or other applicable Act of Congress hereafter enacted) with
respect to its continuance in effect, its termination and the method of
authorization and approval of such contract or renewal thereof.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc.
No Shareholder shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or affairs of
the Trust. No Trustee, officer, employee or agent of the Trust shall be subject
to any personal liability whatsoever to any Person, other than to the Trust or
its Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person; and all such
Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs
<PAGE>
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of the Trust. If any Shareholder, Trustee, officer, employee, or agent, as such,
of the Trust is made a party to any suit or proceeding to enforce any such
liability of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability, provided that
any such expenses shall be paid solely out of the funds and property of the
series of the Trust with respect to which such Shareholder's Shares are issued.
The rights accruing to a Shareholder under this Section 4.1 shall not exclude
any other right to which such Shareholder may be lawfully entitled, nor shall
anything herein contained restrict the right of the Trust to indemnify or
reimburse a Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee, agent or service provider
thereof for any action or failure to act by him (her) or any other such Trustee,
officer, employee, agent or service provider (including without limitation the
failure to compel in any way any former or acting Trustee to redress any breach
of
<PAGE>
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trust) except for his own bad faith, willful misfeasance, gross negligence or
reckless disregard of the duties involved in the conduct of his office. The term
"service provider," as used in this Section 4.2, shall include any investment
adviser, principal underwriter or other person with whom the Trust has an
agreement for provision of services.
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of
the Trust shall be indemnified by the Trust to the fullest extent
permitted by law against all liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party
or otherwise by virtue of his being or having been a Trustee or
officer and against amounts paid or incurred by him in the
settlement thereof;
(ii) the words "claim", "action", "suit", or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal, or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
<PAGE>
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(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body before
which the proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i)
resulting in a payment by a Trustee or officer, unless there has
been a determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office:
(A) by the court or other body approving the settlement
or other disposition; or
<PAGE>
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(B) based upon a review of readily available facts (as
opposed to a full trial-type inquiry) by (x) vote of a
majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then
in office act on the matter) or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
other rights to which any Trustee or officer may now or hereafter be entitled,
shall continue as to a person who has ceased to be such Trustee or officer and
shall inure to the benefit of the heirs, executors, administrators and assigns
of such a person. Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than Trustees and officers
may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section 4.3 may be advanced by the Trust prior to final disposition thereof
<PAGE>
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upon receipt of an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to indemnification
under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other, appropriate security provided by the recipient, or the Trust
shall be insured against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees act
on the matter) or an independent legal counsel in a written opinion
shall determine, based upon a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to
believe that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one
who is not (i) an "Interested Person" of the Trust (including anyone
who has been exempted from being an "Interested Person" by any rule,
regulation or order of the Commission), or (ii) involved in the
claim, action, suit or proceeding.
<PAGE>
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Section 4.4. No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments,
Etc. No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking, and every other act or thing whatsoever executed in connection with
the Trust shall be conclusively presumed to have been executed or done by the
executors thereof only in their capacity as Trustees under this Declaration or
in their capacity as officers, employees or agents of the Trust. Every written
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking made or issued by the Trustees may recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of the Trust under any such instrument are
not binding upon any of the Trustees or Shareholders individually, but bind only
the estate of the Trust or series, as applicable, and may contain any further
recital which they or he may deem
<PAGE>
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appropriate, but the omission of such recital shall not operate to bind the
Trustees individually. The Trustees shall at all times maintain insurance for
the protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by the Investment Adviser, the Distributor,
Transfer Agent, selected dealers, accountants, appraisers or other experts or
consultants selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable
<PAGE>
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Shares of beneficial interest of $.01 par value per share. All Shares shall be
of one class, except as provided in Section 5.11 hereof. The number of shares of
beneficial interest authorized hereunder is unlimited. All Shares issued
hereunder including, without limitation, Shares issued in connection with a
dividend in Shares or a split of Shares, shall be fully paid and non-assessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust
Property and the property of each series of the Trust of every description and
the right to conduct any business hereinbefore described are vested exclusively
in the Trustees, and the Shareholders shall have no interest therein other than
the beneficial interest conferred by their Shares, and they shall have no right
to call for any partition or division of any property, profits, rights or
interests of the Trust nor can they be called upon to share or assume any losses
of the Trust or suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the rights in this
Declaration specifically set forth. The Shares shall not entitle the holder to
preference, preemptive, appraisal, conversion or exchange rights, except as the
Trustees may determine with respect to any series of Shares.
<PAGE>
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Section 5.3. Trust Only. It is the intention of the Trustees to
create only the relationship of Trustee and beneficiary between the Trustees and
each Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their discretion
may, from time to time without vote of the Shareholders, issue Shares, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times and on such
terms as the Trustees may deem best, and may in such manner acquire other assets
(including the acquisition of assets subject to, and in connection with the
assumption of liabilities) and businesses. In connection with any issuance of
Shares, the Trustees may issue fractional Shares and Shares held in the
treasury, and Shares may be issued in separate series as provided in Section
5.11 hereof. The Trustees may from time to time divide or combine the Shares
into a greater or lesser number without thereby changing the proportionate
beneficial interests in the Trust or any series. Contributions to the Trust may
be accepted for, and Shares
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shall be redeemed as, whole Shares and/or 1/1,000ths of a Share or integral
multiples thereof.
Section 5.5. Register of Shares. A register shall be kept at the
principal office of the Trust or an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers thereof. Such register
shall be conclusive as to who are the holders of the Shares and who shall be
entitled to receive dividends or distributions or otherwise to exercise or enjoy
the rights of Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him as herein or in
the By-laws provided, until he has given his address to the Transfer Agent or
such other officer or agent of the Trustees as shall keep the said register for
entry thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of share certificates and promulgate appropriate rules and regulations as to
their use.
Section 5.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be
<PAGE>
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required. Upon such delivery the transfer shall be recorded on the register of
the Trust. Until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer, employee or agent
of the Trust shall be affected by any notice of the proposed transfer.
Any Person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation
of law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.
Section 5.7. Notices. Any and all notices to which any Shareholder
may be entitled and any and all communications shall be deemed duly served or
given if mailed, postage pre-paid, addressed to any Shareholder of record at his
last known address as recorded on the register of the Trust.
<PAGE>
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Section 5.8. Treasury Shares. Shares held in the treasury shall,
until reissued pursuant to Section 5.4, not confer any voting rights on the
Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power to
vote only (i) for the election of Trustees as provided in Section 2.12; (ii)
with respect to any investment advisory or management contract entered into
pursuant to Section 3.2; (iii) with respect to termination of the Trust as
provided in Section 8.2; (iv) with respect to any amendment of this Declaration
to the extent and as provided in Section 8.3; (v) with respect to any merger,
consolidation or sale of assets as provided in Section 8.4; (vi) with respect to
incorporation of the Trust to the extent and as provided in Section 8.5; (vii)
to the same extent as the stockholders of a Massachusetts business corporation
as to whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders; and (viii) with respect to such additional matters relating
to the Trust as may be required by this Declaration, the By-laws or any
registration of the Trust as an investment company under the 1940 Act with the
Commission (or any successor agency) or as the Trustees may consider necessary
or desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote
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and each fractional Share shall be entitled to a proportionate fractional vote,
except that the Trustees may, in conjunction with the establishment of any
series of Shares, establish conditions under which the several series shall have
separate voting rights or no voting rights. There shall be no cumulative voting
in the election of Trustees. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration or the By-laws to be taken by Shareholders. The By-laws may include
further provisions for Shareholders, votes and meetings and related matters.
Section 5.10. Meetings of Shareholders. A meeting of the
Shareholders shall be held at such times, on such day and at such hour as the
Trustees may from time to time determine, either at the principal office of the
Trust, or at such other place as may be designated by the Trustees, for the
purposes specified in Section 2.12 and for such other purposes as may be
specified by the Trustees.
Section 5.11. Series Designation. The Trustees, in their discretion,
may authorize the division of Shares into two or more series, and the different
series shall be established and designated, and the variations in the relative
rights and preferences as between the different series shall be fixed and
determined, by the Trustees; provided, that all Shares shall be identical except
that there may be variations so fixed and determined between
<PAGE>
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different series as to investment objective, purchase price, right of
redemption, special and relative rights as to dividends and on liquidation,
conversion rights, and conditions under which the several series shall have
separate voting rights. All references to Shares in this Declaration shall be
deemed to be Shares of any or all series as the context may require.
If the Trustees shall divide the Shares of the Trust into two or
more series, the following provisions shall be applicable:
(a) All provisions herein relating to the Trust shall apply equally
to each series of the Trust except as the context requires otherwise.
(b) The number of authorized Shares and the number of Shares of each
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired of
any series into one or more series that may be established and designated from
time to time. The Trustees may hold as treasury shares (of the same or some
other series), reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any series reacquired by the Trust at their
discretion from time to time.
<PAGE>
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(c) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors of such series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular series, the Trustees shall allocate them among any
one or more of the series established and designated from time to time in such
manner and on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive and binding
upon all persons for all purposes.
(d) The assets belonging to each particular series shall be charged
with the liabilities of the Trust in respect of that series and all expenses,
costs, charges and reserves attributable to that series, and any general
liabilities, expenses, costs, charges or reserves of the
<PAGE>
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Trust which are not readily identifiable as belonging to any particular series
shall be allocated and charged by the Trustees to and among any one or more of
the series established and designated from time to time in such manner and on
such basis as the Trustees in their sole discretion deem fair and equitable and
no series shall be liable to any person except for its allocated share. Each
allocation of liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon all persons for all purposes. The Trustees
shall have full discretion, to the extent not inconsistent with the 1940 Act, to
determine which items are capital; and each such determination and allocation
shall be conclusive and binding upon all persons. The assets of a particular
series of the Trust shall, under no circumstances, be charged with liabilities
attributable to any other series of the Trust. All persons extending credit to,
or contracting with or having any claim against a particular series of the Trust
shall look only to the assets of that particular series for payment of such
credit, contract or claim.
(e) Each Share of a series of the Trust shall represent a beneficial
interest in the net assets of such series. Each holder of Shares of a series
shall be entitled to receive his pro rata share of distributions of income and
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capital gains made with respect to such series. Upon redemption of his Shares or
indemnification for liabilities incurred by reason of his being or having been a
Shareholder of a series, such Shareholder shall be paid solely out of the funds
and property of such series of the Trust. Upon liquidation or termination of a
series of the Trust, Shareholders of such series shall be entitled to receive a
pro rata share of the net assets of such series. A Shareholder of a particular
series of the Trust shall not be entitled to participate in a derivative or
class action on behalf of any other series or the Shareholders of any other
series of the Trust.
(f) Notwithstanding any other provision hereof, on any matter
submitted to a vote of Shareholders of the Trust, all Shares then entitled to
vote shall be voted by individual series, except that (1) when required by the
1940 Act, Shares shall be voted in the aggregate and not by individual series,
and (2) when the Trustees have determined that the matter affects only the
interests of Shareholders of a limited number of series, then only the
Shareholders of such series shall be entitled to vote thereon.
The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the then Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such series, or as otherwise provided in such instrument. At any
time that there are no Shares outstanding of any particular series previously
established and designated,
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the Trustees may by an instrument executed by a majority of their number abolish
that series and the establishment and designation thereof. Each instrument
referred to in this paragraph shall have the status of an amendment to this
Declaration.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust.
The Trust shall redeem the Shares at the price determined as
hereinafter set forth, upon the appropriately verified written application of
the record holder thereof (or upon such other form of request as the Trustees
may determine) at such office or agency as may be designated from time to time
for that purpose by the Trustees. The Trustees may from time to time specify
additional conditions, not inconsistent with the 1940 Act, regarding the
redemption of Shares in the Trust's then effective registration statement or
prospectus under the Securities Act of 1933.
Section 6.2. Price. Shares will be redeemed at their net asset value
determined as set forth in Section 7.1 hereof as of such time as the Trustees
shall have theretofore prescribed by resolution. In the absence of such
resolution, the redemption price of Shares deposited shall be the net
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asset value of such Shares next determined as set forth in Section 7.1 hereof
after receipt of such application.
Section 6.3. Payment. Payment for such Shares shall be made in cash
or in property out of the assets of the relevant series of the Trust to the
Shareholder of record at such time and in the manner, not inconsistent with the
1940 Act or other applicable laws, as may be specified from time to time in the
Trust's then effective registration statement or prospectus under the Securities
Act of 1933, subject to the provisions of Section 6.4 hereof.
Section 6.4. Effect of Suspension of Determination of Net Asset
Value. If, pursuant to Section 6.9 hereof, the Trustees shall declare a
suspension of the determination of net asset value, the rights of Shareholders
(including those who shall have applied for redemption pursuant to Section 6.1
hereof but who shall not yet have received payment) to have Shares redeemed and
paid for by the Trust shall be suspended until the termination of such
suspension is declared. Any record holder who shall have his redemption right so
suspended may, during the period of such suspension, by appropriate written
notice of revocation at the office or agency where application was made, revoke
any application for redemption not honored and withdraw any certificates on
deposit. The redemption price of Shares for which redemption applications have
not been revoked shall be the net asset value of such Shares next determined as
set forth in Section 7.1 after the termination of such suspension, and payment
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shall be made within seven (7) days after the date upon which the application
was made plus the period after such application during which the determination
of net asset value was suspended.
Section 6.5. Repurchase by Agreement. The Trust may repurchase
Shares directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.
Section 6.6. Redemption of Shareholder's Interest. The Trust shall
have the right at any time without prior notice to the Shareholder to redeem
Shares of any Shareholder for their then current net asset value per Share if at
such time the Shareholder owns Shares having an aggregate net asset value of
less than $250 subject to such terms and conditions as the Trustees may approve,
and subject to the Trust's giving general notice to all Shareholders of its
intention to avail itself of such right, either by publication in the Trust's
prospectus, if any, or by such other means as the Trustees may determine.
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Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. If the Trustees shall, at any time
and in good faith, be of the opinion that direct or indirect ownership of Shares
or other securities of the Trust has or may become concentrated in any Person to
an extent which would disqualify any series of the Trust as a regulated
investment company under the Internal Revenue Code, then the Trustees shall have
the power by lot or other means deemed equitable by them (i) to call for
redemption by any such Person a number, or principal amount, of Shares or other
securities of the Trust sufficient to maintain or bring the direct or indirect
ownership of Shares or other securities of the Trust into conformity with the
requirements for such qualification and (ii) to refuse to transfer or issue
Shares or other securities of the Trust to any Person whose acquisition of the
Shares or other securities of the Trust in question would result in such
disqualification. The redemption shall be effected at the redemption price and
in the manner provided in Section 6.1.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees may deem necessary to comply with the provisions of the
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Internal Revenue Code, or to comply with the requirements of any other taxing
authority.
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to
Net Asset Value Formula. The Trust may also reduce the number of outstanding
Shares pursuant to the provisions of Section 7.3.
Section 6.9. Suspension of Right of Redemption. The Trust may
declare a suspension of the right of redemption or postpone the date of payment
or redemption for the whole or any part of any period (i) during which the New
York Stock Exchange is closed other than customary weekend and holiday closings,
(ii) during which trading on the New York Stock Exchange is restricted, (iii)
during which an emergency exists as a result of which disposal by the Trust of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust fairly to determine the value of its net assets, or
(iv) during any other period when the Commission may for the protection of
security holders of the Trust by order permit suspension of the right of
redemption or postponment of the date of payment or redemption; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (ii), (iii), or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify but not later than the close
of business on the business day next following the declaration of suspension,
and thereafter there shall be no right of redemption or payment on redemption
<PAGE>
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until the Trust shall declare the suspension at an end, except that the
suspension shall terminate in any event on the first day on which said stock
exchange shall have reopened or the period specified in (ii) or (iii) shall have
expired (as to which, in the absence of an official ruling by the Commission,
the determination of the Trust shall be conclusive). In the case of a suspension
of the right of redemption, a Shareholder may either withdraw his request for
redemption or receive payment based on the net asset value existing after the
termination of the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The value of the assets of any series
of the Trust shall be determined by appraisal of the securities allocated to
such series, such appraisal to be on the basis of the market value of such
securities or, consistent with the rules and regulations of the Commission, by
such other method as shall be deemed to reflect the fair value thereof,
determined in good faith by or under the direction of the Trustees. Money market
instruments with remaining maturities of less than sixty days shall be valued on
an amortized cost basis. From the total value of said assets, there shall be
deducted all indebtedness, interest, taxes, payable or accrued, including
estimated taxes on unrealized book profits, expenses and management charges
accrued to the appraisal date, net income determined
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and declared as a distribution and all other items in the nature of liabilities
attributable to such series which shall be deemed appropriate. The resulting
amount which shall represent the total net assets of the series shall be divided
by the number of Shares of such series outstanding at the time and the quotient
so obtained shall be deemed to be the net asset value of the Shares of such
series. The net asset value of the Shares shall be determined at least once on
each business day, as of the close of trading on the New York Stock Exchange or
as of such other time or times as the Trustees shall determine. The power and
duty to make the daily calculations may be delegated by the Trustees to the
Investment Adviser, the Custodian, the Transfer Agent or such other Person as
the Trustees by resolution may determine. The Trustees may suspend the daily
determination of net asset value to the extent permitted by the 1940 Act.
Section 7.2. Distributions to Shareholders. The Trustees shall from
time to time distribute ratably among the Shareholders of a series such
proportion of the net profits, surplus (including paid-in surplus), capital, or
assets of such series held by the Trustees as they may deem proper. Such
distributions may be made in cash or property (including without limitation any
type of obligations of such series or any assets thereof), and the Trustees may
distribute ratably among the Shareholders additional Shares of such series
issuable hereunder in such manner, at such times, and on such terms as the
Trustees may deem proper. Such distributions
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may be among the Shareholders of record at the time of declaring a distribution
or among the Shareholders of record at such other date or time or dates or times
as the Trustees shall determine. The Trustees may in their discretion determine
that, solely for the purposes of such distributions, Outstanding Shares shall
exclude Shares for which orders have been placed subsequent to a specified time
on the date the distribution is declared or on the next preceding day if the
distribution is declared as of a day on which Boston banks are not open for
business, all as described in the then effective registration statement or
prospectus under the Securities Act of 1933. The Trustees may always retain from
the net profits such amount as they may deem necessary to pay the debts or
expenses of the series or to meet obligations of the series, or as they may deem
desirable to use in the conduct of its affairs or to retain for future
requirements or extensions of the business. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plans, cash dividend payout plans or
related plans as the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for Federal
income tax purposes may vary from the computation thereof on the books, the
above provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficent to
enable the Trust or the series to avoid or reduce liability for taxes.
<PAGE>
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Section 7.3. Determination of Net Income. The net income of any
series may consist of (i) all interest income accrued on portfolio assets of the
series, less (ii) all actual and accrued liabilities determined in accordance
with generally accepted accounting principles and plus or minus (iii) net
realized or net unrealized gains and losses on the assets of the series.
Interest income may include discount earned (including both original issue and
market discount) on discount paper accrued ratably to the date of maturity or
determined in such other manner as the Trustees may determine. Expenses of the
series, including the advisory or management fee, shall be accrued each day.
Such net income may be determined by or under the direction of the Trustees as
of the close of trading on the New York Stock Exchange on each day on which such
market is open or as of such other time or times as the Trustees shall
determine, and all the net income of the series, so determined, may be declared
as a dividend on the Outstanding Shares of such series. The Trustees shall have
full discretion to determine whether any cash or property received shall be
treated as income or as principal and whether any item of expense shall be
charged to the income or the principal account, and their determination made in
good faith shall be conclusive. In the case of stock dividends received, the
Trustees shall have full discretion to determine, in the light of the particular
circumstances, how much if any of the value thereof shall be treated as income,
the balance, if any, to be treated as principal.
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Section 7.4. Power to Modify Foregoing Procedures. Notwithstanding
any of the foregoing provisions of this Article VII, the Trustees may prescribe,
in their absolute discretion, such other bases and times for determining the per
Share net asset value of the series' Shares or net income, or the declaration
and payment of dividends and distributions as they may deem necessary or
desirable. Without limiting the generality of the foregoing, the Trustees may
establish several series of Shares in accordance with Section 5.11, and declare
dividends thereon in such manner as they shall determine.
ARTICLE VIII
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust or the series of the Trust shall
continue without limitation of time but subject to the provisions of this
Article VIII.
Section 8.2. Termination of Trust or Series of the Trust. (a) The
Trust or any series of the Trust may be terminated by the affirmative vote of
the holders of not less than two-thirds of the Shares outstanding and entitled
to vote, at any meeting of Shareholders or by an instrument in writing, without
a meeting, signed by a majority of the Trustees and consented to by the holders
of not less than two-thirds of such Shares, or by such other vote as may be
established by the Trustees with respect to any series of Shares. Upon the
termination of the Trust or any series of the Trust,
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(i) The Trust or the series of the Trust shall carry on no
business except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust or the series of the Trust and all of the powers of the
Trustees under this Declaration shall continue until the affairs of
the Trust or the series of the Trust shall have been wound up,
including the power to fulfill or discharge the contracts of the
Trust or the series of the Trust, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part
of the remaining Trust Property or property of the series of the
Trust to one or more persons at public or private sale for
consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its
business; provided that any sale, conveyance, assignment, exchange,
transfer or other disposition of all or substantially all the Trust
Property or property of the series of the Trust shall require
Shareholder approval in accordance with Section 8.4 hereof.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding
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agreements as they deem necessary for their protection, the Trustees
may distribute the remaining Trust Property, in cash or in kind or
partly each, among the Shareholders according to their respective
rights.
(b) After termination of the Trust or any series of the Trust
and distribution to the Shareholders as herein provided, a majority of the
Trustees shall execute and lodge among the records of the Trust or the series of
the Trust an instrument in writing setting forth the fact of such termination,
and the Trustees shall thereupon be discharged from all further liabilities and
duties hereunder, and the rights and interests of all Shareholders shall
thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may be
amended by a vote of the holders of a majority of the Shares outstanding and
entitled to vote or by any instrument in writing, without a meeting, signed by a
majority of the Trustees and consented to by the holders of a majority of the
Shares outstanding and entitled to vote. The Trustees may also amend this
Declaration without the vote or consent of Shareholders to change the name of
the Trust, to supply any omission, to cure, correct or supplement any ambiguous,
defective or inconsistent provision hereof, or if they deem it necessary to
conform this Declaration to the requirements of applicable federal laws or
regulations or the requirements of the regulated investment company provisions
of the Internal Revenue Code (including those provisions of such
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Code relating to the retention of the exemption from federal income tax with
respect to dividends paid by the Trust out of interest income received on
Municipal Bonds), but the Trustees shall not be liable for failing so to do.
(b) No amendment may be made under this Section 8.3 which
would change any rights with respect to any Shares of the Trust by reducing the
amount payable thereon upon liquidation of the Trust or by diminishing or
eliminating any voting rights pertaining thereto, except with the vote or
consent of the holders of two-thirds of the Shares outstanding and entitled to
vote, or by such other vote as may be established by the Trustees with respect
to any series of Shares. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability of
the Shareholders, Trustees, officers, employees and agents of the Trust or to
permit assessments upon Shareholders.
(c) A certificate signed by a majority of of the Trustees
setting forth an amendment and reciting that it was duly adopted by the
Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as
amended, and executed by a majority of the Trustees, shall be conclusive
evidence of such amendment when lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall become effective,
this
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Declaration may be terminated or amended in any respect by the affirmative vote
of a majority of the Trustees or by an instrument signed by a majority of the
Trustees.
Section 8.4. Merger, Consolidation and Sale of Assets. The Trust may
merge or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and for
such consideration when and as authorized at any meeting of Shareholders called
for the purpose by the affirmative vote of the holders of two-thirds of the
Shares outstanding and entitled to vote, or by an instrument or instruments in
writing without a meeting, consented to by the holders of two-thirds of the
Shares or by such other vote as may be established by the Trustees with respect
to any series of Shares; provided, however, that, if such merger, consolidation,
sale, lease or exchange is recommended by the Trustees, the vote or written
consent of the holders of a majority of the Shares outstanding and entitled to
vote, or such other vote or written consent as may be established by the
Trustees with respect to any series of Shares, shall be sufficient
authorization; and any such merger, consolidation, sale, lease or exchange shall
be deemed for all purposes to have been accomplished under and pursuant to the
statutes of the Commonwealth of Massachusetts.
Section 8.5. Incorporation. With the approval of the holders of a
majority of the Shares outstanding and
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entitled to vote, or by such other vote as may be established by the Trustees
with respect to any series of Shares, the Trustees may cause to be organized or
assist in organizing a corporation or corporations under the laws of any
jurisdiction or any other trust, partnership, association or other organization
to take over all of the Trust Property or to carry on any business in which the
Trust shall directly or indirectly have any interest, and to sell, convey and
transfer the Trust Property to any such corporation, trust, association or
organization in exchange for the Shares or securities thereof or otherwise, and
to lend money to, subscribe for the Shares or securities of, and enter into any
contracts with any such corporation, trust, partnership, association or
organization, or any corporation, partnership, trust, association or
organization in which the Trust holds or is about to acquire shares or any other
interest. The Trustees may also cause a merger or consolidation between the
Trust or any successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferrring a
portion of the Trust Property to such organizations or entities.
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ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders
a written financial report, which may be included in the Trust's prospectus, of
the transactions of the Trust, including financial statements which shall at
least annually be certified by independent public accountants.
ARTICLE X
MISCELLANEOUS
Section 10.1. Filing. This Declaration and any amendment hereto
shall be filed in the office of the Secretary of the Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its filing. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and shall, upon filing with the Secretary of the
Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein and may
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hereafter be referred to in lieu of the original Declaration and the various
amendments thereto.
Section 10.2. Governing Law. This Declaration is executed by the
Trustees and delivered in the Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said State.
Section 10.3. Counterparts. This Declaration may be simulantenously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed by
an individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c) the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements of
this Declaration, (e) the form of any By-laws adopted by or the identity of any
officers elected by the Trustees, or (f) the existence of any fact or facts
which in any manner relate to the affairs of the Trust,
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shall be conclusive evidence as to the matters so certified in favor of any
Person dealing with the Trustees and their successors.
Section 10.5. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Declaration are severable, and if
the Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Declaration; provided, however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provisions in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
Section 10.6. Name Reservation. The Trust acknowledges that the
American Association of Retired Persons ("AARP") has reserved the right to grant
the non-exclusive use of the name "AARP" or any derivative thereof to any other
investment company, investment adviser, administrator, or distributor. In
addition, AARP reserves the right
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to grant the non-exclusive use of the name AARP to, and to withdraw such right
from, any other business or other enterprise. AARP/Scudder Financial Management
Company has reserved the right to withdraw from the Trust the use of the said
name AARP and will withdraw such name if AARP withdraws the right of
AARP/Scudder Financial Management Company to the use of such name.
IN WITNESS WHEREOF, the undersigned, pursuant to Article VIII,
Section 8.3(c) hereof, have executed this instrument as of the ____ day of
November, 1984.
- ------------------------- -------------------------
George S. Johnston Cuyler W. Findlay
-------------------------
Cyril F. Brickfield
STATE OF NEW YORK )
ss: November __, 1984
COUNTY OF NEW YORK )
Then personally appeared the above-named George S. Johnston and
Cuyler W. Findlay, who acknowledged the foregoing instrument to be their free
act and deed.
Before me,
-------------------------
Notary Public
My commission expires:
DISTRICT OF COLUMBIA )
ss: November __, 1984
Then personally appeared the above-named Cyril F. Brickfield, who
acknowledged the foregoing instrument to be his free act and deed.
Before me,
-------------------------
Notary Public
My commission expires:
Exhibit 1(a)(2)
[STAMP] [STAMP]
CITY CLERK'S OFFICE FILED
SEP 22 1989 SEP 22 1989
CITY OF BOSTON SECRETARY OF STATE
CORPORATION DIVISION
AARP INCOME TRUST
Certificate of Amendment
The undersigned, being a duly elected and acting Trustee of AARP Income
Trust (the "Trust"), a business trust organized pursuant to a Declaration of
Trust (the "Declaration") dated June 8, 1984, as amended, does hereby certify
that at a meeting of the Trustees of the Trust duly called and held on June 28,
1989, at which meeting a quorum was present and acting throughout, the following
resolution was duly adopted by a vote of the Trustees, acting pursuant to
Article VIII, Section 8.3 of the Declaration:
FURTHER RESOLVED, that the Declaration of Trust be, and it hereby is,
further amended by changing the figure "$250" in Section 6.6 to "$500"
and that a certificate of amendment be duly executed and filed with the
Secretary of The Commonwealth of Massachusetts and the City Clerk of the
City of Boston.
IN WITNESS WHEREOF, the undersigned has, pursuant to Article X, Section
10.1 of the Declaration, this day executed this Certificate.
DATED: Sept 15, 1989 /s/ [Illegible]
------- ----------------------
Trustee
STATE OF NEW YORK
COUNTY OF New York, ss.
Then personally appeared George S. Johnston, the above-named Trustee, who
acknowledged the foregoing instrument to be his free act and deed.
Before me,
/s/ Therese M. Meany
-------------------------
Notary Public
My Commission Expires:
[STAMP]
THERESE M. MEANY
NOTARY PUBLIC, State of New York
No. 41-2644550 - Queens County
Certificate Filed in New York County
Term Expires November 30, 1989
Exhibit 1(a)(3)
[STAMP]
OFFICE OF THE CLERK
CITY HALL
BOSTON, MA 02201
FEB 7 1994
AARP INCOME TRUST
Certificate of Amendment
The undersigned, being a duly elected and qualified Trustee of AARP Income
Trust (the "Trust"), a business trust organized under the laws of The
Commonwealth of Massachusetts pursuant to an Amended and Restated Declaration of
Trust dated November 1, 1984, as amended, does hereby certify that at a meeting
of the Shareholders of the Trust, by the favorable vote on January 13, 1994 of a
majority of the shares issued and entitled to vote, the Shareholders adopted an
amendment to the Declaration of Trust as follows (additions underlined,
deletions struck out):
Section 6.6. Redemption of Shareholder Interest. The Trust shall have the
right at any time without prior notice to the Shareholder to redeem Shares
of any Shareholder for their then current net asset value per Share if at
any such time the Shareholder owns Shares having an aggregate net asset
value of less than an amount set from time to time by the Trustees subject
to such terms and conditions as the Trustees may approve, and subject to
the Trust's giving general notice to all Shareholders of its intention to
avail itself of such right, either by publication in the Trust's
prospectus, if any, or by such other means as the Trustees may determine.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
25th day of January, 1994.
DATED: January 25, 1994 /s/ Cuyler W. Findlay
-------------------------
Cuyler W. Findlay, Trustee
Then personally appeared Cuyler W. Findlay, the above-named Trustee, who
acknowledged the foregoing instrument to be his free act and deed.
Before me,
/s/ Therese M. Meany
--------------------------
Notary Public
My Commission Expires:
[STAMP]
THERESE M. MEANY
NOTARY PUBLIC, State of New York
No. 41-2844550 - Queens County
Certificate Filed in New York County
Term Expires November 30, 1995
Exh 1(b)(1)
[STAMP]
RECEIVED
& filed Michael
[STAMP]
DEC 3 1984
SECRETARY OF STATE
CORPORATION DIVISION
Establishment and
Designation of Series of Shares of
Beneficial Interest of $.01 Par Value Per Share
The undersigned being the Trustees of the AARP Income Trust, a
Massachusetts business trust, (the "Trust" acting pursuant to Section 5.11 of
the Trust's Declaration of Trust dated June 8, 1984, as amended, (the
"Declaration of Trust") hereby divide the shares of beneficial interest of the
Trust into two separate series, each series to have the following special and
relative rights:
1. The series shall be designated the "AARP GNMA and U.S. Treasury Fund"
and the "AARP General Bond Fund".
2. Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective prospectus and registration statement under the
Securities Act of 1933. Each share of beneficial interest of each series
("Share") shall be redeemable, shall be entitled to one vote (or fraction
thereof in respect of a fractional Share) on matters on which Shares of that
series shall be entitled to vote and shall represent a pro rata beneficial
interest in the assets allocated to that series, and shall be entitled to
receive its pro rata share of net assets of that series upon liquidation of that
series, all as provided in the Declaration of Trust.
3. Shareholders of each series shall vote separately as a class on any
matter except to the extent required by the Investment Company Act of 1940. Any
matter shall be deemed to have been effectively acted upon with respect to any
series as provided in Rule 18f-2, as from time to time in effect, under such Act
or any successor rule and in the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated among the
above-referenced series as set forth in Section 5.11 of the Declaration of
Trust, except that costs incurred and payable by the Trust in connection with
its organization and initial registration and public offering of shares shall be
divided equally among the above-referenced series and shall be amortized for
each such series over the period beginning on the date that such costs become
payable and ending sixty months after the commencement of operations of the
Trust.
<PAGE>
-2-
5. The Trustees (including any successor Trustees) shall have the right at
any time and from time to time to reallocate assets and expenses or to change
the designation of any series now or hereafter created, or to otherwise change
the special and relative rights of any such series provided that such chance
shall not adversely affect the rights of holders of Shares of a series.
IN WITNESS WHEREOF, the undersigned have executed this instrument
this 27 day of November, 1984.
-------------------------------
Cyril F. Brickfield
/s/ Cuyler W. Findlay
-------------------------------
Cuyler W. Findlay
/s/ George S. Johnston
-------------------------------
George S. Johnston
-------------------------------
Louise D. Crooks
/s/ Gordon Shillinglaw
-------------------------------
Dr. Gordon Shillinglaw
/s/ Edgar R. Fiedler
-------------------------------
Edgar R. Fiedler
/s/ Eugene P. Forrester
-------------------------------
Lt. Gen. Eugene P. Forrester
/s/ Robert N. Butler, MD
-------------------------------
Dr. Robert N. Butler
/s/ Robert J. Myers
-------------------------------
Robert J. Myers
/s/ George L. Maddox
-------------------------------
George L. Maddox, Jr.
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK ) November 27, 1984
Then personally appeared the above-named signatories who
acknowledged the foregoing instrument to be their free act and deed.
My commission expires: Before me,
/s/ Therese M. Meany
----------------------
Notary Public
[STAMP]
THERESE M. MEANY
NOTARY PUBLIC, State of New York
No. 41-2644550, Queens County
Cert. Filed in New York County
Term Expires March 30, 1985
Exhibit 1(b)(2)
[STAMP]
OFFICE OF THE CLERK
CITY HALL
BOSTON, MA 02201
APR 5 1990
AARP INCOME TRUST
Redesignation of Series
The undersigned, being at least a majority of the duly elected and
qualified Trustees of AARP Income Trust, a Massachusetts business trust (the
"Trust"), acting pursuant to Section 5.11 of the Amended and Restated
Declaration of Trust dated November 1, 1984, as amended. (the "Declaration of
Trust") of the Trust, hereby redesignate one series of the Trust by amending the
Establishment and Designation of Series of Shares of Beneficial Interest filed
with the Secretary of State of the Commonwealth of Massachusetts on December 3,
1984 as follows:
The "AARP General Bond Fund" is redesignated the "AARP High Quality Bond
Fund".
The foregoing shall be effective upon appropriate disclosure in the Trusts
Registration Statement under the Securities Act of 1933 or a supplement thereto.
Date: March 28, 1990
/s/ George S. Johnston /s/ Horace Deets
------------------------- -------------------------
George S. Johnston Horace Deets
/s/ Cuyler W. Findlay
------------------------- -------------------------
Cuyler W. Findlay Edgar R. Fiedler
/s/ Adelaide Atfard /s/ Eugene P. Forrester
------------------------- -------------------------
Adelaide Atfard Eugene P. Forrester
/s/ Cyril F. Brickfield /s/ George L Maddox
------------------------- -------------------------
Cyril F. Brickfield George L Maddox, Jr.
/s/ Lovola W. Burgess /s/ Robert J. Myers
------------------------- -------------------------
Lovola W. Burgess Robert J. Myers
/s/ Mildred M. Seltzer
------------------------- -------------------------
Robert N. Butler Mildred M. Seltzer
[STAMP]
RECEIVED
APR - 5 1990
SECRETARY OF STATE
[Illegible]
Exhibit 2(a)(1)
BY-LAWS
OF
AARP INCOME TRUST
As Amended
June 17, 1992
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - DEFINITIONS 1
ARTICLE II - OFFICES 1
Section 1. Principal Office 1
Section 2. Other Offices 1
ARTICLE III - SHAREHOLDERS 1
Section 1. Meetings 1
Section 2. Notice of Meetings 2
Section 3. Record Date for Meetings and Other
Purposes 2
Section 4. Proxies 3
Section 5. Action Without Meeting 4
ARTICLE IV - TRUSTEES 4
Section 1. Meetings of the Trustees 4
Section 2. Quorum and Manner of Acting 5
ARTICLE V - COMMITTEES 6
Section 1. Executive and Other Committees 6
Section 2. Meetings, Quorum and Manner of Acting 6
ARTICLE VI - OFFICERS 7
Section 1. General Provisions 7
Section 2. Term of Office and Qualifications 7
Section 3. Removal 8
Section 4. Chairperson of the Board 8
Section 5. Vice-Chairperson of the Board 8
Section 6. Powers and Duties of the President 9
Section 7. Powers and Duties of Executive Vice
Presidents and Vice Presidents 9
Section 8. Powers and Duties of the Treasurer 10
Section 9. Powers and Duties of the Secretary 10
Section 10. Powers and Duties of Assistant Treasurers 11
Section 11. Powers and Duties of Assistant Secretaries 11
Section 12. Compensation of Officers and Trustees and
Members of the Advisory Board 11
ARTICLE VII - FISCAL YEAR 12
ARTICLE VIII - SEAL 12
ARTICLE IX - WAIVERS OF NOTICE 12
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
----
ARTICLE X - CUSTODY OF SECURITIES 13
Section 1. Employment of a Custodian 13
Section 2. Action Upon Termination of Custodian
Agreement 13
Section 3. Provisions of Custodian Agreement 13
Section 4. Central Certificate System 15
Section 5. Acceptance of Receipts in Lieu of
Certificates 15
ARTICLE XI - AMENDMENTS 16
ARTICLE XII - INSPECTION OF BOOKS 16
ARTICLE XIII - MISCELLANEOUS 16
ii
<PAGE>
BY-LAWS
OF
AARP INCOME TRUST
ARTICLE I
DEFINITIONS
The terms "Commission", "Custodian", "Declaration", "Distributor",
"Investment Adviser", "Municipal Bonds", "l940 Act", "Shareholder", "Shares",
"Transfer Agent", "Trust", "Trust Property", "Trustees", and "vote of a majority
of the Shares outstanding and entitled to vote", have the respective meanings
given them in the Amended and Restated Declaration of Trust of AARP Income Trust
dated November 1, 1984, as amended from time to time.
ARTICLE II
OFFICES
Section 1. Principal Office. Until changed by the Trustees, the principal
office of the Trust in the Commonwealth of Massachusetts shall be in the City of
Boston, County of Suffolk.
Section 2. Other Offices. The Trust may have offices in such other places
without as well as within the Commonwealth as the Trustees from time to time may
determine.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. Meetings of the Shareholders shall be
<PAGE>
held as provided in the Declaration of Trust at such place within or without the
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares present in person or by proxy shall constitute a
quorum at any meeting of the Shareholders.
Section 2. Notice of Meetings. Notice of all meetings of the Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder at his/her address as recorded on the
register of the Trust mailed at least ten (10) days and not more than sixty (60)
days before the meeting. Only the business stated in the notice of the meeting
shall be considered at such meeting. Any adjourned meeting may be held as
adjourned without further notice. No notice need be given to any Shareholder who
shall have failed to inform the Trust of his/her current address or if a written
waiver of notice, executed before or after the meeting by the Shareholder or his
attorney thereunto authorized, is filed with the records of the meeting.
Section 3. Record Date for Meetings and Other Purposes. For the purpose of
determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding thirty (30) days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more than
sixty (60) days prior to the date of any meeting of Shareholders or distribution
or other action as a record date for the determinations of the persons to be
treated
2
<PAGE>
as Shareholders of record for such purposes, except for dividend payments which
shall be governed by the Declaration.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. If the holder
of any such share is a minor or a person of unsound mind, and subject to
guardianship or the legal control of any other person as regards the charge or
management of such Share, he/she may vote by his guardian or such other person
appointed or having such control, and such vote may be
3
<PAGE>
given in person or by proxy.
Section 5. Action Without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-Laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consents shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the Chairperson, or by any
one of the Trustees, at the time being in office. Notice of the time and place
of each meeting other than regular or stated meetings shall be given by the
Secretary or an Assistant Secretary or by the officer or Trustee calling the
meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or sent by facsimile or other
communication leaving a visual record to each Trustee at his/her business
address, or personally delivered to him at least one day before the meeting.
Such notice may, however, be waived
4
<PAGE>
by any Trustee. Notice of a meeting need not be given to any Trustee if a
written waiver of notice, executed by him/her before or after the meeting, is
filed with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him/her. A notice or waiver of notice need not specify the purpose of any
meeting. Meetings can be held in conjunction with investment companies having
the same investment adviser or an affiliated investment adviser. The Trustees
may meet by means of a telephone conference circuit or similar communications
equipment by means of which all persons participating in the meeting shall be
deemed to have been held at a place designated by the Trustees at the meeting.
Participation in a telephone conference meeting shall constitute presence in
person at such meeting. Any action required or permitted to be taken at any
meeting of the Trustees may be taken by the Trustees without a meeting if all
the Trustees consent to the action in writing and the written consents are filed
with the records of the Trustees' meetings. Such consents shall be treated as a
vote for all purposes.
Section 2. Quorum and Manner of Acting. A majority of the Trustees shall
be present in person at any regular or special meeting of the Trustees in
order to constitute a quorum for the transaction of business at such meeting and
(except as otherwise required by law, the Declaration or these By-Laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may
5
<PAGE>
adjourn the meeting from time to time until a quorum shall be present. Notice of
an adjourned meeting need not be given.
ARTICLE V
COMMITTEES
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) to hold office at the pleasure
of the Trustees, which shall have the power to conduct the current and ordinary
business of the Trust while the Trustees are not in session, including the
purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to them except those
powers which by law, the Declaration or these By-Laws they are prohibited from
delegating. The Trustees may also elect from their own number other Committees
from time to time, the number composing such Committees, the powers conferred
upon the same (subject to the same limitations as with respect to the Executive
Committee) and the term of membership on such Committees to be determined by the
Trustees. The Trustees may designate a chairperson of any such Committee. In the
absence of such designation, the Committee may elect its own Chairperson.
Section 2. Meetings, Quorum and Manner of Acting. The Trustees may (1)
provide for stated meetings of any Committee, (2) specify the manner of calling
and notice required for special meetings of any Committee, (3) specify the
number of members of a
6
<PAGE>
Committee required to constitute a quorum and the number of members of a
Committee required to exercise specified powers delegated to such Committee, (4)
authorize the making of decisions to exercise specified powers by written assent
of the requisite number of members of a Committee without a meeting, and (5)
authorize the members of a Committee to meet by means of a telephone conference
circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, include one or more Executive Vice Presidents, one or
more Vice Presidents, one or more Assistant Secretaries, and one or more
Assistant Treasurers. The Trustees may delegate to any officer or Committee the
power to appoint any subordinate officers or agents. The Trustees by vote of a
majority of all the Trustees may elect, but shall not be required to elect, from
their own number a Chairperson and Vice-Chairperson of the Trustees.
Section 2. Term of Office and Qualifications. Except as otherwise provided
by law, the Declaration or these By-Laws, the
7
<PAGE>
President, the Treasurer and the Secretary shall each hold office until his
successor shall have been duly elected and qualified, and all other officers
shall hold office at the pleasure of the Trustees. The Secretary and Treasurer
may be the same person. An Executive Vice President or Vice President and the
Treasurer or Assistant Treasurer or an Executive Vice President or a Vice
President and the Secretary or Assistant Secretary may be the same person, but
the offices of Executive Vice President or Vice President and Secretary and
Treasurer shall not be held by the same person. The President shall hold no
other office. Except as above provided, any two offices may be held by the same
person. Any officer may be, but none need be, a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer without cause, by a vote of a majority of the
Trustees then in office. Any officer or agent appointed by an officer or
Committee may be removed with or without cause by such appointing officer or
Committee.
Section 4. Chairperson of the Board. The Chairperson of the Board, if
there be such an officer, shall be the senior officer of the Corporation,
preside at all stockholders' meetings and at all meetings of the Board of
Directors, and shall be ex officio a member of all committees of the Board of
Directors. He/She shall have such other powers and perform such other duties as
may be assigned to him/her from time to time by the Board of Directors.
Section 5. Vice-Chairperson of the Board. The Vice-
8
<PAGE>
Chairperson of the Board, if there be such an officer, shall in the absence of
the Chairperson preside at all stockholders' meetings and at all meetings of the
Board of Directors and shall have such powers and perform such other duties as
may be assigned to him/her from time to time by the Board of Directors.
Section 6. Powers and Duties of the President. The President may call
meetings of the Trustees and of any Committee thereof when he/she deems it
necessary and shall preside at all meetings of the Shareholders. Subject to the
control of the Trustees and to the control of any Committees of the Trustees,
within their respective spheres, as provided by the Trustees, he/she shall at
all times exercise a general supervision and direction over the affairs of the
Trust. He/She shall have the power to employ attorneys and counsel for the Trust
and to employ such subordinate officers, agents, clerks and employees as he/she
may find necessary to transact the business of the Trust. He/She shall also have
the power to grant, issue, execute or sign such powers of attorney, proxies or
other documents as may be deemed advisable or necessary in furtherance of the
interests of the Trust. The President shall have such other powers and duties,
as from time to time may be conferred upon or assigned to him by the Trustees.
Section 7. Powers and Duties of Executive Vice Presidents and Vice
Presidents. In the absence or disability of the President, the Executive Vice
President or, if there be more than one Executive Vice President, any Executive
Vice President designated by the Trustees shall perform all the duties and may
exercise any of the powers of the President, subject to the
9
<PAGE>
control of the Trustees. In the event no Executive Vice President is able so to
serve, the Vice President or, if there be more than one Vice President, any Vice
President designated by the Trustees shall perform all the duties and may
exercise any of the powers of the President, subject to the control of the
Trustees. Each Executive Vice President and Vice President shall perform such
duties as may be assigned to him from time to time by the Trustees and the
President.
Section 8. Powers and Duties of the Treasurer. The Treasurer shall be the
principal financial and accounting officer of the Trust. He/She shall deliver
all funds of the Trust which may come into his/her hands to such Custodian as
the Trustees may employ pursuant to Article X of these By-Laws. He/She shall
render a statement of condition of the finances of the Trust to the Trustees as
often as they shall require the same and he/she shall in general perform all the
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned to him/her by the Trustees. The Treasurer shall give a bond
for the faithful discharge of his/her duties, if required so to do by the
Trustees, in such sum and with such surety or sureties as the Trustees shall
require.
Section 9. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Trustees and of the Shareholders in proper
books provided for that purpose; he/she shall have custody of the seal of the
Trust; he/she shall have charge of the Share transfer books, lists and records
unless the same are in the charge of the Transfer Agent. He/She shall attend to
the giving and serving of all notices by
10
<PAGE>
the Trust in accordance with the provisions of these By-Laws and as required by
law; and subject to these By-Laws, he/she shall in general perform all duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him/her by the Trustees.
Section 10. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall perform such other duties as from time
to time may be assigned to him/her by the Trustees. Each Assistant Treasurer
shall give a bond for the faithful discharge of his duties, if required so to do
by the Trustees, in such sum and with such surety or sureties as the Trustees
shall require.
Section 11. Powers and Duties of Assistant Secretaries. In the absence or
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from time
to time may be assigned to him by the Trustees.
Section 12. Compensation of Officers and Trustees and Members of the
Advisory Board. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of any Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he/she is
11
<PAGE>
also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of October in
each year and shall end on the thirtieth day of September in each year,
provided, however, that the Trustees may from time to time change the fiscal
year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration of these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before of after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or wirelessed for the purposes of these By-Laws when it
has been delivered to a representative of any telegraph, cable or wireless
company with instructions that it be telegraphed, cabled or wirelessed.
ARTICLE X
12
<PAGE>
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having not
less than $2,000,000 aggregate capital, surplus and undivided profits and shall
be appointed from time to time by the Trustees, who shall fix its remuneration.
Section 2. Action Upon Termination of Custodian Agreement. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Trustees shall promptly appoint a successor custodian, but in the
event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trusts
shall function without a custodian or shall be liquidated. If so directed by
vote of the holders of a majority of the outstanding voting securities, the
Custodian shall deliver and pay over all Trust Property held by it as specified
in such vote.
Section 3. Provisions of Custodian Agreement. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed:
The Trustees shall cause to be delivered to the Custodian all securities
included in the Trust Property or to which the Trust may become entitled,
and shall order the same to be delivered by the Custodian only in
completion of a sale,
13
<PAGE>
exchange, transfer, pledge, loan of portfolio securities to another
person, or other disposition thereof, all as the Trustees may generally or
from time to time require or approve or to a successor Custodian; and the
Trustees shall cause all funds included in the Trust Property or to which
it may become entitled to be paid to the Custodian, and shall order the
same disbursed only for investment against delivery of the securities
acquired, or the return of cash held as collateral for loans of portfolio
securities, or in payment of expenses, including management compensation,
and liabilities of the Trust, including distributions to shareholders, or
to a successor Custodian. Notwithstanding anything to the contrary in
these By-Laws, upon receipt of proper instructions, which may be standing
instructions, the custodian may deliver funds in the following cases. In
connection with repurchase agreements, the Custodian shall transmit, prior
to receipt on behalf of the Fund of any securities or other property,
funds from the Fund's custodian account to a special custodian approved by
the Trustees of the Fund, which funds shall be used to pay for securities
to be purchased by the Fund subject to the Fund's obligation to sell and
the seller's obligation to repurchase such securities. In such case, the
securities shall be held in the custody of the special custodian. In
connection with the Trust's purchase or sale of financial futures
contracts, the Custodian shall transmit, prior to receipt on behalf of the
Fund of any securities or other property, funds from the Trust's custodian
account in order to furnish to and
14
<PAGE>
maintain funds with brokers as margin to guarantee the performance of the
Trust's futures obligations in accordance with the applicable requirements
of commodities exchanges and brokers.
Section 4. Central Certificate System. Subject to such rules, regulations
and orders as the Commission may adopt, the Trustees may direct the Custodian to
deposit all or any part of the securities owned by the Trust in a system for the
central handling of securities established by a national securities exchange or
a national securities association registered with Commission under the
Securities Exchange Act of 1934, or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act, pursuant to which
system all securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery or such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust.
Section 5. Acceptance of Receipts in Lieu of Certificates. Subject to such
rules, regulations and orders as the Commission may adopt, the Trustees may
direct the Custodian to accept written receipts or other written evidences
indicating purchases of securities held in bookentry form in the Federal Reserve
System in accordance with regulations promulgated by the Board of the Governors
of the Federal Reserve System and the local Federal Reserve Banks in lieu of
receipt of certificates representing such securities.
ARTICLE XI
15
<PAGE>
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (a) vote of a majority of the Share outstanding and
entitled to vote or (b) the Trustees, provided, however, that no By-Law may be
amended, adopted or repealed by the Trustees if such amendment, adoption or
repeal requires, pursuant to law, the Declaration or these By-Laws, a vote of
the Shareholders.
ARTICLE XII
INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to what extent,
and at what time and places, and under what conditions and regulations the
accounts and books of the Trust or any of them shall be open to the inspection
of the shareholders; and no shareholder shall have any right of inspecting any
account or book or document of the Trust except as conferred by laws or
authorized by the Trustees or by resolution of the shareholders.
ARTICLE XIII
MISCELLANEOUS
(A) Except as hereinafter provided, no officer or Trustee of the Trust and
no partner, officer, director or shareholder of the Investment Adviser of the
Trust (as that term is defined in the Investment Company Act of 1940) or of the
underwriter of the Trust, and no Investment Adviser or underwriter of the Trust,
shall take long or short positions in the securities issued by the Trust.
(1) The foregoing provisions shall not prevent the
16
<PAGE>
underwriter from purchasing Shares from the Trust if such purchased are
limited (except for reasonable allowances for clerical errors, delays and
errors of transmission and cancellation of orders) to purchase for the
purpose of filling orders for such Shares received by the underwriter, and
provided that orders to purchase from the Trust are entered with the Trust
or the Custodian promptly upon receipt by the underwriter of purchase
orders for such Shares, unless the underwriter is otherwise instructed by
its customer.
(2) The foregoing provision shall not prevent the underwriter from
purchasing Shares of the Trust as agent for the account of the Trust.
(3) The foregoing provisions shall not prevent the purchase from the
Trust or from the underwriter of Shares issued by the Trust, by any
officer, or Trustee of the Trust or by any partner, officer, director or
shareholder of the Investment Adviser of the Trust or of the underwriter
of the Trust at the price available to the public generally at the moment
of such purchase, or as described in the then currently effective
Prospectus of the Trust.
(4) The foregoing shall not prevent the Investment Adviser, or any
affiliate thereof, of the Trust from purchasing Shares prior to the
effectiveness of the first registration statement relating to the Shares
under the Securities Act of 1933.
(B) The Trust shall not lend assets of the Trust to any officer or Trustee
of the Trust, or to any partner, officer,
17
<PAGE>
director or shareholder of, or person financially interested in, the Investment
Adviser of the Trust, or the underwriter of the Trust, or to the Investment
Adviser of the Trust or to the underwriter of the Trust.
(C) The Trust shall not impose any restrictions upon the transfer of the
Shares of the Trust except as provided in the Declaration, but this requirement
shall not prevent the charging of customary transfer agent fees.
(D) The Trust shall not permit any officer or Trustee of the Trust, or any
partner, officer or director of the Investment Adviser or underwriter of the
Trust to deal for or on behalf of the Trust with himself/herself as principal or
agent, or with any partnership, association or corporation in which he has a
financial interest; provided that the foregoing provisions shall not prevent (a)
officers and Trustees of the Trust or partners, officers or directors of the
Investment Adviser or underwriter of the Trust from buying, holding or selling
shares in the Trust, or from being partners, officers or directors or otherwise
financially interested in the Investment Adviser or underwriter of the Trust;
(b) purchases or sales of securities or other property by the Trust from or to
an affiliated person or to the Investment Advisers or underwriters of the Trust
if such transaction is exempt from the applicable provisions of the 1940 Act;
(c) purchases of investments for the portfolio of the Trust or sales of
investments owned by the Trust through a security dealer who is, or one or more
of whose partners, shareholders, officers or directors is, an officer or Trustee
of the Trust, or a partner, officer or director of the Investment Adviser or
18
<PAGE>
underwriter of the Trust, if such transactions are handled in the capacity of
broker only and commissions charged do not exceed customary brokerage charges
for such services; (d) employment of legal counsel, registrar, Transfer Agent,
dividend disbursing agent or Custodian who is, or has a partner, shareholder,
officer, or director who is, an officer or Trustee of the Trust, or a partner,
officer or director of the Investment Adviser or underwriter of the Trust, if
only customary fees are charged for services to the Trust; (e) sharing
statistical research, legal and management expenses and office hire and expenses
with any other investment company in which an officer or Trustee of the Trust,
or a partner, officer or director of the Investment Adviser or underwriter of
the Trust, is an officer or director or otherwise financially interested.
19
Exhibit 2(a)(2)
Amended and Restated
BY-LAWS
OF
AARP INCOME TRUST
March 17, 1993
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - DEFINITIONS 1
ARTICLE II - OFFICES 1
Section 1. Principal Office 1
Section 2. Other Offices 1
ARTICLE III - SHAREHOLDERS 1
Section 1. Meetings 1
Section 2. Notice of Meetings 2
Section 3. Record Date for Meetings and Other
Purposes 2
Section 4. Proxies 3
Section 5. Action Without Meeting 4
ARTICLE IV - TRUSTEES 4
Section 1. Meetings of the Trustees 4
Section 2. Quorum and Manner of Acting 5
ARTICLE IV.A - HONORARY TRUSTEES 6
Section 1. Number; Qualification; Term: 6
Section 2. Duties; Remuneration: 6
ARTICLE V - COMMITTEES 7
Section 1. Executive and Other Committees 7
Section 2. Meetings, Quorum and Manner of Acting 8
ARTICLE VI - OFFICERS 8
Section 1. General Provisions 8
Section 2. Term of Office and Qualifications 9
Section 3. Removal 9
Section 4. Chairperson of the Board 9
Section 5. Vice-Chairperson of the Board 10
Section 6. Powers and Duties of the President 10
Section 7. Powers and Duties of Executive Vice
Presidents and Vice Presidents 11
Section 8. Powers and Duties of the Treasurer 11
Section 9. Powers and Duties of the Secretary 12
Section 10. Powers and Duties of Assistant Treasurers 12
Section 11. Powers and Duties of Assistant Secretaries 12
Section 12. Compensation of Officers and Trustees and
Members of the Advisory Board 13
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
----
ARTICLE VII - FISCAL YEAR 13
ARTICLE VIII - SEAL 13
ARTICLE IX - WAIVERS OF NOTICE 14
ARTICLE X - CUSTODY OF SECURITIES 14
Section 1. Employment of a Custodian 14
Section 2. Action Upon Termination of Custodian
Agreement 14
Section 3. Provisions of Custodian Agreement 15
Section 4. Central Certificate System 16
Section 5. Acceptance of Receipts in Lieu of
Certificates 17
ARTICLE XI - AMENDMENTS 17
ARTICLE XII - INSPECTION OF BOOKS 18
ARTICLE XIII - MISCELLANEOUS 18
ii
<PAGE>
BY-LAWS
OF
AARP INCOME TRUST
ARTICLE I
DEFINITIONS
The terms "Commission", "Custodian", "Declaration", "Distributor",
"Investment Adviser", "Municipal Bonds", "1940 Act" "Shareholder", "Shares",
"Transfer Agent", "Trust", "Property", "Trustees", and "vote of a majority of
the Shares outstanding and entitled to vote", have the respective meanings given
them in the Amended and Restated Declaration of Trust of AARP Income Trust dated
November 1, 1984, as amended from time to time.
ARTICLE II
OFFICES
Section 1. Principal Office. Until changed by the Trustees, the
principal office of the Trust in the Commonwealth of Massachusetts shall be
in the City of Boston, County of Suffolk.
Section 2. Other Offices. The Trust may have offices in such other
places without as well as within the Commonwealth as the Trustees from time
to time may determine.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. Meetings of the Shareholders shall be held as
provided in the Declaration of Trust at such place within
<PAGE>
or without the Commonwealth of Massachusetts as the Trustees shall designate.
The holders of a majority of outstanding Shares present in person or by proxy
shall constitute a quorum at any meeting of the Shareholders.
Section 2. Notice of Meetings. Notice of all meetings of the Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder at his/her address as recorded on the
register of the Trust mailed at least ten (10) days and not more than sixty (60)
days before the meeting. Only the business stated in the notice of the meeting
shall be considered at such meeting. Any adjourned meeting may be held as
adjourned without further notice. No notice need be given to any Shareholder who
shall have failed to inform the Trust of his/her current address or if a written
waiver of notice, executed before or after the meeting by the Shareholder or
his/her attorney thereunto authorized, is filed with the records of the meeting.
Section 3. Record Date for Meetings and Other Purposes. For the purpose of
determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding thirty (30) days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more than
sixty (60) days prior to the date of any meeting of Shareholders or
distribution or other action as a record date for the determinations of the
persons to be treated
2
<PAGE>
as Shareholders of record for such purposes, except for dividend payments which
shall be governed by the Declaration.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy provided that no proxy shall be voted
at any meeting unless it shall have been placed on file with the Secretary, or
with such other officer or agent of the Trust as the Secretary may direct, for
verification prior to the time at which such vote shall be taken. Proxies may be
solicited in the name of one or more Trustees or one or more of the officers of
the Trust. Only Shareholders of record shall be entitled to vote. Each whole
share shall be entitled to one vote as to any matter on which it is entitled by
the Declaration to vote, and each fractional Share shall be entitled to a
proportionate fractional vote. When any Share is held jointly by several
persons, any one of them may vote at any meeting in person or by proxy in
respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. If the holder
of any such share is a minor or a person of unsound mind, and subject to
guardianship or the legal control of any other person as regards the charge or
management of such Share, he/she may vote by his/her guardian or such other
3
<PAGE>
person appointed or having such control, and such vote may be given in person or
by proxy.
Section 5. Action Without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-Laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consents shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the Chairperson, or by any
one of the Trustees, at the time being in office. Notice of the time and place
of each meeting other than regular or stated meetings shall be given by the
Secretary or an Assistant Secretary or by the officer or Trustee calling the
meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or sent by facsimile or other
communication leaving a visual record to each Trustee at his/her business
address, or personally delivered to him/her at
4
<PAGE>
least one day before the meeting. Such notice may, however, be waived by any
Trustee. Notice of a meeting need not be given to any Trustee if a written
waiver of notice, executed by him/her before or after the meeting, is filed with
the records of the meeting, or to any Trustee who attends the meeting without
protesting prior thereto or at its commencement the lack of notice to him/her. A
notice or waiver of notice need not specify the purpose of any meeting. Meetings
can be held in conjunction with investment companies having the same investment
adviser or an affiliated investment adviser. The Trustees may meet by means of a
telephone conference circuit or similar communications equipment by means of
which all persons participating in the meeting shall be deemed to have been
present at a place designated by the Trustees at the meeting. Any action
required or permitted to be taken at any meeting of the Trustees may be taken by
the Trustees without a meeting if all the Trustees consent to the action in
writing and the written consents are filed with the records of the Trustees'
meetings. Such consents shall be treated as a vote for all purposes.
Section 2. Quorum and Manner of Acting. A majority of the Trustees shall
be present in person at any regular or special meeting of the Trustees in order
to constitute a quorum for the transaction of business at such meeting and
(except as otherwise required by law, the Declaration or these By-Laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may
5
<PAGE>
adjourn the meeting from time to time until a quorum shall be present. Notice of
an adjourned meeting need not be given.
ARTICLE IV.A
HONORARY TRUSTEES
Section 1. Number; Qualification; Term: The Trustees may from time to time
designate and appoint one or more qualified persons to the position of "honorary
trustee." Each honorary trustee shall serve for such term as shall be specified
in the resolution of the Trustees appointing him or her until his or her earlier
resignation or removal. An honorary trustee may be removed from such position
with or without cause by the vote of a majority of the Trustees given at any
regular meeting or special meeting of the Board.
Section 2. Duties; Remuneration: An honorary trustee shall be invited to
attend all meetings of the Trustees but shall not be present at any portion of a
meeting from which the honorary trustee shall have been excluded by vote of the
Trustees. An honorary trustee shall not be a "Trustee" or "officer" within the
meaning of the Trust's Declaration of Trust or of these By-Laws, shall not be
deemed to be a member of an "advisory board" within the meaning of the
Investment Company Act of 1940, as amended from time to time, shall not hold
himself or herself out as any of the foregoing, and shall not be liable to any
person for any act of the Trust. Notice of special meetings may be given to an
honorary trustee but the failure to give such notice shall not affect the
validity of any meeting or the action taken thereat. An honorary trustee shall
not have the powers of a Trustee, may
6
<PAGE>
not vote at meetings of the Trustees and shall not take part in the operation or
governance of the Trust. An honorary trustee shall not receive any compensation
but may, in the discretion of the Trustees, be reimbursed for expenses incurred
in attending meetings of the Trustees or otherwise.
ARTICLE V
COMMITTEES
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) to hold office at the pleasure
of the Trustees, which shall have the power to conduct the current and ordinary
business of the Trust while the Trustees are not in session, including the
purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to them except those
powers which by law, the Declaration or these By-Laws they are prohibited from
delegating. The Trustees may also elect from their own number other Committees
from time to time, the number composing such Committees, the powers conferred
upon the same (subject to the same limitations as with respect to the Executive
Committee) and the term of membership on such Committees to be determined by the
Trustees. The Trustees may designate a Chairperson of any such Committee. In the
absence of such designation, the Committee may elect its own Chairperson.
7
<PAGE>
Section 2. Meetings, Quorum and Manner of Acting. The Trustees may (1)
provide for stated meetings of any Committee, (2) specify the manner of calling
and notice required for special meetings of any Committee, (3) specify the
number of members of a Committee required to constitute a quorum and the number
of members of a Committee required to exercise specified powers delegated to
such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Executive Vice Presidents, one
or more Vice Presidents, one or more Assistant Secretaries, and one or more
Assistant Treasurers. The Trustees may delegate to any officer or Committee the
power to appoint any subordinate officers or agents. The Trustees by vote of a
majority of all the Trustees may elect, but shall not be required to elect, from
8
<PAGE>
their own number a Chairperson and Vice-Chairperson of the Trustees.
Section 2. Term of Office and Qualifications. Except as otherwise provided
by law, the Declaration or these By-Laws, the President, the Treasurer and the
Secretary shall each hold Office until his/her successor shall have been duly
elected and qualified, and all other officers shall hold office at the pleasure
of the Trustees. The Secretary and Treasurer may be the same person. An
Executive Vice President or Vice President and the Treasurer or Assistant
Treasurer or an Executive Vice President or a Vice President and the Secretary
or Assistant Secretary may be the same person, but the offices of Executive Vice
President or Vice President and Secretary and Treasurer shall not be held by the
same person. The President shall hold no other office. Except as above provided,
any two offices may be held by the same person. Any officer may be, but none
need be, a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer without cause, by a vote of a majority of the
Trustees then in office. Any officer or agent appointed by an officer or
Committee may be removed with or without cause by such appointing officer or
Committee.
Section 4. Chairperson of the Board. The Chairperson of the Board,
if there be such an officer, shall be the senior officer of the Trust,
preside at all shareholders' meetings and at all meetings of the Board of
Trustees, and shall be ex officio a member of all committees of the Board
of Trustees. The
9
<PAGE>
Chairperson of the Board shall also call meetings of the Trustees and of any
committee thereof when he/she deems it necessary. He/She shall have such other
powers and perform such other duties as may be assigned to him/her from time to
time by the Board of Trustees.
Section 5. Vice-Chairperson of the Board. The Vice Chairperson of the
Board, if there be such an officer, shall, in the absence of the Chairperson,
preside at all shareholders' meetings and at all meetings of the Board of
Trustees and shall have such powers and perform such other duties as may be
assigned to him/her from time to time by the Board of Trustees.
Section 6. Powers and Duties of the President. The president, in the
absence of the Chairperson and Vice-Chairperson, if any, may call meetings of
the Trustees and of any Committee thereof when he/she deems it necessary and, in
the absence of the Chairperson and Vice-Chairperson, if any, may preside at all
meetings of the Shareholders and at all meetings of the Trustees. Subject to the
control of the Trustees and to the control of any Committees of the Trustees,
within their respective spheres, as provided by the Trustees, he/she shall at
all times exercise a general supervision and direction over the affairs of the
Trust. He/She shall have the power to employ attorneys and counsel for the Trust
and to employ such subordinate officers, agents, clerks and employees as he/she
may find necessary to transact the business of the Trust. He/She shall also have
the power to grant, issue, execute or sign such powers of attorney, proxies or
other documents as may be deemed advisable or necessary in furtherance of the
interests of the
10
<PAGE>
Trust. The President shall have such other powers and duties, as from time
to time may be conferred upon or assigned to him/her by the Trustees.
Section 7. Powers and Duties of Executive Vice Presidents and Vice
Presidents. In the absence or disability of the President, the Executive Vice
President or, if there be more than one Executive Vice President, any Executive
Vice President designated by the Trustees shall perform all the duties and may
exercise any of the powers of the President, subject to the control of the
Trustees. In the event no Executive Vice President is able so to serve, the Vice
President or, if there be more than one Vice President, any Vice President
designated by the Trustees shall perform all the duties and may exercise any of
the powers of the President, subject to the control of the Trustees. Each
Executive Vice President and Vice President shall perform such duties as may be
assigned to him/her from time to time by the Trustees and the President.
Section 8. Powers and Duties of the Treasurer. The Treasurer shall be the
principal financial and accounting officer of the Trust. He/She shall deliver
all funds of the Trust which may come into his/her hands to such Custodian as
the Trustees may employ pursuant to Article X of these By-Laws. He/She shall
render a statement of condition of the finances of the Trust to the Trustees as
often as they shall require the same and he/she shall in general perform all the
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned to him/her by the Trustees. The Treasurer shall give a bond
for the faithful discharge of his/her duties, if required so
11
<PAGE>
to do by the Trustees, in such sum and with such surety or sureties as the
Trustees shall require.
Section 9. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Trustees and of the Shareholders in proper
books provided for that purpose; he/she shall have custody of the seal of the
Trust; he/she shall have charge of the Share transfer books, lists and records
unless the same are in the charge of the Transfer Agent. He/She shall attend to
the giving and serving of all notices by the Trust in accordance with the
provisions of these By-Laws and as required by law; and subject to these
By-Laws, he/she shall in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him/her
by the Trustees.
Section 10. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall perform such other duties as from time
to time may be assigned to him/her by the Trustees. Each Assistant Treasurer
shall give a bond for the faithful discharge of his/her duties, if required so
to do by the Trustees, in such sum and with such surety or sureties as the
Trustees shall require.
Section 11. Powers and Duties of Assistant Secretaries. In the absence or
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary.
12
<PAGE>
Each Assistant Secretary shall perform such other duties as from time to time
may be assigned to him/her by the Trustees.
Section 12. Compensation of Officers and Trustees and Members of the
Advisory Board. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of any Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he/she is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of October in
each year and shall end on the thirtieth day of September in each year,
provided, however, that the Trustees may from time to time change the fiscal
year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
13
<PAGE>
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration of these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or sent by facsimile or other communication leaving a
visual record for the purposes of these By-Laws when it has been delivered to a
representative of any telegraph, cable or facsimile or other such communications
company with instructions that it be telegraphed, cabled or sent by facsimile or
other communication leaving a visual record.
ARTICLE X
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having not
less than $2,000,000 aggregate capital, surplus and undivided profits and shall
be appointed from time to time by the Trustees, who shall fix its remuneration.
Section 2. Action Upon Termination of Custodian Agreement. Upon
termination of a Custodian Agreement or inability of the Custodian to
continue to serve, the Trustees shall promptly appoint a successor
custodian, but in the event that no successor
14
<PAGE>
custodian can be found who has the required qualifications and is willing to
serve, the Trustees shall call as promptly as possible a special meeting of the
Shareholders to determine whether the Trusts shall function without a custodian
or shall be liquidated. If so directed by vote of the holders of a majority of
the outstanding voting securities, the Custodian shall de1iver and pay over all
Trust Property held by it as specified such vote.
Section 3. Provisions of Custodian Agreement. The following
provisions shall apply to the employment of a Custodian and to any contract
entered into with the Custodian so employee:
[Paragraph illegible]
15
<PAGE>
custodian may deliver funds in the following cases. In connection with
repurchase agreements, the Custodian shall transmit, prior to receipt on
behalf of the Trust of any securities or other property, funds from the
Trust's custodian account to a special custodian approved by the Trustees
of the Trust, which funds shall be used to pay for securities to be
purchased by the Trust subject to the Trust's obligation to sell and the
seller's obligation to repurchase such securities, In such case, the
securities shall be held in the custody of the special custodian. In
connection with the Trust's purchase or sale of financial futures
contracts, the Custodian shall transmit, prior to receipt on behalf of the
Trust of any securities or other property, funds from the Trust's
custodian account in order to furnish to and maintain funds with brokers
as margin to guarantee the performance of the Trust's futures obligations
in accordance with the applicable requirements of commodities exchanges
and brokers.
Section 4. Central Certificate System. Subject to such rules, regulations
and orders as the Commission may adopt, the Trustees may direct the Custodian to
deposit all or any part of the securities owned by the Trust in a system for the
central handling of securities established by a national securities exchange or
a national securities association registered with Commission under the
Securities Exchange Act of 1934, or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act, pursuant to which
system all securities of any particular class or series of any issuer
16
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deposited within the system are treated as fungible and may be transferred or
pledged by bookkeeping entry without physical delivery of such securities,
provided that all such deposits shall be subject to withdrawal only upon the
order of the Trust or its Custodian.
Section 5. Acceptance of Receipts in Lieu of Certificates. Subject to such
rules, regulations and orders as the Commission may adopt, the Trustees may
direct the Custodian to accept written receipts or other written evidences
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
ARTICLE XI
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (a) vote of a majority of the Shares outstanding and
entitled to vote or (b) the Trustees, provided, however, that no By-Law may be
amended, adopted or repealed by the Trustees if such amendment, adoption or
repeal requires, pursuant to law, the Declaration or these By-Laws, a vote of
the Shareholders.
17
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ARTICLE XII
INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to what extent,
and at what time and places, and under what conditions and regulations the
accounts and books of the Trust or any of them shall be open to the inspection
of the Shareholders; and no Shareholder shall have any right of inspecting any
account or book or document of the Trust except as conferred by laws or
authorized by the Trustees or by resolution of the Shareholders.
ARTICLE XIII
MISCELLANEOUS
(A) Except as hereinafter provided, no officer or Trustee of the Trust and
no partner, officer, director or shareholder of the Investment Adviser of the
Trust (as that term is defined in the Investment Company Act of 1940) or of the
underwriter of the Trust, and no Investment Adviser or underwriter of the Trust,
shall take long or short positions in the securities issued by the Trust.
(1) The foregoing provisions shall not prevent the underwriter from
purchasing Shares from the Trust if such purchased are limited (except for
reasonable allowances for clerical errors, delays and errors of
transmission and cancellation of orders) to purchase for the purpose of
filling orders for such Shares received by the underwriter, and provided
that orders to purchase from the Trust are entered with the Trust or the
Custodian promptly upon receipt by the underwriter of purchase orders for
such
18
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Shares, unless the underwriter is otherwise instructed by its customer.
(2) The foregoing provision shall not prevent the underwriter from
purchasing Shares of the Trust as agent for the account of the Trust.
(3) The foregoing provisions shall not prevent the purchase from the
Trust or from the underwriter of Shares issued by the Trust, by any
officer, or Trustee of the Trust or by any partner, officer, director or
shareholder of the Investment Adviser of the Trust or of the underwriter
of the Trust at the price available to the public generally at the moment
of such purchase, or as described in the then currently effective
Prospectus of the Trust.
(4) The foregoing shall not prevent the Investment Adviser, or any
affiliate thereof, of the Trust from purchasing Shares prior to the
effectiveness of the first registration statement relating to the Shares
under the Securities Act of 1933.
(B) The Trust shall not lend assets of the Trust to any officer or Trustee
of the Trust, or to any partner, officer, director or shareholder of, or person
financially interested in, the Investment Adviser of the Trust, or the
underwriter of the Trust, or to the Investment Adviser of the Trust or to the
underwriter of the Trust.
(C) The Trust shall not impose any restrictions upon the transfer of the
Shares of the Trust except as provided in the Declaration, but this requirement
shall not prevent the charging of customary transfer agent fees.
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(D) The Trust shall not permit any officer or Trustee of the Trust, or any
partner, officer or director of the Investment Adviser or underwriter of the
Trust to deal for or on behalf of the Trust with himself/herself as principal or
agent, or with any partnership, association or corporation in which he/she has a
financial interest; provided that the foregoing provisions shall not prevent (a)
officers and Trustees of the Trust or partners, officers or directors of the
Investment Adviser or underwriter of the Trust from buying, holding or selling
shares in the Trust, or from being partners, officers or directors or otherwise
financially interested in the Investment Adviser or underwriter of the Trust;
(b) purchases or sales of securities or other property by the Trust from or to
an affiliated person or to the Investment Advisers or underwriters of the Trust
if such transaction is exempt from the applicable provisions of the 1940 Act;
(c) purchases of investments for the portfolio of the Trust or sales of
investments owned by the Trust through a security dealer who is, or one or more
of whose partners, shareholders, officers or directors is, an officer or Trustee
of the Trust, or a partner, officer or director of the Investment Adviser or
underwriter of the Trust, if such transactions are handled in the capacity of
broker only and commissions charged do not exceed customary brokerage charges
for such services; (d) employment of legal counsel, registrar, Transfer Agent,
dividend disbursing agent or Custodian who is, or has a partner, shareholder,
officer, or director who is, an officer or Trustee of the Trust, or a partner,
officer or director of the Investment Adviser or underwriter of the Trust, if
only customary fees are charged for
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services to the Trust; (e) sharing statistical research, legal and management
expenses and office hire and expenses with any other investment company in which
an officer or Trustee of the Trust, or a partner, officer or director of the
Investment Adviser or underwriter of the Trust, is an officer or director
otherwise financially interested.
21
Exhibit 5(a)
AARP INCOME TRUST
175 Federal Street
Boston, Massachusetts 02110
January 2, 1987
AARP/Scudder Financial Management Company
345 Park Avenue
New York, New York 10154
Investment Management and Advisory Agreement
Dear Sirs:
AARP Income Trust (the "Trust") has been established as a Massachusetts
business trust to engage in the business of an investment company. The Trust's
Declaration of Trust provides that the Trust's Trustees may, from time to time,
determine that the shares of beneficial interests of the Trust ("Shares") shall
be issued in separate series of the Trust ("Series"). There are currently two
Series. The Trust has selected you to act as investment adviser, for each of the
current two Series of the Trust and for each Series that may subsequently be
authorized by the Trustees (unless otherwise provided at the time and subject to
such conditions and amendments to this agreement as shall mutually be agreed
upon), and to provide certain other services, as more fully set forth below, and
you are willing to act as such investment manager and adviser and to perform
such services under the terms and conditions hereinafter set forth.
1. Delivery of Trust Documents. The Trust has furnished you with copies
properly certified or authenticated of each of the following:
(a) Declaration of Trust, dated June 8, 1984, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof.
<PAGE>
(c) Resolutions of the Trustees selecting you as investment adviser
and approving the form of this Agreement.
The Trust will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements to the foregoing, if any.
2. Advisory Services. You will regularly provide, or cause to be provided
pursuant to the Subadvisory Agreement and other agreements referred to in
paragraph 9 hereof, each Series of the Trust with investment research, advice
and supervision and will furnish continuously an investment program for each
Series consistent with the investment objectives and policies of that Series.
You will determine what securities shall be purchased for each Series, what
securities shall be held or sold by each Series, and what portion of the assets
of each Series shall be held uninvested, subject always to the provisions of the
Trust's Declaration of Trust and By-Laws and of the Investment Company Act of
1940, as amended, and to the investment objectives, policies and restrictions of
the Trust and the Series, as each of the same shall be from time to time in
effect, and subject, further, to such policies and instructions as the Trustees
may from time to time establish. You shall advise and assist the officers of the
Trust in taking such steps as are necessary or appropriate to carry out the
decisions of the Trustees and the appropriate committees of the Trustees
regarding the conduct of the business of the Trust and each Series.
3. Allocation of Charges and Expenses. You will pay the compensation and
expenses of all officers and executive employees of the Trust and will make
available or cause to be made available, without expense to the Trust, the
services of such of your partners, directors, officers and employees, or of the
partners, directors, officers and employees of your partners, as may duly be
elected officers, directors or trustees of the Trust, subject to their
individual consent to serve and to any limitations imposed by law. You will pay
the Trust's office rent and will provide, or cause to be provided, investment
advisory, research and statistical facilities and all clerical services relating
to research, statistical and investment work. You will not be required to pay
any expenses of the Trust other than those specifically allocated to you in this
paragraph 3. In particular, but without limiting the generality of the
foregoing, you will not be required to pay: organization expenses of the Trust;
clerical salaries; fees and expenses incurred by the Trust in connection with
membership in investment company organizations; brokers' commissions; payment
for portfolio pricing services to a pricing agent, if any; legal, auditing or
accounting expenses; taxes or governmental fees; the fees and expenses of the
transfer agent of the Trust; the cost of preparing share certificates or any
other expenses, including clerical and administrative expenses of issue, sale,
underwriting, distribution, redemption or repurchase of Shares issued by the
Trust; the expenses of and fees for registering or qualifying Shares of the
Trust for sale under federal or state
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securities law; the fees and expenses of directors or Trustees of the Trust who
are not affiliated with you; the cost of preparing and distributing reports and
notices to shareholders; or the fees or disbursements of custodians of the
Trust's assets, including expenses incurred in the performance of any
obligations enumerated by the Declaration of Trust or By-Laws of the Trust
insofar as they govern agreements with any such custodian. You shall not be
required to pay expenses of activities which are primarily intended to result in
sales of Shares of the Trust if and to the extent that (i) such expenses are
required to be borne by a principal underwriter which acts as the distributor of
the Trust's Shares pursuant to an underwriting agreement which provides that the
underwriter shall assume some of all of such expenses, (ii) the Trust shall have
adopted a plan in conformity with Rule 12b-l under the Investment Company Act of
1940, as amended, providing that the Trust (or some other party) shall assume
some or all of such expenses or (iii) such expenses are required to be borne by
Scudder pursuant to Section 4 of the Investment Company Services Agreement,
dated as of October 9, 1984, among Scudder, American Association of Retired
Persons and the Manager. You shall be required to pay such expenses as are
excluded by the preceding sentence.
4. Compensation of the Adviser. For all services to be rendered and
payments made as provided in paragraphs 2 and 3 hereof, the Trust will pay you
on the last day of each month a fee equal to the sum of 45/1200 of 1% on the
first $2 billion, 44/1200 of 1% on the next $1 billion and 43/1200 of 1% on the
balance of average daily net assets (as defined below) of the Series of the
Trust known as "AARP GNMA and U.S. Treasury Fund" and 49/1200 of 1% of the value
of the average daily net assets of the Series of the Trust known as "AARP
General Bond Fund." The "average daily net assets" of the Trust or any Series
are defined as the average of the values placed on the net assets as of the
close of the New York Stock Exchange, on each day on which the net asset value
of the portfolio of the Trust or a series thereof is determined consistent with
the provisions of Rule 22c-l under the Investment Company Act of 1940 or, if the
Trust lawfully determines the value of the net assets of its portfolio as of
some other time on each business day, as of such time. The value of net assets
of the Trust or any Series shall be determined pursuant to the applicable
provisions of the Declaration of Trust and By-Laws of the Trust. If, pursuant to
such provisions, the determination of net asset value for any Series is
suspended for any particular business day, then for the purposes of this
paragraph 4, the value of the net assets of that Series of the Trust as last
determined shall be deemed to be the value of the net assets as of the close of
the New York Stock Exchange, or as of such other time as the value of the net
assets of the portfolio of that Series may lawfully be determined, on that day.
If the determination of the net asset value of the Shares of any Series of the
Trust has been suspended pursuant to the Declaration of Trust or By-Laws of the
Trust for a period including such month, your compensation payable at the end of
such month shall be computed on the basis of the value of the net assets of the
Trust as last determined (whether during or prior to such month). You agree that
your compensation for any fiscal year shall be reduced by the amount, if any, by
which the expenses of the Trust for such fiscal year exceed the lowest
applicable expense limitation established pursuant to the statutes or
regulations of any jurisdiction in which the Shares of the Trust may be
qualified for offer and sale. You shall refund to the Trust or Series, as
applicable, the amount of any reduction of your compensation pursuant to this
paragraph 4 as promptly as
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practicable after the end of such fiscal year, provided that you will not be
required to pay the Trust or Series an amount greater than the fee paid to you
in respect of such year pursuant to this Agreement. As used in this paragraph 4,
"expenses" shall mean those expenses included in the applicable expense
limitation having the broadest specifications thereof, and "expense limitation"
means a limit on the maximum annual expenses which may be incurred by an
investment company determined (i) by multiplying a fixed percentage by the
average, or by multiplying more than one such percentage by different specified
amounts of the average, of the values of an investment company's net assets for
a fiscal year or (ii) by multiplying a fixed percentage by an investment
company's net investment income for a fiscal year. The words "lowest applicable
expense limitation" shall be construed to result in the largest reduction of
your compensation for any fiscal year of the Trust. Nothing in this paragraph 4
shall be construed to require you to reduce your compensation unless such
reduction would be required by the statutes and regulations of any jurisdiction
in which Shares of the Trust are qualified for sale without the application of
this paragraph 4.
5. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Trust, neither you nor any
of your partners, directors, officers or employees will act as a principal or
agent or receive any commission. You or your agent shall arrange for the placing
of all orders for the purchase and sale of portfolio securities for the Trust's
account with brokers or dealers selected by you. In the selection of such
brokers or dealers and the placing of such orders, you are directed at all times
to seek for the Trust the most favorable execution and net price available. If
any occasion should arise in which you give any advice to clients of yours
concerning the Shares of the Trust, you will act solely as investment counsel
for such clients and not in any way on behalf of the Trust. Your services to the
Trust pursuant to this Agreement are not to be deemed to be exclusive and it is
understood that you may render investment advice, management and other services
to others.
6. Limitation of Liability of Adviser. You shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on your part
in the performance of your duties or from reckless disregard by you of your
obligations and duties under this Agreement. Any person, even though also
employed by you, who may be or become an employee of and paid by the Trust shall
be deemed, when acting within the scope of his employment by the Trust, to be
acting in such employment solely for the Trust and not as your employee or
agent.
7. Duration and Termination of this Agreement. This Agreement shall become
effective as of the date hereof and shall remain in force until August 31, 1987
and with respect to each Series, from year to year thereafter, but only so long
as such continuance is specifically approved at least annually by the vote of a
majority of the trustees who are not interested persons of you or of the Trust,
cast in person at a meeting called for the purpose of voting on such approval
and by a vote of the Trustees, or, with respect to each Series, by vote of a
majority of the outstanding voting securities of such Series of the Trust. The
aforesaid requirement that continuance of this Agreement be "specifically
approved at least annually" shall be construed in
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a manner consistent with the Investment Company Act of 1940 and the rules and
regulations thereunder. This Agreement may, on 60 days' written notice, be
terminated at any time without the payment of any penalty, by the Trustees, by
vote of a majority of the outstanding voting securities of the Trust (or Series,
with respect only to that Series), or by you. This Agreement shall automatically
terminate in the event of its assignment, provided that an assignment to a
corporate successor to all or substantially all of your business or to a
wholly-owned subsidiary of such corporate successor which does not result in a
change of actual control or management of your business shall not be deemed to
be an assignment for the purposes of this Agreement. In interpreting the
provisions of this Agreement, the definitions contained in Section 2(a) of the
Investment Company Act of 1940 (particularly the definitions of "interested
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
8. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of his Agreement shall be
effective with respect to any Series until approved by the Trustees, including a
majority of the odirectors or Trustees who are not interested persons of you or
of the Trust, cast in person at a meeting called for the purpose of voting on
such approval and by vote of the holders of a majority of the outstanding voting
securities of such Series of the Trust.
9. Subadvisory Agreement, etc. In rendering the services required under
this Agreement, you may, subject to the legally required approval of the Trust,
its shareholders and Trustees or directors, cause such services to be provided
by a registered investment adviser and receive other assistance from such
investment adviser pursuant to an agreement or agreements, and may contract with
such other parties as you may deem appropriate to obtain information, advice and
management services and other assistance, but any fees, compensation or expenses
to be paid to any such party shall be paid by you, and no obligation shall be
incurred on the Trust's behalf in any respect.
10. Termination of Prior Agreement. The Investment Management and Advisory
Agreement between AARP Income Trust, a Massachusetts business trust, and you
dated December 16, 1985 is terminated as of the opening of business on the date
hereof.
11. Miscellaneous. It is understood and expressly stipulated that neither
the shareholders of the Trust nor the Trustees shall be personally liable
hereunder. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. This Agreement shall be construed in accordance with and governed by
the laws of New York.
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<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract.
Yours very truly,
AARP INCOME TRUST
By /s/ [Illegible]
---------------------------
President
The foregoing Agreement is hereby accepted as of the date hereof.
AARP/SCUDDER FINANCIAL
MANAGEMENT COMPANY
By: SCUDDER, STEVENS & CLARK
A General Partner
By /s/ [Illegible]
---------------------------
Title: Managing Director
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Exhibit 5(a)(1)
AARP Income Trust
345 Park Avenue
New York, New York 10154
February 1, 1994
Scudder, Stevens & Clark, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Dear Sirs:
AARP Income Trust (the "Trust") has been established as a Massachusetts
business trust to engage in the business of an investment company. The Trust's
Declaration of Trust provides that the Trust's Trustees may, from time to time,
determine that the shares of beneficial interests of the Trust ("Shares") shall
be issued in separate series of the Trust ("Series"). There are currently two
Series. Series may be abolished and dissolved, and additional series
established, from time to time by action of the Trustees. The Trust has selected
you to act as the sole investment manager, for each of the two Series of the
Trust and for each Series that may subsequently be authorized by the Trustees
(unless otherwise provided at the time and subject to such conditions and
amendments to this Agreement as shall mutually be agreed upon), and to provide
certain other services, as more fully set forth below, and you have indicated
that you are willing to act as such investment manager and to perform such
services under the terms and conditions hereinafter set forth. Accordingly, the
Trust agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of investing
and reinvesting the assets of the Trust in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus ("Prospectus") and Statement of Additional Information
("SAI") included in the Trust's Registration Statement on Form N-1A, as amended
from time to time (the "Registration Statement") filed by the Trust under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities
Act of 1933, as amended. Copies of the documents referred to in the preceding
sentence have been furnished to you by the Trust. The Trust has also furnished
you with copies properly certified or authenticated of each of the following
additional documents related to the Trust:
(a) Amended and Restated Declaration of Trust, dated November 1,
1984, as amended to date (the "Declaration").
(b) By-Laws of the Trust as in effect on the date hereof (the
"By-Laws").
(c) Resolutions of the Trustees and the shareholders selecting you
as investment manager and approving the form of this Agreement.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Portfolio Management Services. As manager of the assets of the Trust,
you shall provide to each Series of the Trust continuing investment management
of its assets in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended (the "Code"),
relating to regulated investment companies and all rules and regulations
thereunder, and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Trust's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Series so that each Series will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. Each Series shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to
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<PAGE>
your investment advisory clients. In managing the Series in accordance with the
requirements set forth in this section 2, you shall be entitled to receive and
act upon the advice of counsel to the Trust or counsel to you. You shall also
make available to the Trust promptly upon request all of the Series' investment
records and ledgers as are necessary to assist the Trust to comply with the
requirements of the 1940 Act and other applicable laws. To the extent required
by law, you shall furnish to regulatory authorities having the requisite
authority any information or reports in connection with the services provided
pursuant to this Agreement which may be requested in order to ascertain whether
the operations of the Trust are being conducted in a manner consistent with
applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by each Series and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
each Series' policies as expressed in the Registration Statement. You shall
determine what portion of each Series' portfolio shall be invested in securities
and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on the
investment performance of each Series and on the performance of your obligations
pursuant to this Agreement, and you shall supply such additional reports and
information as the Trust's officers or Board of Trustees shall reasonably
request.
3. Administrative Services. In addition to the portfolio management
services specified above in section 2, you shall furnish at your expense for the
use of each Series such office space and facilities as each Series may require
for its reasonable needs, and you (or one or more of your affiliates designated
by you) shall render to the Trust administrative services on behalf of each
Series necessary for operating as an investment company and not provided by
persons not parties to this Agreement including, but not limited to, preparing
reports to and meeting materials for the Trust's Board of Trustees and reports
and notices to Series shareholders; supervising, negotiating contractual
arrangements with, to the extent appropriate, and monitoring the performance of,
custodians, depositories, transfer and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Trust or Series operations;
preparing and making filings with the Securities and Exchange Commission (the
"SEC") and other regulatory and self-regulatory organizations, including, but
not limited to, preliminary and definitive proxy materials, post-effective
amendments to the Registration Statement, semi-annual reports on Form N-SAR and
notices pursuant to Rule 24f-2 under the 1940 Act; overseeing the tabulation of
proxies by each Series' transfer agent; assisting in the preparation and filing
of each Series' federal, state and local tax returns; preparing and filing each
Series' federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities, the calculation of net asset value and the
calculation and payment of distributions to Series shareholders; monitoring the
registration of Shares of each Series under applicable federal and state
securities laws; maintaining or causing to be maintained for each Series all
books, records and reports and any other information required under the 1940
Act, to the extent that such books, records and reports and other information
are not maintained by each Series' custodian or other agents of each Series;
assisting in establishing the accounting policies of each Series; assisting in
the resolution of accounting issues that may arise with respect to each Series'
operations and consulting with each Series' independent accountants, legal
counsel and each Series' other agents as necessary in connection therewith;
establishing and monitoring each Series' operating expense budgets; reviewing
each Series' bills; processing the payment of bills that have been approved by
an authorized person; assisting each Series in determining the amount of
dividends and distributions available to be paid by each Series to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent and the
custodian with such information as is required for such parties to effect the
payment of dividends and distributions; and otherwise assisting the Trust as it
may reasonably request in the conduct of each Series' business, subject to the
direction and control of the Trust's Board of Trustees. Nothing in this
Agreement shall be deemed to shift to you or to diminish the obligations of any
agent of the Series or any other person not a party to this Agreement which is
obligated to provide services to each Series.
4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including each Series'
share of payroll taxes) who are affiliated persons of you, and you shall make
available or cause to be made available, without expense to the Trust, the
services of such of your directors, officers and employees as may duly be
elected officers of the Trust, subject to their individual consent to serve and
to any limitations imposed by law. You shall provide, or cause to be provided,
at your expense the portfolio management services described in section 2 hereof
and the administrative services described in section 3 hereof. You shall not be
required to pay any expenses of the Trust or a Series other than those
specifically allocated to you in this paragraph 4. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Trust's
2
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Trustees and officers as are directors, officers or employees of you or of your
partners whose services may be involved, for the following expenses of the Trust
or its Series: organization expenses of the Series (including out-of-pocket
expenses, but not including your overhead or employee costs); fees payable to
you and to any other Series advisers or consultants; legal expenses; auditing
and accounting expenses; maintenance of books and records which are required to
be maintained by each Series' custodian or other agents of the Trust; telephone,
telex, facsimile, postage and other communications expenses; taxes and
governmental fees; fees, dues and expenses incurred by each Series in connection
with membership in investment company trade organizations; fees and expenses of
each Series' custodians, subcustodians, transfer agents, dividend disbursing
agents and registrars; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and, except as provided below in this section 4,
other expenses in connection with the issuance, offering, distribution, sale.
redemption or repurchase of securities issued by the Series; expenses relating
to investor and public relations; expenses and fees of registering or qualifying
Shares of each Series for sale; interest charges, bond premiums and other
insurance expense; freight, insurance and other charges in connection with the
shipment of the Series' portfolio securities; the compensation and all expenses
(specifically including travel expenses relating to Trust business) of Trustees,
officers and employees of the Trust who are not affiliated persons of you;
brokerage commissions or other costs of acquiring or disposing of any portfolio
securities of the Series; expenses of printing and distributing reports, notices
and dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Series and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Trustees and officers of the Trust who are directors, officers or
employees of you to the extent that such expenses relate to attendance at
meetings of the Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of each Series if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of each Series' Shares pursuant to an
underwriting agreement which provides that the underwriter shall assume some or
all of such expenses, or (ii) the Trust on behalf of the Series shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act providing that
the Series (or some other party) shall assume some or all of such expenses, or
(iii) such expenses are required to be borne by Scudder pursuant to section 4 of
the Investment Company Services Agreement, dated as of October 9, 1984, among
American Association of Retired Persons, AARP/Scudder Financial Management
Company, and us. You shall be required to pay such of the foregoing sales
expenses as are not required to be paid by the principal underwriter pursuant to
the underwriting agreement or are not permitted to be paid by the Series (or
some other party) pursuant to such a plan.
5. Management Fee. For all services to be rendered, payments made and
costs to be assumed by you as provided in paragraphs 2,3 and 4 hereof, the
Trust shall pay you on the last day of each month the unpaid balance of a fee
composed of an asset charge in two parts.
(a) The asset charge for each calendar day of each year shall be
equal to the total of 1/365th (1/366th in each leap year) of the amount computed
in accordance with paragraphs (b) and (c) below. The computation shall be made
for each such day on the basis of net assets as of the close of business of the
full business day one (1) business day prior to the day for which the
computation is being made. In the case of the suspension of the computation of
net asset value, the asset charge for each day during such suspension shall be
computed as of the close of business on the last full business day on which the
net assets were computed. As used herein, "net assets" as of the close of a full
business day shall include all transactions in shares of each Series recorded on
the books of each Series for that day.
(b) The base fee rate part of the fee shall be based on the average
daily net assets of all funds within the AARP Investment Program from Scudder
(the "Program"), including any new fund which may be organized in the future.
The base fee rate will be the percent of Program net assets as set forth in the
following table.
3
<PAGE>
Base Fee Rate
- ------------------------------------------------
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
- ------------------------------------------------
The portion of the base fee rate which each Series shall bear will be the
same percentage of the base fee rate as its net assets are to the total net
assets of all the Program funds.
(c) The fund fee rate part of the fee shall be 0.12 percent per
annum of net assets of AARP GNMA and U.S. Treasury Fund and 0.19 percent per
annum of net assets of AARP High Quality Bond Fund.
The value of net assets of the Trust or any Series shall be determined
pursuant to the applicable provisions of the Declaration, By-Laws and
Registration Statement of the Trust. If, pursuant to such provisions, the
determination of net asset value for any Series is suspended for any particular
business day, then for the purposes of this paragraph 5, the value of the net
assets of that series of the Trust as last determined shall be deemed to be the
value of the net assets as of the close of the New York Stock Exchange, or as of
such other time as the value of the net assets of the portfolio of that Series
may lawfully be determined, on that day. If the determination of the net asset
value of the shares of any Series of the Trust has been suspended pursuant to
the Declaration, By-Laws or Registration Statement of the Trust for a period
including such month, your compensation payable at the end of such month shall
be computed on the basis of the value of the net assets of the Trust as last
determined (whether during or prior to such month). If a Series determines the
net asset value of its portfolio more than once on any day, then the last such
determination thereof on that day shall be deemed to be the sole determination
thereof on that day for the purposes of this section 5.
You agree that your gross compensation for any fiscal year shall not be
greater than an amount which, when added to the other expenses of a Series,
shall cause the aggregate expenses of the Series to equal the maximum expenses
under the lowest applicable expense limitation established pursuant to the
statutes or regulations of any jurisdiction in which the Shares of the Trust may
be qualified for offer and sale. Except to the extent that such amount has been
reflected in reduced payments to you, you shall refund to the Series the amount
of any payment received in excess of the limitation pursuant to this section 5
as promptly as practicable after the end of such fiscal year, provided that you
shall not be required to pay the Trust or Series an amount greater than the fee
paid to you in respect of such year pursuant to this Agreement. As used in this
section 5, "expenses" shall mean those expenses included in the applicable
expense limitation having the broadest specifications thereof, and "expense
limitation" means a limit on the maximum annual expenses which may be incurred
by an investment company determined (i) by multiplying a fixed percentage by the
average, or by multiplying more than one such percentage by different specified
amounts of the average, of the values of an investment company's net assets for
a fiscal year or (ii) by multiplying a fixed percentage by an investment
company's net investment income for a fiscal year. The words ("lowest applicable
expense limitation" shall be construed to result in the largest reduction of
your compensation for any fiscal year of the Trust; provided, however, that
nothing in this Agreement shall limit your fees if not required by an applicable
statute or regulation referred to above in this section 5.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the terms of any publicly
announced waiver of your fee, or any limitation of a Series' expenses, as if
such waiver or limitation were fully set forth herein.
6. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of a Series, neither you nor any of your partners, directors,
officers or employees will act as a principal or agent or receive any
commission. You or your agent shall arrange for the placing of all orders for
the purchase and sale of portfolio securities and other investments for a
Series' account with brokers or dealers selected by you in accordance with Trust
or Series policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of a Series, you will act solely as investment counsel for such clients
and not in any way on behalf of a Series. Your services to the Trust and each
Series
4
<PAGE>
pursuant to this Agreement are not to be deemed to be exclusive and it is
understood that you may render investment advice, management and other services
to others. In acting under this Agreement, you shall be an independent
contractor and not an agent of the Trust or a Series.
7. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees that
you shall not be liable for any error of judgment or mistake of law or for any
loss suffered by the Trust or its Series in connection with the matters to which
this Agreement relates, provided that nothing in this Agreement shall be deemed
to protect or purport to protect you against any liability to the Trust, each
Series or its shareholders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties or by reason of your reckless disregard of your obligations and duties
hereunder. Any person, even though also employed by you, who may be or become an
employee of and paid by the Trust or a Series shall be deemed, when acting
within the scope of his or her employment by the Trust or Series, to be acting
in such employment solely for the Trust or Series and not as your employee or
agent.
8. Duration and Termination of this Agreement. This Agreement shall remain
in force until August 31,1995, and with respect to each Series, from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (i) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval
and (ii) by the Trustees of the Trust, or, with respect to each Series, by vote
of a majority of the outstanding voting securities of such Series of the Trust.
The aforesaid requirement that continuance of this Agreement be "specifically
approved at least annually" shall be construed in a manner consistent with the
1940 Act and the rules and regulations thereunder.
This Agreement may, on 60 days' written notice, be terminated at any time
without the payment of any penalty, by the Trustees, by vote of a majority of
the outstanding voting securities of each Series (or of a Series, with respect
only to that Series), or by you. This Agreement shall automatically terminate in
the event of its assignment, provided that an assignment to a corporate
successor to all or substantially all of your business or to a wholly-owned
subsidiary of such corporate successor which does not result in a change of
actual control or management of your business shall not be deemed to be an
assignment for the purposes of this Agreement.
9. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective with respect to any Series until approved by the vote of a majority of
the outstanding securities of that Series and by the Trustees, including a
majority of the Trustees who are not parties to this Agreement or interested
persons of any party to this Agreement, cast in person at a meeting called for
the purpose of voting on such approval.
10. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
of The Commonwealth of Massachusetts, provides that the name "AARP Income Trust"
refers to the Trustees under the Declaration collectively as Trustees and not as
individuals or personally, and that no shareholder of any Series of the Trust,
or Trustee, officer, employee or agent of the Trust, shall be subject to claims
against or obligations of the Trust or of any Series of the Trust to any extent
whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Trust on behalf of any Series of the Trust pursuant to this Agreement shall be
limited in all cases to the Series and its assets, and you shall not seek
satisfaction of any such obligation from the shareholders or any shareholder of
any Series of the Trust, or from any Trustee, officer, employee or agent of the
Trust. You understand that the rights and obligations of a Series, under the
Declaration are separate and distinct from those of any and all other Series.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their constriction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definition contained
in Section 2(a) of the 1940 Act (particularly the definitions of "interested
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with and governed by the
laws of New York.
5
<PAGE>
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Trust on behalf of the Series.
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract.
Yours very truly,
AARP INCOME TRUST
By: /s/ Linda Coughlin
-----------------------
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER, STEVENS & CLARK, INC.
By: /s/ David S. Lee
------------------------
Managing Director
6
Exhibit 5(b)
AARP/SCUDDER FINANCIAL MANAGEMENT COMPANY
345 Park Avenue
New York, N.Y. 10154
December 16, 1985
SCUDDER, STEVENS & CLARK LTD.
345 Park Avenue
New York, New York 10154
Subadvisory Agreement
Dear Sirs:
We have entered into separate Investment Management and Advisory
Agreements (collectively, the "Management Agreements") each dated as of December
16, 1985 with each of the AARP Insured Tax Free Income Trust, the AARP Growth
Trust and the AARP Income Trust (collectively the "Funds"), pursuant to which we
act as investment adviser to and manager of the Funds. The shares of beneficial
interests of each Fund may be issued in separate series of such Fund (the
"Series"). Copies of the Management Agreements have been previously furnished to
you. In furtherance of such duties to the Funds, and with the approval of the
Funds, we wish to avail ourselves of your investment management and advisory
services. Accordingly, with the acceptance of the Funds, we hereby agree with
you as follows for the duration of this Agreement:
1. You agree to perform on our behalf the services required by the
Management Agreements, and to furnish to us such other information, investment
recommendations, advice and management services, as we shall from time to time
reasonably request.
2. We agree to pay you, as compensation for the services to be rendered by
you hereunder, a monthly fee equal to the Monthly Subadvisory Fee for that
month less one-half of she Account Manager Monthly Budget for the same month.
The Monthly Subadvisory Fee shall mean the gross fees payable to us in a given
month by the Funds (excluding any Fund which has terminated its rights and
obligations pursuant to Section 6 of this Agreement) under the Management
Agreements less the Monthly Member Services Fees (as defined in the Member
Services Agree-
<PAGE>
ment (the "Member Services Agreement"), dated November 30, 1984, between you and
AARP Subsidiary) for that month. If no Monthly Member Services Fees are payable
to AARP Financial Services Corp. and AARP Financial Services Corp. does not
contribute one-half of the Account Manager Monthly Budget, you will receive such
gross fees less the Account Manager's Monthly Budget. The Account Manager
Monthly Budget shall mean, with respect to a given month, the greater of (a) the
costs and expenses of the Account manager (other than fees paid by the Account
Manager pursuant to this Agreement and the Member Services Agreement) actually
incurred in that month; and (b) one-twelfth of our annual budget (other than
for amounts to be paid by us pursuant to this Agreement and the Member Services
Agreement) most recently adopted by our Management Committee.
3. Your services to us are not to be deemed exclusive and you are free to
render similar services to others.
4. Nothing herein shall be construed as constituting you as agent of us or
of the Funds.
5. You shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Funds in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on your part in the performance of your duties or from
reckless disregard by you of your obligations and duties under this Agreement.
Any person, even though also employed by you, who may be or become an employee
of and paid by the Funds shall be deemed, when acting within the scope of his
employment by the Funds, to be acting in such employment solely for the Funds
and not as your employee or agent.
6. This Agreement shall become effective as of the date hereof and shall
remain in effect until August 31, 1986 and shall continue in effect thereafter
so long as such continuance is specifically approved at least annually by the
affirmative vote of (i) a majority of the members of the Trustees or Board of
Directors, as the case may be, of each Fund who are not interested persons of
such Fund, you or us, cast in person at a meeting called for the purpose of
voting on such approval, and (ii) Trustees or Board of Directors, as the case
may be, of each Fund or, with respect to each Series of such
2
<PAGE>
Fund, the holders of a majority of the outstanding voting securities of such
Series of such Fund. In the event that the Boards of Directors or security
holders of fewer than all of the Funds, or all of the Series of a Fund, fail to
approve this Agreement in the manner described, in the preceding sentence, this
Agreement shall remain in, effect, but you shall not provide any services for
the account or receive any fees on account of such Funds, or Series, as the case
may be, as fail so to approve this, Agreement. Our rights and obligations and
any rights and obligations of a given Fund under this Agreement may nevertheless
be terminated at any time, without penalty, by us or, as to a particular Fund,
by the Trustees or Board of Directors, as the case may be, of such Fund or by
vote of holders of a majority of the outstanding voting securities of such Fund,
or Series, with respect only to that Series, upon sixty days' written notice
delivered or sent by registered mail, postage prepaid, to you, at your address
given above or at any other address of which you shall have notified us in
writing or by you upon six months' such written notice to us and to the Funds,
and shall automatically be terminated in the event of its assignment or the
assignment of the Management Agreement to which such Fund is a party provided
that an assignment to a corporate successor to all or substantially all of your
business or to a wholly-owned subsidiary of such corporate successor which does
not result in a change of actual control or management of your business shall
not be deemed to be an assignment for the purposes of this Agreement. Any such
notice shall be deemed given when received by the addressee.
7. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by either party hereto. It may be amended by mutual
agreement, but only after authorization of such amendment by the affirmative
vote of (i) the holders of a majority of the outstanding voting securities of
each series of the Funds; and (ii) the Trustees or Board of Directors, as the
case may be, of each Fund, including a majority of the Trustees or directors of
such Fund who are not interested persons of such Fund, you or us, cast in person
at a meeting called for the purpose of voting on such approval.
8. This Agreement shall be construed in accordance with the laws of the
State of New York, provided, however, that nothing herein shall be construed as
being
3
<PAGE>
inconsistent with the Investment Company Act of 1940, as amended. As used herein
the terms "interested persons", "assignment" and "vote of a majority of the
outstanding voting securities" shall have the meanings set forth in the
Investment Company Act of 1940, as amended.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart hereof and return the same to us.
Very truly yours,
AARP/SCUDDER FINANCIAL
MANAGEMENT COMPANY
By: SCUDDER, STEVENS & CLARK LTD.
A General Partner
By /s/ [illegible]
-------------------------
Title: Managing Director
The foregoing Agreement is
hereby accepted as of the
date first above written
SCUDDER, STEVENS & CLARK LTD.
By /s/ [illegible]
-------------------------
Title: Managing Director
Accepted:
AARP INSURED TAX FREE TRUST
By: /s/ [illegible]
------------------------
4
<PAGE>
AARP GROWTH TRUST
By: /s/ [illegible]
-----------------
AARP INCOME TRUST
By: /s/ [illegible]
-----------------
5
Exhibit 6
AARP INCOME TRUST
175 Federal Street
Boston, Massachusetts 02110
September 4, 1985
Scudder Fund Distributors, Inc.
175 Federal Street
Boston, Massachusetts 02110
Underwriting Agreement
Dear Sirs:
AARP Income Trust (hereinafter called the "Fund") is a business trust
organized under the laws of Massachusetts and is engaged in the business of an
investment company. The authorized capital of the Fund consists of shares of
beneficial interest, without par value ("Shares"), currently divided into two
series (the "Series"). Additional Series may be established from time to time by
action of the Trustees. The Fund has selected you to act as principal
underwriter (as such term is defined in Section 2(a)(29) of the Investment
Company Act of 1940, as amended (the "1940 Act")) of the Shares and you are
willing to act as such principal underwriter and to perform the duties and
functions of underwriter in the manner and on the terms and conditions
hereinafter set forth. Accordingly, the Fund hereby agrees with you as follows:
1. Delivery of Documents. The Fund has furnished you with copies properly
certified or authenticated of each of the following:
<PAGE>
(a) Declaration of Trust of the Fund, dated June 8, 1984, as amended to
date.
(b) By-Laws of the Fund as in effect on the date hereof.
(c) Resolutions of the Board of Trustees of the Fund selecting you as
principal underwriter and approving this form of Agreement.
The Fund will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
The Fund will furnish you promptly with properly certified or
authenticated copies of any registration statement filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
(the "1933 Act") or the 1940 Act, together with any financial statements and
exhibits included therein, and all amendments or supplements thereto hereafter
filed.
2. Registration and Sale of Additional Shares. The Fund will from time to
time use its best efforts to register under the 1933 Act such number of Shares
not already so registered as you may reasonably be expected to sell on behalf of
the Fund. You and the Fund will cooperate in taking such action as may be
necessary from time to time to qualify Shares so registered for sale by you or
the Fund in any states mutually agreeable to you and the Fund, and to maintain
such qualification. This Agreement relates to the issue and sale of Shares that
are duly authorized and registered and available for sale by the Fund,
-2-
<PAGE>
including redeemed or repurchased Shares if and to the extent that they may be
legally sold and if, but only if, the Fund sees fit to sell them.
3. Sale of Shares. No other person than you is authorized to act as
principal underwriter (as such term is defined in the 1940 Act) for the Fund.
Subject to the provisions of paragraphs 5 and 7 hereof and to such minimum or
maximum purchase or other requirements as may from time to time be currently
indicated in the Fund's prospectus or statement of additional information, you
are authorized to sell as agent on behalf of the Fund Shares authorized for
issue and registered under the 1933 Act. You may also purchase as principal
Shares for resale to the public. Such sales will be made by you on behalf of the
Fund by accepting unconditional orders to purchase Shares placed with you by
investors and such purchases will be made by you only after acceptance by you of
such orders. The sales price to the public of Shares shall be the public
offering price as defined in paragraph 6 hereof.
4. Solicitation of Orders. You will use your best efforts (but only in
states in which you may lawfully do so) to obtain from investors unconditional
orders for Shares authorized for issue by the Fund and registered under the 1933
Act, provided that you may in your discretion refuse to accept orders for Shares
from any particular applicant.
5. Sale of Shares by the Fund. Unless you are otherwise notified by the
Fund, any right granted to you to accept orders
-3-
<PAGE>
for Shares or to make sales on behalf of the Fund or to purchase Shares for
resale will not apply to (i) Shares issued in connection with the merger or
consolidation of any other investment company with the Fund or its acquisition,
by purchase or otherwise, of all or substantially all of the assets of any
investment company or substantially all the outstanding shares of any such
company, and (ii) Shares that may be offered by the Fund to shareholders of the
Fund by virtue of their being such shareholders, including Shares to be
purchased through reinvestment of income dividends and capital gain
distributions.
6. Public Offering Price. All Shares offered and sold to investors by you
will be offered and sold at the public offering price. The public offering price
for all accepted subscriptions will be the net asset value per Share,
determined, in the manner provided in the Fund's registration statements as from
time to time in effect under the 1933 Act and the 1940 Act, next after the order
is accepted by you.
7. Suspension of Sales. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further orders
for Shares shall be accepted by you except unconditional orders placed with you
before you had knowledge of the suspension. In addition, the Fund reserves the
right to suspend sales and your authority to accept orders for Shares on behalf
of the Fund if, in the judgment of a majority of the Board of Trustees or a
majority of
-4-
<PAGE>
the Executive Committee of such Board, if such body exists, it is in the best
interests of the Fund to do so, such suspension to continue for such period as
may be determined by such majority; and in that event, no Shares will be sold by
you on behalf of the Fund while such suspension remains in effect except for
Shares necessary to cover unconditional orders accepted by you before you had
knowledge of the suspension.
8. Portfolio Securities. Portfolio securities of any Series of the Fund
may be bought or sold by or through you and you may participate directly or
indirectly in brokerage commissions or "spread" in respect of transactions in
portfolio securities of any Series of the Fund; provided, however, that all sums
of money received by you as a result of such purchases and sales or as a result
of such participation must, after reimbursement of your actual expenses in
connection with such activity, be paid over by you to or for the benefit of the
Fund.
9. Expenses. (a) The Fund will pay (or will enter into arrangements
providing that others than you will pay) all fees and expenses:
(1) in connection with the preparation, setting in type and filing
of any registration statement (including a prospectus and
statement of additional information) under the 1933 Act or the
1940 Act, or both, and any amendments or supplements thereto
that may be made from time to time;
-5-
<PAGE>
(2) in connection with the registration and qualification of
Shares for sale in the various jurisdictions in which the Fund
shall determine it advisable to qualify such Shares for sale
(including registering the Fund as a broker or dealer or any
officer of the Fund or other person as agent or salesman of
the Fund in any such jurisdictions);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, prospectus or other
communication to shareholders of the Fund in their capacity as
such;
(4) of preparing, setting in type, printing and mailing
prospectuses annually, and any supplements thereto, to
existing shareholders;
(5) in connection with the issue and transfer of Shares resulting
from the acceptance by you of orders to purchase Shares placed
with you by investors, including the expenses of printing and
mailing confirmations of such purchase orders and the expenses
of printing and mailing a prospectus included with the
confirmation of such orders;
(6) of any issue taxes or any initial transfer taxes;
-6-
<PAGE>
(7) of WATS (or equivalent) telephone lines other than the portion
allocated to you in this paragraph 9;
(8) of wiring funds in payment of Share purchases or in
satisfaction of redemption or repurchase requests, unless such
expenses are paid for by the investor or shareholder who
initiates the transaction;
(9) of the cost of printing and postage of business reply
envelopes sent to Fund shareholders;
(10) of one or more CRT terminals connected with the computer
facilities of the transfer agent other than the portion
allocated to you in ths paragraph 9;
(11) permitted to be paid or assumed by the Fund pursuant to a plan
("12b-l Plan"), if any, adopted by the Fund in conformity
with the requirements of Rule 12b-1 under the 1940 Act ("Rule
12b-l") or any successor rule, notwithstanding any other
provision to the contrary herein;
(12) of the expense of setting in type, printing and postage of the
periodic newsletter to shareholders other than the portion
allocated to you in this paragraph 9; and
-7-
<PAGE>
(13) of that portion of the salaries and overhead of persons
employed by you as shareholder representatives other than the
portion allocated to you in this paragraph 9.
(b) You shall pay or arrange for the payment of all fees and expenses:
(1) of printing and distributing any prospectuses or reports
prepared for your use in connection with the offering of
Shares to the public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of
Shares to the public;
(3) of advertising in connection with the offering of Shares to
the public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
directors, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information or prospectuses;
-8-
<PAGE>
(6) of that portion of the expense of setting in type, printing
and postage of the periodic newsletter to shareholders
attributable to promotional material included in such
newsletter at your request concerning investment companies
other than the Fund or concerning the Fund to the extent you
are required to assume the expense thereof pursuant to
paragraph 9(b)(8), except such material which is limited to
information, such as listings of other investment companies
and their investment objectives, given in connection with the
exchange privilege as from time to time described in the
Fund's prospectus;
(7) of that portion of the salaries and overhead of persons
employed by you as shareholder representatives attributable to
the time spent by such persons in responding to requests from
investors, but not shareholders, for information;
(8) of any activity which is primarily intended to result in the
sale of Shares, unless a 12b-l Plan shall be in effect which
provides that the Fund shall bear some or all of such
expenses, in which case the Fund shall bear such expenses in
accordance with such Plan; and
-9-
<PAGE>
(9) of that portion of one or more CRT terminals connected with
the computer facilities of the transfer agent attributable to
your use of such terminal(s) to gain access to such of the
transfer agent's records as also serve as your records.
Expenses which are to be allocated between you and the Fund shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon
from time to time, which procedures or formulae shall to the extent practicable
reflect studies of relevant empirical data.
10. Sales Literature and Advertising. You agree that all sales literature
and advertising developed by you in connection with the Fund is subject to the
approval of the Fund. You and the Fund further acknowledge, as provided in the
agreement between the American Association of Retired Person ("AARP") and
Scudder, Stevens & Clark (the Funds investment adviser), dated as of October 9,
1984, that all sales literature and advertising, including that developed by
you, designed for use with the Fund shall be subject to the prior approval of
AARP through its properly delegated representatives.
11. Conformity with Law. You agree that in selling Shares you will duly
conform in all respects with the laws of the United States and any jurisdiction
in which Shares may be offered for sale by you pursuant to this Agreement and to
the rules and regulations of the National Association of Securities Dealers,
Inc., of which you are a member.
-10-
<PAGE>
12. Independent Contractor. You shall be an independent contractor and
neither you nor any of your officers or employees is or shall be an employee of
the Fund in the performance of your duties hereunder. You shall be responsible
for your own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others through your
agents or employees. You assume full responsibility for your agents and
employees under applicable statutes and agree to pay all employee taxes
thereunder.
13. Services Not Exclusive. Except to the extent necessary to perform your
obligations hereunder, nothing hererin shall be deemed to limit or restrict your
right or that of any of your affiliates or employees, including any of your
employees who may also be a trustee, officer or employee of the Fund, to engage
in any other business or to devote time and attention to the distribution or
other related aspects of any other registered investment company or to render
services of any kind to any other corporation, firm, individual or association.
14. Indemnification. You agree to indemnify and hold harmless the Fund and
each of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act, against any and all losses,
claims, damages, liabilities or litigation (including legal and other expenses)
to which the Fund or such Trustees, officers, or controlling person may become
subject under such Act, under any other statute, at common law or otherwise,
arising out of
-11-
<PAGE>
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by you or any of your employees or representatives, or (ii) may be
based upon any untrue statement or alleged untrue statement of a material fact
contained in a registration statement (including a prospectus or statement of
additional information) covering Shares or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading if such statement or omission was made in reliance upon information
furnished to the Fund by you, or (iii) may be incurred or arise by reason of
your acting as the Fund's agent instead of purchasing and reselling Shares as
principal in distributing the Shares to the public, provided, however, that in
no case (i) is your indemnity in favor of a Trustee or officer or any other
person deemed to protect such Trustee or officer or other person against any
liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of his reckless disregard of obligations and duties under
this Agreement or (ii) are you to be liable under your indemnity agreement
contained in this paragraph with respect to any claim made against the Fund or
any person indemnified unless the Fund or such person, as the case may be, shall
have notified you in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the
-12-
<PAGE>
claims shall have been served upon the Fund or upon such person (or after the
Fund or such person shall have received notice of such service on any designated
agent), but failure to notify you of any such claim shall not relieve you from
any liability which you may have to the Fund or any person against whom such
action is brought otherwise than on account of your indemnity agreement
contained in this paragraph. You shall be entitled to participate, at your own
expense, in the defense, or, if you so elect, to assume the defense of any suit
brought to enforce any such liability, but if you elect to assume the defense,
such defense shall be conducted by counsel chosen by you and satisfactory to the
Fund, to its officers and Trustees, or to any controlling person or persons,
defendant or defendants in the suit. In the event that you elect to assume the
defense of any such suit and retain such counsel, the Fund, such officers and
Trustees or controlling person or persons, defendant or defendants in the suit
shall bear the fees and expenses of any additional counsel retained by them,
but, in case you do not elect to assume the defense of any such suit, you will
reimburse the Fund, such officers and Trustees or controlling person or persons,
defendant or defendants in such suit for the reasonable fees and expenses of any
counsel retained by them. You agree promptly to notify the Fund of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of Shares.
-13-
<PAGE>
The Fund agrees to indemnify and hold harmless you and each of your
directors and officers and each person, if any, who controls you within the
meaning of Section 15 of the 1933 Act, against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
you or such directors, officers or controlling person may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Fund or any of its employees or representatives, or (ii) may
be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement (including a prospectus or statement
of additional information) covering Shares or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
information furnished to you by the Fund; provided, however, that in no case (i)
is the Fund's indemnity in favor of a director or officer or any other person
deemed to protect such director or officer or other person against any liability
to which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Fund to be liable under its indemnity
-14-
<PAGE>
agreement contained in this paragraph with respect to any claims made against
you or any such director, officer or controlling person unless you or such
director, officer or controlling person, as the case may be, shall have notified
the Fund in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon you or upon such director, officer or controlling person (or after
you or such director, officer or controlling person shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve it from any liability which it may have to the
person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Fund will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the Fund
elects to assume the defense, such defense shall be conducted by counsel chosen
by it and satisfactory to you, your directors, officers or controlling persons
or persons, defendant or defendants in the suit. In the event that the Fund
elects to assume the defense of any such suit and retain such counsel, you, your
directors, officers or controlling person or persons, defendant or defendants in
the suit, shall bear the fees and expenses of any additional counsel retained by
them, but, in case the Fund does not elect to assume the defense of any such
suit, it will
-15-
<PAGE>
reimburse you or such directors, officers or controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees promptly to notify you of the
commencement of any litigation or proceedings against it or any of its officers
or Trustees in connection with the issuance or sale of any Shares.
15. Authorized Representations. The Fund is not authorized to give any
information or to make any representations on behalf of you other than the
information and representations contained in a registration statement (including
a prospectus or statement of additional information) covering Shares, as such
registration statement may be amended or supplemented from time to time, or
reports prepaid for distribution to shareholders of the Fund.
You are not authorized to give any information or to make any
representations on behalf of the Fund or in connection with the sale of Shares
other than the information and representations contained in a registration
statement (including a prospectus or statement of additional information)
covering Shares, as such registration statement may be amended or supplemented
from time to time, or reports prepared for distribution to shareholders of the
Fund.
16. Duration and Termination of this Agreement. This Agreement shall
become effective upon the date first written above and will remain in effect for
a period of two years from
-16-
<PAGE>
the date hereof and from year to year thereafter, but only so long as such
continuance is specifically approved at least annually by the vote of a majority
of the Trustees who are not interested persons of you or of the Fund, cast in
person at a meeting called for the purpose of voting on such approval, and by
vote of the Board of Trustees or of a majority of the outstanding voting
securities of the Fund. This Agreement may, on 60 days' written notice, be
terminated at any time without the payment of any penalty, by the Board of
Trustees of the Fund, by a vote of a majority of the outstanding voting
securities of the Fund, or by you. This Agreement will automatically terminate
in the event of its assignment. In interpreting the provisions of this paragraph
16, the definitions contained in Section 2(a) of the 1940 Act (particularly the
definitions of "interested person", "assignment" and "majority of the
outstanding voting securities"), as modified by any applicable order of the
Securities and Exchange Commission, shall be applied.
17. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. If the Fund should at any time deem it
necessary or advisable in the best interests of the Fund that any amendment of
this Agreement be made in order to comply with the recommendations or
requirements of the
-17-
<PAGE>
Securities and Exchange Commission or other governmental authority or to obtain
any advantage under state or federal tax laws and should notify you of the form
of such amendment, and the reasons therefor, and if you should decline to assent
to such amendment, the Fund may terminate this Agreement forthwith. If you
should at any time request that a change be made in the Fund's Declaration of
Trust or By-laws or in its methods of doing business, in order to comply with
any requirements of federal law or regulations of the Securities and Exchange
Commission or of a national securities association of which you are or may be a
member relating to the sale of shares of the Fund, and the Fund should not make
such necessary change within a reasonable time, you may terminate this Agreement
forthwith.
18. Termination of Prior Agreements. This Agreement upon its effectiveness
terminates and supersedes all prior underwriting contracts between the parties.
19. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
The name "AARP Income Trust" is the designation of the Trustees for the
time being under a Declaration of Trust dated June 8, 1984, as amended from time
to time, and all persons
-18-
<PAGE>
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Trustees, officers,
agents or shareholders assume any personal liability for obligations entered
into on behalf of the Fund.
You acknowledge that if the Trustees of the Fund shall have established
additional series of the Shares, the Fund may, at any time such action is deemed
desirable, suspend or terminate sales of Shares of a Series and that upon your
receipt of notice of such action by the Fund you will, for such period as
determined by the Fund, accept no further orders for Shares of that Series
except unconditional orders placed with you before you had knowledge of such
action. You acknowledge further that the Fund may from time to time set upper
and lower limits on the number of Shares of a Series for which a purchaser may
subscribe and may limit sales of Shares of a Series to its existing
shareholders.
-19-
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding contract.
Very truly yours,
AARP INCOME TRUST
BY: /s/ David S. Lee
-----------------------
The foregoing Agreement is hereby accepted as of the date thereof.
SCUDDER FUND DISTRIBUTORS, INC.
BY: /s/ [Illegible]
-----------------------
-20-
CUSTODIAN AGREEMENT
This Agreement between AARP Income Trust (the "Fund"), a
Massachusetts business trust created under a Declaration of Trust dated June 8,
1984 as the same may be amended from time to time (the "Declaration of Trust"),
and State Street Bank and Trust Company (the "Custodian"),
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
I. Employment of Custodian and Property to be Held by It; Application of
Contract
The Fund hereby employs the Custodian as the Custodian of its
assets, including the assets of the two initial series and of any additional
series which may be created ("Series") of shares of beneficial interest of the
Fund ("Shares"), pursuant to the provisions of the Declaration of Trust and the
By-Laws of the Fund. If the context requires and unless otherwise specifically
provided herein, the term "Fund" as used in this Agreement shall mean in
addition each separate Series and the term "Shares" shall mean all Shares of
beneficial interest in all Series of the Fund.
The Fund agrees to deliver to the Custodian all securities and cash
owned by it, and all payments of income,
<PAGE>
-2-
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury Shares as may be issued or sold from
time to time. The Custodian shall not be responsible for any property of the
Fund held or received by the Fund and not delivered to the Custodian.
The Custodian may from time to time employ one or more
sub-custodians, but only in accordance with an applicable vote by the Trustees
of the Fund, and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. Any sub-custodian so employed shall satisfy the same eligibility
requirements as are imposed by the Trust's Declaration of Trust and/or By-Laws
upon the Custodian.
The Fund may from time to time employ a special custodian in
connection with certain repurchase agreements which may be entered into by the
Fund, with the terms of such employment to be governed by a special custodian
agreement between the Fund and the special custodian. However, the Fund agrees
not to employ any such special custodian until the Fund and the Custodian have
entered into a master repurchase agreement or other agreement which sets forth
the terms governing the relationship, including the method of transfer of
securities and cash, between the Custodian and such special custodian.
<PAGE>
-3-
State Street acknowledges that additional Series may be established
and that Series may be terminated, from time to time by action of the Trustees
of the Fund.
II. Duties of the Custodian with Respect to Property of the Fund Held by the
Custodian
A. Holding Securities. The Custodian shall hold and physically
segregate in a separate account for the Fund all non-cash property of the Fund,
including all securities owned by the Fund, except that securities which are
maintained pursuant to Section L of Article II hereof in a clearing agency which
acts as a securities depository or in a book-entry system authorized by the U.S.
Department of the Treasury, collectively referred to herein as "Securities
Systems," shall be identified as belonging to the Fund.
The Custodian shall maintain records of all receipts, deliveries,
and locations of such securities, together with a current inventory thereof and
shall conduct periodic physical inspections of certificates representing bonds
and other securities held by it under this Agreement in such manner as the
Custodian shall determine from time to time to be advisable in order to verify
the accuracy of such inventory. In addition, an annual physical count of vaulted
securities will be conducted by the Custodian's personnel who are independent of
its Custody Department. A complete reconcilement of all items will be performed,
including all out-of-vault items. With respect to securities held by any agent
appointed pursuant to Section K of Article II hereof,
<PAGE>
the Custodian may rely upon certificates from such agent as to the holdings of
such agent, it being understood that such reliance in no way relieves the
Custodian of its responsibilities under this Agreement. The Custodian will
promptly report to the Trust the results of such inspections, indicating any
shortages or discrepancies uncovered thereby, and take appropriate action to
remedy any such shortages or discrepancies.
B. Delivery of Securities. The Custodian shall release and deliver
securities owned by the Fund held by the Custodian or in a Securities Systems
account of the Custodian only upon receipt of proper instructions, which may be
continuing instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section L of Article II
hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired
<PAGE>
-5-
or otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section K of Article II hereof or into
the name or nominee name of any sub-custodian appointed
pursuant to Article I hereof; or for exchange for a different
number of bonds, certificates or other evidence representing
the same aggregate face amount or number of units; provided
that, in any such case, the new securities are to be delivered
to the Custodian;
7) To the broker selling the same for examination in accordance
with the "street delivery" custom; provided that the Custodian
shall adopt such procedures, as the Fund from time to time
shall approve, to ensure their prompt return to the Custodian
by the broker in the event the broker elects not to accept
them;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities
<PAGE>
-6-
of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to
any deposit agreement; provided that, in any such case, the
new securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities, for the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities except that in connection with any loans for
which collateral is to be credited to the Custodian's account
in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian may deliver securities prior to
the credit of such collateral,
<PAGE>
-7-
provided that the Custodian shall promptly notify the Fund if
such collateral is not credited;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) Upon receipt of instructions from the transfer agent for the
Fund (the "Transfer Agent"), for delivery to the Transfer
Agent or to holders of shares in connection with distributions
in kind, as may be described from time to time in the Fund's
currently effective prospectus and registration statement, in
satisfaction of requests by holders of Shares for repurchase
or redemption; and
13) For any other proper corporate purposes, but only upon receipt
of, in addition to proper instructions, a certified copy of a
resolution of the Trustees or of the Executive Committee
signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purposes to be proper
corporate purposes, and naming
<PAGE>
-8-
the person or persons to whom delivery of such securities
shall be made.
C. Registration of Securities. Securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund or in
the name of any nominee of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be used in common with
other registered investment companies having the same investment adviser as the
Fund, or in the name or nominee name of any agent appointed pursuant to Section
K of Article II hereof or in the name or nominee name of any sub-custodian or
special custodian appointed pursuant to Article I hereof. All securities
accepted by the Custodian on behalf of the Fund under the terms of this
Agreement shall be in "street" or other good delivery form.
D. Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to draft or order
by the Custodian acting pursuant to the terms of this Agreement, and shall hold
in such account or accounts, subject to the provisions hereof, all cash received
by it from or for the account of the Fund, other than cash maintained by the
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940, as amended ("Investment Company Act"). Funds
held by the Custodian for the Fund may be deposited by it to its credit as
Custodian in
<PAGE>
-9-
the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act, and that each such bank or trust
company and the funds to be deposited with each such bank or trust company shall
be approved by vote of a majority of the Trustees of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
E. Payment of Shares. The Custodian shall receive from the
distributor of the Fund's Shares or from the Transfer Agent and deposit into the
Fund's account such payments as are received for Shares of the Fund issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund and the Transfer Agent of any receipt by it of payments
for Shares of the Fund.
F. Investment and Availability of Federal Funds. Upon mutual
agreement between the Fund and the Custodian, the Custodian shall, upon the
receipt of proper instructions, which may be continuing instructions when deemed
appropriate by the parties,
1) invest in such instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and
the Fund; and
<PAGE>
-10-
2) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the
Fund which are deposited into the Fund's account.
G. Collections. The Custodian shall:
1) collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the
Fund shall be entitled either by law or pursuant to custom in
the securities business;
2) collect on a timely basis all income and other payments with
respect to bearer securities if, on the date of payment by the
Issuer, such securities are held by the Custodian or agent
thereof and shall credit such income, as collected, to the
Fund's custodian account; and
3) endorse and deposit for collection, in the name of the Fund,
checks, drafts or other negotiable instruments timely on the
same day as received.
Without limiting the generality of the foregoing, the Custodian
shall detach and present for payment all coupons and other income items
requiring presentation as and
<PAGE>
-11-
when they become due and shall collect interest when due on securities held
hereunder.
The Custodian shall notify the Fund as soon as reasonably
practicable whenever income on securities held by it for the Fund is not
received in due course. The Custodian shall not be obligated to take legal
action to enforce collection unless and unitl it is authorized by the Fund to do
so and is indemnified therefor to its satisfaction.
Income due the Fund on securities loaned pursuant to the provisions
of Section B(10) shall be the responsibility of the Fund. The Custodian will
have no duty or responsibility in connection therewith except as set forth in
the preceding paragraph, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the timely delivery
to the Custodian of the income to which the Fund is properly entitled.
H. Payment of Fund Moneys. Upon receipt of proper instructions,
which may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out moneys of the Fund in the following cases only:
1) Upon the purchase of securities for the account of the Fund
but only (a) against the delivery of such securities to the
Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified
under the Investment Company Act or is permitted by a rule
under
<PAGE>
-12-
such Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) or sub-custodian or
special custodian registered in the name of the Fund or in the
name of a nominee of the Custodian referred to in Section C of
Article II hereof or in proper form for transfer; (b) in the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section L of
Article II hereof or (c) in the case of repurchase agreements
entered into between the Fund and the Custodian, or another
bank, (i) against delivery of the securities either in
certificate form or through an entry crediting the
Custodian's, sub-custodian's or special custodian's account
at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the
Fund of securities owned by the Custodian or other bank along
with written evidence of the agreement by the Custodian or
other bank to repurchase such securities from the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section B of
Article II hereof;
<PAGE>
-13-
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Section J of Article II hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent, dividend disbursing agent, plan
agent and legal fees, and operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For any other proper purposes, but only upon receipt of, in
addition to proper instructions, a certified copy of a
resolution of the Trustees or of the Executive Committee of
the Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which such payment
is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to
be made.
<PAGE>
-14-
I. Liability for Payment in Advance of Receipt of Securities
Purchased. In any and every case where payment for purchase of securities for
the account of the Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from the
Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been received by
the Custodian, except that, in the case of repurchase agreements entered into by
the Fund with a bank which is a member of the Federal Reserve System, the
Custodian may transfer funds to the account of such bank for the purchase of
securities pursuant to such repurchase agreement prior to the receipt on behalf
of the Fund of any securities or other property or of written evidence that the
securities subject to such repurchase agreement have been transferred by
book-entry into a segregated non-proprietary account of the Custodian
maintained with the Federal Reserve Bank of Boston or of the safe-keeping
receipt, provided that such securities have in fact been so transferred by
book-entry.
J. Payments for Repurchases or Redemptions of Shares of the Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Trustees
of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions
from the Transfer Agent, make funds available
<PAGE>
-15-
for payment to holders of Shares who have delivered to the Transfer Agent a
request for redemption or repurchase of their Shares. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian is authorized upon
receipt of instructions from the Transfer Agent to wire funds to or through a
commercial bank or other participant in the Federal Reserve System designated by
the redeeming shareholders. In connection with the redemption or repurchase of
Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the Fund to the holder of
Shares, when presented to the Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time between the Fund and the
Custodian.
K. Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act to act as a
custodian, as its agent to carry out such of the provisions of this Article II
as the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of any of its
responsibilities or liabilities hereunder.
L. Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities
<PAGE>
-16-
Exchange Act of 1934, which acts as a securities depository, or in the
book-entry system authorized by the U.S. Department of the Treasury and certain
federal agencies, collectively referred to herein as "Securities Systems" in
accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian, or otherwise for
customers.
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund.
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
<PAGE>
-17-
sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices
from the Securities System of transfers of securities for the
account of the Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Fund at its
request. The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form
of a written advice or notice and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Fund on the next business day.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System.
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article IX
hereof.
<PAGE>
-18-
6) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Securities System
by reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from any failure of the Custodian or any such
agent to enforce effectively such rights as it may have
against the Securities System; at the election of the Fund, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
M. Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to securities of the Fund held by it and in connection with transfers of
securities.
N. Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed
<PAGE>
-19-
by the registered holder of such securities, if the securities are registered
otherwise than in the name of the Fund or a nominee of the Fund, all proxies,
without indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting materials
and all notices relating to such securities.
0. Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of securities
and expirations of rights in connection therewith) received by the Custodian
from issuers of the securities being held for the Fund. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with respect to any
tender offer, exchange offer or any other similar transaction, the Fund shall
notify the Custodian at least three business days prior to the date on which the
Custodian is to take such action.
P. Proper Instructions. "Proper instructions" as used throughout
this Article II means a writing signed or initialled by one or more person or
persons as the Trustees shall have from time to time authorized. Each such
writing shall set forth the specific statement or type of transaction
<PAGE>
-20-
involved, including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered proper instructions if the
Custodian reasonably believes them to have been given by a person authorized to
give such instructions with respect to the transaction involved. The Fund shall
cause all oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Secretary or an Assistant Secretary as to the authorization
by the Trustees of the Fund accompanied by a detailed description of procedures
approved by the Trustees, "proper instructions" may include communications
effected directly between electro-mechanical or electronic devices provided that
the Trustees and the Custodian are satisfied that such procedures afford
adequate safeguards for the Fund's assets.
Q. Actions Permitted Without Express Authority. The Custodian may in
its discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
<PAGE>
-21-
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Trustees of
the Fund.
R. Evidence of Authority. The Custodian shall be protected in acting
upon any instructions, notice, request, consent, certificate or other instrument
or paper believed by it to be genuine and to have been properly executed by or
on behalf of the Fund. The Custodian may receive and accept a certified copy of
a vote of the Trustees of the Fund as conclusive evidence (a) of the authority
of any person to act in accordance with such vote or (b) of any determination or
of any action by the Trustees pursuant to the Declaration of Trust as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
III. Duties of Custodian with Respect to Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information
to the entity or entities appointed by the Trustees of the Fund to keep the
books of account of the
<PAGE>
-22-
Fund and/or compute the net asset value per share of the outstanding shares of
the Fund or, if directed in writing to do so by the Fund, shall itself keep such
books of account and/or compute such net asset value per share. The Custodian
shall also upon request calculate the net income of the Fund for such periods as
requested by the Fund and shall notify the Transfer Agent of the amounts of such
income. The Custodian shall also, if instructed in writing by an officer of the
Fund to do so, advise the Transfer Agent, for such periods as specified by the
Fund, of the division of such net income among its various components. The
calculations of the net asset value per share and the income of the Fund shall
be made at the time or times described from time to time in the Fund's currently
effective prospectus and registration statement.
IV. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the Investment Company Act, with particular
attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, applicable
federal and state tax laws and any other law or administrative rules or
procedures which may be applicable to the Fund. All such records shall be the
property of the Fund and shall at all times during the
<PAGE>
-23-
regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
V. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-1R or other
annual reports to the Securities and Exchange Commission and with respect to any
other requirements of such Commission.
VI. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, including securities deposited and/or maintained in a Securities
System, relating to the services provided by
<PAGE>
-24-
the Custodian under this Agreement; such reports, which shall be of sufficient
scope and in sufficient detail, as may reasonably be required by the Fund, to
provide reasonable assurance that any material inadequacies would be disclosed,
shall state in detail material inadequacies disclosed by such examination, and,
if there are no such inadequacies, shall so state.
VII. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
VIII. Responsibility of Custodian
So long and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Agreement, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on
<PAGE>
-25-
and may act upon advice of counsel (who may be counsel for the Fund) on all
matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. Notwithstanding the foregoing, the
responsibility of the Custodian with respect to any redemptions effected by
check shall be in accordance with a separate Agreement entered into between the
Custodian and the Fund.
In order that the indemnification provision contained in this
Article VIII shall apply, however, it is understood that if in any case the Fund
may be asked to indemnify or save the Custodian harmless, the Fund shall be
fully and promptly advised of all pertinent facts concerning the situation in
question, and it is further understood that the Custodian will use all
reasonable care to identify and notify the Fund promptly concerning any
situation which presents or appears likely to present the probability of such a
claim for indemnification against the Fund. The Fund shall have the option to
defend Custodian against any claim which may be the subject of this
indemnification, and in the event that the Fund so elects it will so notify the
Custodian, and thereupon the Fund shall take over complete defense of the claim;
and the Custodian shall in such situation seek indemnification under this
Article VIII. The Custodian shall in no case confess any claim or make any
compromise in any case in which the Fund will be asked to indemnify the
Custodian except with the Fund's prior written consent.
<PAGE>
-26-
If the Fund requires the Custodian to take any action with respect
to securities, which action involves the payment of money or which action may,
in the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement.
IX. Effective Period, Termination and Amendment
This Agreement shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
<PAGE>
-27-
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section L of Article II hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Trustees of the Fund have approved the initial use
of a particular Securities System and the receipt of an annual certificate of
the Secretary or an Assistant Secretary that the Trustees have reviewed the use
by the Fund of such Securities System, as required in each case by Rule 17f-4
under the Investment Company Act of 1940, as amended; provided further, however,
that the Fund shall not amend or terminate this Agreement in contravention of
any applicable federal, state or other jurisdictional regulations, or any
provision of the Declaration of Trust or the Fund's By-Laws, and further
provided, that the Fund may at any time by action of its Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Agreement in the
event of the appointment of a conservator or receiver for the Custodian by the
Federal Deposit Insurance Corporation or Commissioner of Banks for the
Commonwealth of Massachusetts or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
<PAGE>
-28-
Upon termination of the Agreement, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses and
disbursements.
X. Successor Custodian
If a successor custodian shall be appointed by the Trustees of the
Fund, the Custodian shall, upon termination, deliver to such successor custodian
at the office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the
Trustees of the Fund, deliver at the office of the Custodian such securities,
funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Trustees shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a "bank" as defined in the Investment Company Act doing business in
Boston, Massachusetts, of its own selection, having an aggregate capital,
surplus, and undivided profits, as shown by its last published report, of not
less than $2,000,000, all securities, funds and other properties held by the
Custodian and all instruments held by the Custodian relative thereto and all
other property
<PAGE>
-29-
held by it under this Agreement. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Agreement.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of vote referred to or of the
Trustees to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Agreement relating to the duties and obligations of the Custodian shall
remain in full force and effect.
XI. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian
and the Fund may from time to time agree on such provisions interpretive of or
in addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto,
<PAGE>
-30-
provided that no such interpretive or additional provisions shall contravene any
applicable federal, state or other jurisdictional regulations or any provision
of the Declaration of Trust or the By-Laws of the Fund. No interpretive or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Agreement.
XII. Trustees.
All references to actions of or by Trustees herein shall require
action by such Trustees acting as a board or formally constituted group and not
individually.
XIII. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
The name "AARP Income Trust" is the designation of the Trustees for
the time being under a Declaration of Trust dated June 8, 1984 and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Trustees, officers,
agents, employees or shareholders of the Fund assume any personal liability for
obligations entered into on behalf of the Fund, nor shall resort be had to
<PAGE>
-31-
their private property for the satisfaction of any obligation or claim or
otherwise in connection with the Fund's affairs.
IN WITNESS WHEREOF, each of the parties has caused this instrument
to be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 30th day of November, 1984.
SEAL AARP INCOME TRUST
ATTEST
/s/ [Illegible] By: /s/ David S. Lee
- ------------------------- --------------------------
Assistant Secretary Executive Vice President
SEAL STATE STREET BANK AND TRUST
ATTEST COMPANY
/s/ [Illegible] By: /s/ [Illegible]
- ------------------------- --------------------------
Assistant Secretary Vice President
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
A.A.R.P. INCOME TRUST
Effective November 30, 1984
- --------------------------------------------------------------------------------
I. Administration
Custody, Portfolio and Fund Accounting Service - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report
cash transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and
capital stock accounts. Prepare daily trial balance. Calculate net asset
value daily. Provide selected general ledger reports. Securities yield or
market value quotations will be provided to State Street by the fund.
A.A.R.P. Income Trust consists of two separate portfolios. The current
portfolios are as follows:
A.A.R.P. GNMA and U.S. Treasury Fund
A.A.R.P. General Bond Fund
Each portfolio will be individually subject to the administrative fee
shown below. This fee is an annual charge, billed and payable monthly,
based on the average net assets of each portfolio.
ANNUAL FEE
Fund Net Assets
---------------
First $20 million 1/15 of 1%
Next $80 million 1/30 of 1%
Excess 1/100 of 1%
There will be no minimum monthly charge under this section.
II. Portfolio Trades - For each line item processed
-----------------------------------------------
State Street Bank Repos $ 7.00
All other trades $16.00
<PAGE>
III. Earnings Credit
A balance credit will be applied against the above fees equal to 75
percent of the 30 day Treasury Bill rate in effect on the last Monday of
the month adjusted to a monthly basis, times the average collected balance
in the custodian demand deposit accounts for the month billed.
IV. Special Services
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation
of special reports will be subject to negotiation.
V. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire charges ($3.85 per wire in and $3.70 out)
Postage and insurance
Courier service
Legal fees
Supplies related to fund records
Rush transfer - $8 each
Duplication
DTC Eligibility Books
Transfer fees
Pricing services
Sub-custodian charges
Price Waterhouse Audit Letter
GNMA Transfer - $15 each
Principal Reduction - $3 each
A.A.R.P. INCOME TRUST STATE STREET BANK & TRUST CO.
By: /s/ David S. Lee By: /s/ [ILLEGIBLE]
---------------------- -------------------------
Title: Exec. Vice President Title: Vice President
Date: November 3O, 1984 Date: October 5, 1984
CUSTODIAN AGREEMENT
AARP INCOME TRUST
ADDITIONAL PROVISION
Pursuant to Article XI, Interpretive and Additional Provisions, of
the Custodian Agreement dated November 30, 1984 between AARP Income Trust (the
"Fund") and State Street Bank and Trust Company ("State Street"), the Fund and
State Street agree to the terms of the following Additional Provision:
The Fund hereby acknowledges that State Street Bank and Trust
Company provides custodial and other services of the types to be provided to the
Fund to other investment companies, including registered investment companies
affiliated with and/or sponsored by the American Association of Retired Persons
("AARP"), and that State Street, either acting in its capacity as custodian or
transfer agent or in another capacity as a commercial bank and trust company,
has and may in the future develop other products and services which are offered
to persons who are members of AARP. The Fund, for itself and its Trustees and
officers, agrees that the provision of any such services by State Street in
whatever capacity shall not present in itself any conflict of interest under
said Custodian Agreement or Transfer, Dividend Disbursing and Plan Agency
Agreement and shall not in any way prejudice or affect the rights of State
Street under either Agreement, including the right to indemnification provided
therein.
<PAGE>
-2-
The Fund will use its best efforts to cause AARP/Scudder Financial Management
Company, the Fund's investment advisor and Scudder Fund Distributors, Inc., the
distributor of the Fund's shares, to agree to this additional provision for the
benefit of State Street. In consideration therefor, State Street agrees that (a)
it will not disclose any confidential information pertaining to the Fund, its
portfolio securities and its shareholders to any party without the prior written
consent of the Fund (except as may otherwise be provided in the Custodian
Agreement or the Transfer, Dividend Disbursing and Plan Agency Agreement), and
(b) it will not discriminate against the Fund in providing services to the Fund
and/or such other investment companies or persons. The provisions of this
Additional Provision shall not affect the standard of care applicable to State
Street in the provision of service to the Fund under the Custodian Agreement or
the Transfer, Dividend Disbursing and Plan Agency Agreement.
ATTEST AARP INCOME TRUST
/s/ [ILLEGIBLE[] /s/ David S. Lee
- ----------------------- ------------------------
Assistant Secretary Executive Vice President
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- ----------------------- ------------------------
Assistant Secretary Vice President
Exh 8(a)(4)
AARP INCOME TRUST
Custodian Contract
Amendment No. 1
AARP Income Trust (the "Fund") and State Street Bank and Trust
Company (the "Custodian") hereby agree to amend the Custodian Contract entered
into on November 30, 1984 pursuant to Article IX therein, as follows:
1. Page 7, Article II, Section B. By inserting the following new
Paragraphs 12 and 13 as follows and by renumbering the existing Paragraphs 12
and 13 as Paragraphs 14 and 15, respectively:
"12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act")
and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a futures commission merchant
registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar
organization or organizations, regarding account deposits in
connection with transactions by the Fund;"
2. Page 11, Article II, Section H, Paragraph 1, line 1. By inserting
after "securities" the following: ", futures contracts or options on futures
contracts".
3. Page 11, Article II, Section H, Paragraph 1, line 3. By inserting
after "securities" the following: ", or evidence of title to futures contracts
or options on futures contracts,".
4. Page 12, Article II, Section H, Paragraph 1, line 20. By
inserting after "another bank" the following: "or a broker-dealer which is a
member of the NASD,".
5. Page 13, Article II, Section H. By adding a new Paragraph 6 as
follows and by renumbering the current Paragraph 6 as Paragraph 7:
"6)For payment of the amount of dividends received in respect of
securities sold short;"
6. Page 18, Article II. By adding the following new Section M. as
follows and by renumbering the current Sections M., N., O., P., Q. and R. as
Sections N., 0., P., Q., R. and S., respectively:
<PAGE>
-2-
"M. Segregated Account. The Custodian shall upon receipt of proper
instructions, which may be standing instructions, establish and
maintain a segregated account or accounts for and on behalf of
the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account
by the Custodian pursuant to Section L hereof, (i) in accordance
with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act
and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market) or
of any similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the Fund,
(ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold
by the Fund, (iii) for the purposes of compliance by the Fund
with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv)
for other proper corporate purposes, but only, in the case of
clause (iv), upon receipt of, in addition to proper instructions,
a certified copy of a resolution of the Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes."
7. Page 19, Article II, Section 0 (pre-amendment), line 5. By
inserting after " connection therewith" the following: "and notices of exercise
of call and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund)".
8. Page 23, Article VI, line 5. By inserting after "safe-guarding
securities," the following: "futures contracts and options on futures
contracts,".
<PAGE>
-3-
This Amendment shall become effective as of its date of execution.
IN WITNESS WHEREOF, each of the parties has caused this instrument
to be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 29th day of July, 1985.
AARP INCOME TRUST
(SEAL)
By /s/ David S. Lee
--------------------------------
Title: Executive Vice President
STATE STREET BANK
AND TRUST COMPANY
(SEAL)
By /s/ [ILLEGIBLE]
--------------------------------
Title: Vice President
Exhibit 8(a)(5)
AMENDMENT
The Custodian Contract dated November 30, 1984 between AARP Income Trust
(the "Fund") and State Street Bank and Trust Company (the "Custodian") is hereby
amended as follows:
I. Section II.A is amended to read as follows:
"Holding Securities. The Custodian shall hold and physically segregate in a
separate account for each series ("Portfolio") of the Fund all non-cash property
allocated to each portfolio, including all Securities owned by the Fund and
allocated to each Portfolio except that (a) securities which are maintained
pursuant to Section II.L. in a clearing agency which acts as a securities
depository or in a book-entry system authorized by the U.S. Department of
Treasury, collectively referred to herein as "Securities System", shall be
identified as belonging to a specified Portfolio and (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing and paying
agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper
System of the Custodian pursuant to Section II.L.l., shall be identified as
belonging to a specified Portfolio".
II. Sections II.B is amended to read, in relevant part as follows:
"Delivery of Securities. The Custodian shall release and deliver securities
owned by the Fund held by the Custodian or in a Securities System account of the
Custodian or in the Custodian's Direct Paper book entry system account ("Direct
Paper System Account") only upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, and only in the
following cases:
1) . . . .
.
.
.
13) . . . ."
III. Section II.B. 4) through 13) are renumbered 5) through 14) and the
following is added as subparagraph 4):
"4) In the case of a sale effected through the Direct Paper System, in
accordance with the provisions of Section L.l hereof."
IV. Section II.H(l) is amended to read in relevant part as follows:
"Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of securities, options, futures contracts or options
on futures contracts for the account of the Fund but only (a) against
the delivery of such securities or evidence of title to such
MG-24
<PAGE>
options, futures contracts or options on futures contracts, to the
Custodian (or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the Investment Act
of 1940, as amended, to as as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in the name of
the Fund or in the name of a nominee of the Custodian referred to in
Section II.C hereof or in proper form for transfer; (b) in the case of
a purchase effected through a Securities System, in accordance with the
conditions set forth in Section II.L. hereof;
(c) in the case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section II.L.l.; or (d) in
the case of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in certificate form
or through an entry crediting the Custodian's account in which is holds
securities as a fiduciary, custodian or otherwise for customers at the
Federal Reserve Bank with such securities or (ii) in the case of
purchase by the Fund of securities owned by State Street Bank and Trust
Company ("State Street") for its own account, against (A) delivery of
the receipt evidencing purchase by the Fund, (B) earmarking
certificates for such securities to show ownership by the Fund or
transfer of such securities from State Street's proprietary account at
the Federal Reserve Bank to its account described in (i) above, unless
the securities are already held in the latter account, (C) the entry on
the records of State Street showing that such securities are held by
the Fund, and (D) delivery of written evidence of the agreement of
State Street to repurchase such securities from the Fund; provided
that, upon receipt of Proper Instructions, the Custodian shall transfer
to another bank or trust company qualified to act as a custodian under
the Investment Company Act of 1940, as amended, securities held in a
Securities System and purchased from State Street subject to State
Street's agreement to repurchase such securities;"
V. Following Section II.L., there is inserted a new Section II.L.l to
read as follows:
L.l "Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund for which the Custodian
acts as issuing and paying agent for the direct issue of commercial paper by and
for issuers through the Custodian's book-entry system, referred to herein as the
"Direct Paper System", subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which
shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
-2- 0098Z
<PAGE>
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by Portfolio by book-entry those securities belonging
to the Fund;
4) The Custodian shall pay for securities purchased for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to
the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt
of payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written
advice or notice, of Direct Paper on the next business day
following such transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's transactions in the
Direct Paper System for the account of the Fund; and
6) The Custodian shall provide the Fund with any report on its system
of internal accounting control regarding the Direct Paper System
as the Fund may reasonably request from time to time."
VI. Section IX is hereby amended to read as follows:
Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement to the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
Custodian shall not act under Section II.L. hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the Board
of Trustees of the Fund has approved the initial use of a particular Securities
System and the receipt of an annual certificate of the Secretary or an Assistant
Secretary that the Board of Trustees has reviewed the use by the Fund of such
Securities System, as required in each case by Rule 17f-4 under the Investment
Company Act of 1940, as amended and that the Custodian shall not act under
Section II.L.l hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Trustees has
reviewed the use by the Fund of the Direct Paper System; provided further,
however, that the Fund shall not amend or terminate this act in contravention of
any applicable federal or state regulations, or any provision of the Declaration
of Trust, and further provided, that the Fund may at any time by action of its
Board of Trustees (i) substitute another bank or trust company for the Custodian
by giving notice as described above to the Custodian, or (ii) immediately
terminate this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the Comptroller of the Currency, the Federal
-3-- 0098Z
<PAGE>
Deposit Insurance Corporation or the Commissioner of Banks for the Commonwealth
of Massachusetts or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements."
Except as otherwise expressly amended and modified herein, the provisions of
the Custodian Contract shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
to be executed in its name on its behalf by its duly authorized
representatives and its Seal to be hereto affixed as of the 23rd day of
September, 1987.
ATTEST: AARP INCOME TRUST
/s/ [ILLEGIBLE] By: /s/ David S. Lee
- -------------------- ------------------------
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- -------------------- ------------------------
Assistant Secretary Vice President
-4- 0098Z
Exhibit 8(a)(6)
AMENDMENT TO THE
CUSTODIAN AGREEMENT
AGREEMENT made this 15th day of Sept. 1988 by and between STATE STREET
BANK AND TRUST COMPANY ("Custodian") and AARP INCOME TRUST (the "Fund").
WITNESSETH THAT:
WHEREAS, the Custodian and the Fund are parties to a Custodian Agreement
dated November 30, 1984 (as amended to date, the "Agreement") which governs the
terms and conditions under which the Custodian maintains custody of the
securities and other assets of the Fund:
NOW THEREFORE, the Custodian and the Fund hereby amend the terms of the
Custodian Agreement and mutually agree to the following:
Replace subsection 7) of Section II.B. Delivery of Securities with the
following new subsection 7):
7) Upon the sale of such securities for the account of the Fund, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any
such case, the Custodian shall have no responsibility or liability
for any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from the
Custodian's own negligence or willful misconduct;
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and on its behalf by a duly authorized officer as of the
day and year first above written.
ATTEST AARP INCOME TRUST
/s/ Marilyn J. Hayes /s/ David S. Lee
- ----------------------- ----------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- ---------------------- ----------------------------
Assistant Secretary Vice President
FC0812C/3
EXHIBIT 9(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
AARP INCOME TRUST
and
SCUDDER SERVICE CORPORATION
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of October 2, 1989, by and between AARP INCOME TRUST, a
Massachusetts business trust, having its principal office and place of business
at 175 Federal Street, Boston, Massachusetts 02 110 (the "Company") and SCUDDER
SERVICE CORPORATION, a Massachusetts corporation, having its principal office
and place of business at 160 Federal Street, Boston, Massachusetts 02110 (the
"Agent").
WHEREAS, the Company desires to appoint the Agent as a transfer agent,
dividend disbursing agent and agent in connection with certain other activities
and the Agent desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1. Terms of Appointment: Duties of the Agent.
1.01. Subject to the terms and conditions set forth in this Agreement, the
Company hereby employs and appoints the Agent to act as, and the Agent agrees to
act as, transfer agent for the Company's authorized and issued shares of
beneficial interest ("Shares"), dividend disbursing agent and agent in
connection with any accumulation, open-account or similar plans provided to the
shareholders of the Company ("Shareholders") and set out in a currently
effective prospectus ("Prospectus") or currently effective statement of
additional information ("Statement of Additional Information") of the Company,
including without limitation any periodic investment plan or periodic withdrawal
program. If the Company offers two or more series of Shares as of the date
hereof, the term "Company shall be deemed to apply to each series of Shares,
unless the context otherwise requires.
1.02. The Agent agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Company and the Agent, the Agent shall:
(i) Receive for acceptance orders for the purchase of Shares
and promptly deliver payment and appropriate documentation
thereof to the duly authorized custodian of the Company
(the "Custodian").
(ii) Pursuant to orders for the purchase of Shares, record the
purchase of the appropriate number of Shares in the
Shareholder's account and, if requested by the
Shareholder, and if the Trustees of the Company have
authorized the issuance of stock certificates, issue a
certificate for the appropriate number of Shares;
<PAGE>
(iii) Pursuant to instructions provided by Shareholders,
reinvest income dividends and capital gain distributions;
(iv) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation
thereof to the Custodian;
(v) Provide an appropriate response to Shareholders with
respect to all correspondence and rejected trades;
(vi) At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any
redemption, pay over or cause to be paid over in the
appropriate manner such monies as instructed by the
redeeming Shareholders;
(vii) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(viii) Prepare and transmit payments for dividends and
distributions declared by the Company;
(ix) Report abandoned property to the various states as
authorized by the Company in accordance with policies and
principles agreed upon by the Company and Agent;
(x) Maintain records of account for and advise the Company and
its Shareholders as to the foreqoing;
(xi) Record the issuance of Shares of the Company and maintain
an accurate control book with respect to Shares pursuant
to SEC Rule 17Ad-l0 (e) under the Securities Exchange Act
of 1934. The Agent shall also provide the Company on a
regular basis with the total number of Shares which are
issued and outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the issuance
of such Shares or to take cognizance of any laws relating
to the issue or sale of such Shares, which functions shall
be the sole responsibility of the Company;
(xii) Respond to all telephone inquiries from shareholders or
their authorized representatives regarding the status of
Shareholder accounts;
(xiii) Respond to correspondence from Shareholders or their
authorized representatives regarding the status of
Shareholder accounts or information related to Shareholder
accounts; and
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<PAGE>
(xiv) Perform all Shareholder account maintenance updates.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Agent shall: (i) perform the
customary services of a transfer agent, dividend disbursing agent and, as
relevant, agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program). The detailed definition, frequency, limitations and
associated costs (if any) set out in the attached fee schedule include but are
not limited to: maintaining all Shareholder accounts, preparing Shareholder
meeting lists, mailing proxy statements and proxies, receiving and tabulating
proxies, mailing shareholder reports and prospectuses to current Shareholders,
and withholding all applicable taxes (including but not limited to all
withholding taxes imposed under the U.S. Internal Revenue Code and Treasury
regulations promulgated thereunder, and applicable state and local laws to the
extent consistent with good industry practice), preparing and filing U.S.
Treasury Department Forms 1099, Form 941 when applicable and other appropriate
forms required with respect to dividends, distributions and taxes withheld on
Shareholder accounts by federal authorities for all registered Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders, and providing Shareholder account information, (ii) provide
daily and monthly a written report and access to information which will enable
the Company to monitor the total number of Shares sold and the aggregate public
offering price thereof in each State by the Company, added by sales in each
State of the registered Shareholder or dealer branch office, as defined by the
Company, and (iii) if directed by the Company, (A) each confirmation of the
purchase which establishes a new account will be accompanied by a Prospectus and
any amendment or supplement thereto, and B) a Prospectus, and any amendment or
supplement thereto, will be railed to each Shareholder at the time a
confirmation of the first purchase by such Shareholder, subsequent to the
effective date of a Prospectus or any amendment or supplement thereto, is mailed
to such Shareholders.
(c) In addition, the Company shall (i) identify to the Agent inn
writing those transactions and assets to be treated as exempt from blue sky
reporting to the Company for each state and (ii) approve those transactions to
be included for each state on the blue sky system prior to activation and
thereafter monitor the daily activity for each state. The responsibility of the
Agent for the Company's blue sky State registration status is solely limited to
the initial establishment of transactions subject to blue sky compliance by the
Company and the reporting of such transactions as provided above.
-3-
<PAGE>
(d) The Agent shall utilize a system to identify all share
transactions which involve purchase and redemption orders that are processed at
a time other than the time of the computation of net asset value per share next
computed after receipt of such orders, and shall compute the net effect upon the
Company of such transactions so identified on a daily and cumulative basis.
(e) The Agent shall supply to the Company from time to time, as
mutually agreed upon, reports summarizing the transactions identified pursuant
to paragraph (d) above, and the daily and cumulative net effects of such
transactions, and shall advise the Company at the end of each month of the net
cumulative effect at such tine. The Agent shall promptly advise the Company if
at any time the cumulative net effect exceeds a dollar amount equivalent to 1/2
of 1 cent per outstanding Share.
(f) The Agent shall make appropriate arrangements with banking
institutions in connection with effecting timely redemptions of shares by the
Write-a-Check redemption feature described in the Company's Prospectus and
Statement of Additional Information.
1.03. The Agent's offices, personnel and computer and other equipment
shall be adequate to perform the services contemplated by this Agreement for the
Company and for other investment companies advised by Scudder, Stevens & Clark,
Inc. and its affiliates. The Agent shall notify the Company in the event that it
proposes to provide such services for any investment companies or other entities
other than those managed by Scudder, Stevens & Clark, Inc. and its affiliates.
Article 2. Fees and Expenses
2.01. For the performance by the Agent pursuant to this Agreement, the
Company agrees to pay the Agent an annual maintenance fee for each Shareholder
account as set out in a fee schedule agreed to by both parties in writing. Such
fees and out-of-pocket expenses and advances identified under Section 2.02 below
may be changed from time to time subject to mutual written agreement between the
Company and the Agent, as approved by a majority of the Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Company.
2.02. In addition to the fee paid under Section 2.01 above, the Company
agrees to reimburse the Agent for out-of-pocket expenses or advances incurred by
the Agent for the items set out in the fee schedule agreed to by both parties in
writing. In addition, any other expenses incurred by the Agent at the request or
with the consent of the Company will be reimbursed by the Company.
2.03. The Company agrees to pay all fees and reimbursable expenses
promptly, the terms, method and procedures for which are detailed on the fee
schedule agreed to by both parties in writing. Postage for mailing of dividends,
proxy statements, Company reports and other mailings to all Shareholders
accounts shall be advanced to
-4-
<PAGE>
the Agent by the Company at least two (2) days prior to the mailing date of such
materials.
2.04. The Company may engage accounting firms or other consultants to
evaluate the fees paid by the Company and quality of services rendered by the
Servicing Company hereunder, and such firms or other consultants shall be
provided access by the Servicing Company to such information as may be
reasonably required in connection with such engagement. The Servicing Company
will give due consideration and regard to the recommendations to the Company in
connection with such engagement, but shall not be bound thereby.
Article 3. Representations and Warranties of the Agent
The Agent represents and warrants to the Company that:
3.01. It is a corporation duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
3.02. It has the legal power and authority to carry on its business in The
Commonwealth of Massachusetts.
3.03. It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
3.04. All requisite proceedings have been taken to authorize it to enter
into and perform this Agreement.
3.05. It is duly registered as a transfer agent under Section 17A of the
Securities Exchange Act of 1934, as amended.
3.06. It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 4. Representations and Warranties of the Company.
The Company represents and warrants to the Agent that:
4.01. It is a business trust duly organized and existing and in good
standing under the laws of Massachusetts.
4.02 It is empowered under applicable laws and by its Declaration of Trust
and By-Laws to enter into and perform this Agreement.
4.03. All proceedings required by said Declaration of Trust and By-Laws
have been taken to authorize it to enter into and perform this Agreement.
4.04. It is an investment company registered under the Investment Company
Act of 1940, as amended.
-5-
<PAGE>
4.05 A registration statement under the Securities Act of 1933 is
currently effective (or will be effective prior to commencement by the Agent of
performance of services hereunder) and will remain effective, and appropriate
state securities law filings have been made and/or will continue to be made,
with respect to all Shares of the Company being offered for sale.
Article 5. Indemification
5.01. To the extent that the Agent acts in good faith and without
negligence or willful misconduct, the Agent shall not be responsible for, and
the Company shall indemnify and hold the Agent harmless from and against, any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributable to:
(a) All actions of the Agent or its agents or subcontractors
required to be taken and correctly executed pursuant to this Agreement.
(b) The Company's lack of good faith, negligence or willful
misconduct or which arise out of the breach of any representation or warranty of
the Company hereunder.
(c) The reasonable reliance on or use by the Agent or its agents or
subcontractors of information, records and documents or services which are
received or relied upon by the Agent or its agents or subcontractors and
furnished to it or performed by or on behalf of the Company.
(d) The reasonable reliance on, or the carrying out by the Agent or
its agents or subcontractors of, any written instructions or requests of the
Company.
(e) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations, or the securities laws or
regulations of any state that such Shares be registered in such state, or in
violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state, unless such violation is the result of the Agent's negligent or willful
failure to comply with the provisions of Section 1.02 (b) of this Agreement.
5.02. The Agent shall indemnify and hold the Company harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liabilities arising out of or attributable to the Agent's refusal
or failure to comply with the terms of this Agreement (whether as a result of
the acts or omissions of the Agent or of its agents or subcontractors) or
arising out of the lack of good faith, negligence or willful misconduct of the
Agent, or its agents or subcontractors, or arising out of the breach of any
representation or warranty of the Agent hereunder.
-6-
<PAGE>
5.03. At any time the Agent may apply to any officer of the Company for
instructions, and may consult with outside legal counsel with respect to any
matter arising in connection with the services to be performed by the Agent
under this Agreement, and the Agent and its agents or subcontractors shall not
be liable and shall be indemnified by the Company for any action reasonably
taken or omitted by it in reliance upon such instructions or upon tine opinion
of such counsel. The Agent, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of
the Company, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data, records or
documents provided to the Agent or its agents or subcontractors by machine-
readable input, telex, CRT data entry or other similar means authorized by the
Company, and shall not be held to have notice of any change of authority of any
person, until receipt by the Agent of written notice thereof from the Company.
The Agent, its agents and subcontractors shall also be protected and indemnified
in recognizing stock certificates which are reasonably believed to bear the
proper manual or facsimile signatures of the officers of the Company, and the
proper countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
5.04. In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable to the other for
any damages resulting from such failure to perform or otherwise from such
causes.
5.05. Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement, but each shall
be liable for general damages resulting from breach of this Agreement. For the
purposes of this Agreement, the term "general damages" shall include but shall
not be limited to:
(a) All costs of correcting errors made by the Agent or its agents
or subcontractors in Company shareholder accounts, including the
expense of computer time, computer programming and personnel;
(b) Amounts which the Company is liable to pay to a person (or his
representative) who has purchased or redeemed, or caused to be
repurchased, Shares at a price which is higher, in tine case of
a purchase, or lower, in the case of a redemption or repurchase,
than correct net asset value per Share, but only to the extent
that the price at which such Shares were purchased, redeemed or
repurchased was incorrect as a result of either (i) one or more
errors caused by the Agent or its agents or subcontractors in
processing shareholder accounts of the Company or (ii) the
posting by the Agent of the purchase, redemption or repurchase
of Shares subsequent to the time such purchase, redemption or
repurchase
-7-
<PAGE>
should have been posted pursuant to laws and regulations
applicable to open-end investment companies, if the delay is
caused by the Agent, its agents or subcontractors;
(c) The value of dividends and distributions which were not credited
on Shares because of the failure of the Agent or its agents or
subcontractors to timely post the purchase of such Shares;
(d) The value of dividends and distributions which were incorrectly
credited on Shares because of the failure of the Agent or its
agents or subcontractors to timely post the redemption or
repurchase of such Shares;
(e) The value of dividends and distributions, same portion of which
was incorrectly credited, or was not credited, on Shares because
of the application by the Agent or its agents or subcontractor
of an incorrect dividend or distribution factor or otherwise;
(f) Penalties and interest which the Company is required to pay
because of the failure of the Agent or its agents or
subcontractors to comply with the information reporting and
withholding (including backup withholding) requirements of the
Internal Revenue Code of 1986, as amended, and applicable
Treasury regulations thereunder, applicable to Company
Shareholder accounts; and
(g) Interest in accordance with the laws of The Commonwealth of
Massachusetts on any damages from the date of the breach of this
Agreement.
5.06. In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim or loss for which either
party may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion or loss, and shall keep
the other party advised with respect to all developments concerning such claim.
The party who may be required to indemnify shall have the option to participate
at its expense with the party seeking indemnification inn the defense of such
claim. The party seeking indemnification shall in no case confess any claim or
make any compromise in any case in which the other party may be required to
indemnify it except with the other party's prior written consent.
5.07. Losses incurred by the Company arising from the Agent effecting a
share transaction at a trade (pricing) date prior to the processing date shall
be governed by a separate agreement between the Agent and the Company.
The obligations of the parties hereto under this Article 5 shall survive
the termination of this Agreement.
-8-
<PAGE>
Article 6. Covenants of the Company and the Agent.
6.01. The Company shall promptly furnish to the Agent the following:
(a) A certified copy of the resolution of the Board of Trustees of
the Company authorizing the appointment of the Agent and the execution and
delivery of thus Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Company
and all amendments thereto.
6.02. The Agent hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Company for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account, of such certificates,
forms and devices.
6.03. The Agent shall at all times maintain insurance coverage which is
reasonable and customary in light of its duties hereunder and its other
obligations and activities.
6.04. The Agent shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
(the "Act") and the Rules thereunder, the Agent agrees that all such records
prepared or maintained by the Agent relating to the services to be performed by
the Agent hereunder and those records that the Company and the Agent agree from
time to time to be the records of the Company are the property of the Company
and will be preserved, maintained and made available in accordance with such
Section and Rules, and will be surrendered promptly to the Company on and in
accordance with its request. Records surrendered hereunder shall be in machine
readable form, except to the extent that the Agent has maintained such a record
only in paper form.
6.05. The Agent and the Company agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person,
except as may be required by law.
6.06. In case of any requests or demands for the inspection of the
Shareholders records of the Company, the Agent will endeavor to notify the
Company and to secure instructions from an authorized officer of the Company as
to such inspection. The Agent reserves the right, however, to exhibit the
Shareholders records to any person whenever it is reasonably advised by its
counsel that it may be held liable for the failure to exhibit the Shareholders
records to such person.
-9-
<PAGE>
6.07. The Agent agrees to maintain or provide for redundant facilities or
a compatible configuration and to maintain or provide for backup of the
Company's master and input files and to store such files in a secure
off-premises location so that in the event of a power failure or other
interruption of whatever cause at the location of such files the Company's
records are maintained intact and transactions can be processed at another
location.
6.08. The Agent acknowledges that the Company, as a registered investment
company under the Act, is subject to the provisions of the Act and the rules and
regulations thereunder, and that the offer and sale of the Company's Shares are
subject to the provisions of federal and state laws and regulations applicable
to the offer and sale of securities. The Company acknowledges that the Agent is
not responsible for the Company's compliance with such laws and regulations. If
the Company advises the Agent that a procedure of the Agent related to the
discharge of its obligations hereunder has or may have the effect of causing the
Company to violate any of such laws or regulations, the Agent shall use its best
efforts to develop a mutually agreeable alternative procedure which does not
have such effect.
Article 7. Termination of Agreement.
7.01. This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02. Should the Company exercise its right to terminate, all reasonable
out-of-pocket expenses of the Agent associated with the movement of records and
materials required by this Agreement will be borne by the Company. Additionally,
the Agent reserves the right to charge for any other reasonable expenses
associated with such termination.
Article 8. Additional Series.
8.01. In the event that the Company establishes one or more series of
Shares with respect to which it desires to have the Agent render services as
transfer agent under the terms hereof, it shall so notify the Agent in writing,
and unless the Agent objects in writing to providing such services, the term
"Company" hereunder, unless the context otherwise requires, shall be deemed to
include each such series of Shares. All recordkeeping and reporting shall be
done separately for each series. Unless the Company and the Agent agree to an
amended fee schedule, the fee schedule attached hereto shall apply to each
series separately.
Article 9. Assignment.
9.01. Except as provided in Section 9.03 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
-10-
<PAGE>
9.02. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
9.03. The Agent may, with notice to and consent on the part of the
Company, which consent shall not be unreasonably withheld, subcontract for the
performance of certain services under this Agreement to qualified service
providers, which shall be registered as transfer agents under Section 17A of the
Securities Exchange Act of 1934 if such registration is required; provided,
however, that the Agent shall be as fully responsible to the Company for the
acts and omissions of any subcontractor as it is for its own acts and omissions.
Article 10. Amendment.
10.01. This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Directors or Trustees of each party.
Article 11. Massachusetts Law to Apply.
11.01. This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonmwealth of
Massachusetts .
Article 12. Form N-SAR.
12.01. The Agent shall maintain such records as shall enable the Company
to fulfill the requirements of Form N-SAR or any successor report which must be
filed with the Securities and Exchange Commission .
Article 13. Merger of Agreement.
13.01. This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject hereof
whether oral or written.
Article 14. Counterparts.
14.01. This Agreement may be executed by the parties hereto in any number
of counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
-11-
<PAGE>
Article 15. Limitation of Liability of the Trustees and the Shareholders
It is understood and expressly stipulated that none of the Trustees,
officers, agents, or shareholders of the Company shall be personally liable
hereunder. The name of the Company is the designation of the Trustees for the
time being under the Company's Declaration of Trust, as the same is now stated
or may hereafter be amended, and all persons dealing with the trust must look
solely to the property of the trust for the enforcement of any claims against
the trust as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the trust. No
series of the Company, if any, shall be liable for the obligations of any other
series.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
ATTEST: AARP INCOME TRUST
/s/ Marilyn J. Hayes BY: /s/ David S. Lee
- ---------------------- ---------------------
Title: Executive Vice President
ATTEST: SCUDDER SERVICE CORPORATIQN
/s/ Marilyn J. Hayes BY: /s/ Daniel Pierce
- ---------------------- ---------------------
Title: Vice President
-12-
AARP/SCUDDER FINANCIAL MANAGEMENT COMPANY
345 Park Avenue
New York, New York 10154
November 30, 1984
AARP Financial Services Corp.
c/o American Association of
Retired Person:
1909 K Street, N.W.
Washington, D.C. 20049
Member Services Agreement
Dear Sirs:
Reference is made to the Omnibus Agreement, dated as of October 9,
1984, between Scudder, Stevens & Clark ("Scudder") and American Association of
Retired Persons ("AARP"); the Partnership Agreement, dated as of October 9,
1984, between you and Scudder; and the Investment Company Service Agreement (the
"ICS Agreement"), dated as of October 9, 1984, among Scudder, AARP and us.
Capitalized terms used herein without definition shall have the meanings
assigned thereto in the ICS Agreement.
This Agreement constitutes the agreement required to be entered into
by you and us pursuant to Section 5 of the ICS Agreement and referred to as the
"Member Services Agreement" therein.
We hereby agree with you as follows:
<PAGE>
1. You agree to provide us with such advice and services relating to
investment by members of AARP in the Funds as we shall from time to time
reasonably request, including advice and services as to product design of the
Funds, the development of new products and services for the Funds and such other
information as will assist us in tailoring the Funds best to meet the investment
objectives and needs of the AARP membership, based upon your analysis thereof.
You agree to contribute or cause to be contributed certain resources to the Fund
to assist in the organization and operation of the Funds, including "seed
money" for the Funds and assistance in monitoring our activities and the
services provided by Scudder and other agents of the Funds. You agree to make
available certain of your directors, officers and staff to assist in the
operation of the Funds, and, subject to their individual consent, to serve as
directors and officers of the Funds. You also agree to facilitate communications
with and the provision of services to the AARP membership by analyzing the needs
of AARP members and recommending the appropriate services and methods of
communication for the purpose of disseminating information and providing
services relating to the Account and the Services. For this purpose, you will
arrange that
2
<PAGE>
there be made available to us and Scudder, in accordance with AARPs policies and
practices, membership lists of AARP and of AARPs publications and access to
advertising space in AARP publications. Further, AARP and Scudder have granted
to us the right and license to do business under the name "AARP/Scudder
Financial Management Company", and each of AARP and Scudder will grant to the
Funds a license to use certain of your respective service marks.
2. Commencing on the earlier of (a) the second anniversary of the
initial public offering of the first of the Funds to be so offered and (b) such
time as Scudder shall have recovered, through partnership distributions by us
whenever made and through fees received by Scudder under agreements between
Scudder and us (including the Subadvisory Agreement (the "Subadvisory
Agreement"), dated as of November 30, 1984, between us and Scudder) relating to
investment management and advisory services with respect to the Funds (but only
to the extent that such fees exceed the costs and expenses incurred by Scudder
in the performance of such agreements) the full amount of the start-up expenses
(including the expenses described in Section 4 of the Investment Company
Services Agreement) incurred by Scudder in connection
3
<PAGE>
with the Funds and the Account, we agree to pay you, as compensation for the
services to be rendered by you hereunder, a monthly fee equal to the Monthly
Member Services Fee less one half of the Account Manager Monthly Budget for the
same month. The Monthly Member Services Fee shall be a monthly fee equal to the
sum of: 1/1200 of 1% of the value of the average daily net assets of each of
AARP U.S. Treasury and GNMA Fund, AARP General Bond Fund, AARP Insured Tax Free
Short Term Fund, AARP Insured Tax Free General Bond Fund, AARP Capital Growth
Fund and AARP Growth and Income Fund as described in the Prospectus dated
November 30, 1984 (collectively, the "Portfolios") over $300 million for a
Portfolio up to and including $600 million for such Portfolio; 1/600 of 1% of
the value of the average daily net assets of a Portfolio over $600 million up to
and including $900 million; 1/300 of 1% of the value of the average daily net
assets of a Portfolio over $900 million up to and including $1,200 million;
1/200 of 1% of the value of average daily net assets of a Portfolio over $1,200
million up to and including $1,500 million; 1/150 of 1% of the value of average
daily net assets of a Portfolio over $1,500 million up to and including $1,800
million; and 1/120 of 1% of the value of the average daily net assets of a
Portfolio over $1,800
4
<PAGE>
million. The value of the average daily net assets of the portfolios shall be
determined in the manner set forth in the respective Investment Management and
Advisory Agreements, dated as of November 30, 1984, between us and each of AARP
Income Trust, AARP Insured Tax Free Income Trust and AARP Growth Trust. The
Account Manager Monthly Budget shall mean, with respect to a given month, the
greater of (a) our costs and expenses (other than fees owed by us pursuant to
this Agreement or the Subadvisory Agreement) actually incurred in that month
and (b) one-twelfth of our annual budget (other than for amounts to be paid by
us pursuant to this Agreement and the Subadvisory Agreement) most recently
adopted by our Management Committee.
3. Nothing herein shall be construed as constituting you as an agent
of us or of the Funds.
4. This Agreement shall become effective as of the date hereof and
shall remain in effect, with respect to each series of each Fund, until
September 30, 1986 and shall continue in effect thereafter so long as such
continuance is specifically approved at least annually by the affirmative vote
of (i) a majority of the members of the Trustees or Board of Directors, as the
case may be, of each Fund who are not interested persons of such Fund,
5
<PAGE>
you or us, cast in person at a meeting called for the purpose of voting on such
approval; and (ii) the Trustees or Board of Directors, as the case may be, of
each Fund or, with respect to each series of such Fund, the holders of a
majority of the outstanding voting securities of such series of such Fund. In
the event that the Trustees or Boards of Directors, as the case may be, or
security holders of fewer than all of the Funds, or all of the series of a Fund,
fail to approve this Agreement in the manner described in the preceeding
sentence, this Agreement shall remain in effect only with respect to such Funds,
or series, as the case may be, as do so approve this Agreement. This Agreement
may, on 60 days' written notice, be terminated at any time without the payment
of any penalty by us or, as to a particular Fund, by the Trustees or Board of
Directors, as the case may be, of such Fund or by vote of holders of a majority
of the outstanding voting securities of such Fund, or series, with respect only
to that series or by you.
5. This Agreement may not be transferred, assigned, sold or in any
manner hypothecated or pledged by either party hereto. It may be amended by
mutual agreement, but only after authorization of such amendment by the
affirmative vote of (i) the holders of a majority
6
<PAGE>
of the outstanding voting securities of each series of the Funds; and (ii) the
Trustees or Board of Directors, as the case may be, of each Fund, including a
majority of the Trustees or directors of such Fund who are not interested
persons of such Fund, you or us, cast in person at a meeting called for the
purpose of voting on such approval.
6. This Agreement shall be construed in accordance with the laws of
the State of New York.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart hereof and return the same to us.
Very truly yours,
AARP/SCUDDER FINANCIAL
MANAGEMENT COMPANY
By: SCUDDER, STEVENS & CLARK
A General Partner
By: /s/ [Illegible]
----------------------------
Title: General Partner
The foregoing agreement is
hereby accepted as of the
date first written above.
AARP FINANCIAL SERVICES
CORP.
By: /s/ [Illegible]
----------------------------
Title:
7
<PAGE>
Accepted:
AARP INSURED TAX FREE
INCOME TRUST
By: /s/ [Illegible]
----------------------------
Title: President
AARP GROWTH TRUST
By: /s/ [Illegible]
----------------------------
Title: President
AARP INCOME TRUST
By: /s/ [Illegible]
----------------------------
Title: President
8
SCUDDER, STEVENS & CLARK, INC.
345 Park Avenue
New York, New York 10154
February 1, 1994
AARP Financial Services Corp.
c/o American Association of Retired Persons
601 E Street, N.W.
Washington, DC 20049
Member Services Agreement
Dear Sirs:
Reference is made to the Omnibus Agreement, dated as of October 9, 1984,
between American Association of Retired Persons ("AARP") and us; the Partnership
Agreement, dated as of October 9, 1984, between you and us; and the Investment
Company Service Agreement (the "ICS Agreement"), dated as of October 9, 1984,
among AARP, AARP/Scudder Financial Management Company (the "Partnership") and
us. Capitalized terms used herein without definition shall have the meanings
assigned thereto in the ICS Agreement.
This Agreement constitutes the agreement required to be entered into by you
and us pursuant to Section 5 of the ICS Agreement and referred to as the "Member
Services Agreement" therein.
This Agreement supercedes all prior Member Services Agreements entered into
between you and the Partnership.
We hereby agree with you as follows:
1. You agree to provide us with such advice and services relating to
investment by members of AARP in the AARP Cash Investment Funds, the AARP Growth
Trust, the AARP Income Trust, and the AARP Tax Free Income Trust, each
established as a Massachusetts business trust to engage in the business of an
investment management company (each a "Fund" and, collectively, the "Funds"),
and any separate portfolios of the Funds, created from time to time by action of
the Trustees (each a "Portfolio" and, collectively, the "Portfolios"), as we
shall from time to time reasonably request, including advice and services as to
product design of the Funds and Portfolios, the development of new products and
services for the Funds and Portfolios and such other information as will assist
us in tailoring the Funds and Portfolios best to meet the investment objectives
and needs of the AARP membership, based upon your analysis thereof. You agree to
contribute or cause to be contributed certain resources to the Funds and
Portfolios to assist in the organization and operation of the Funds and
Portfolios, including "seed money" for the Funds and assistance in monitoring
our activities and the services provided by Scudder and other agents of the
Funds and Portfolios. You agree to make available certain of your directors,
officers and staff to assist in the operation of the Funds and Portfolios, and,
subject to their individual consent, to serve as directors and officers of the
Funds. You also agree to facilitate communications with and the provision of
services to the AARP membership by analyzing the needs of AARP members and
recommending the appropriate services and methods of communication for the
purpose of disseminating information and providing services relating to the
Account and the Services. For this purpose, you will arrange that there be made
available to us, in accordance with AARP's policies and practices, membership
lists of AARP and of AARP's publications and access to advertising space in AARP
publications. Further, AARP and we have agreed to grant to the Partnership the
right and license to do business under the name "AARP/Scudder Financial
Management Company," and each of AARP and we have agreed to grant to the Funds a
license to use certain of our respective service marks.
2. We agree to pay you, as compensation for the services to be rendered by
you hereunder, a monthly fee equal to the Monthly Member Services Fee. The
Monthly Member Services Fee shall be a monthly fee calculated for each calendar
day of each year in an amount equal to the sum of: 1/365 (1/366 in each leap
year) of .07 of 1% of the average daily net assets as defined below of all
Portfolios within the AARP Investment Program from Scudder, including any new
fund or portfolio which may be organized in the future, for such month; provided
that, for any calendar month during which the average of such values exceed $6
billion, the fee payable for that month based on the portion of the average of
such values in excess of $6 billion shall be 1/365 (1/366 in each leap year) of
.06 of 1% of such portion; provided that, for any calendar month during which
<PAGE>
the average of such values exceed $16 billion, the fee payable for that month
based on the portion of the average of such values in excess of $16 billion
shall be 1/365 (1/366 in each leap year) of .05 of 1% of such portion. The value
of the average daily net assets of the Portfolios shall be determined in the
manner set forth in the respective Investment Management Agreements dated as of
February 1, 1994, between us and each Fund.
3. Nothing herein shall be construed as constituting you as an agent of us
or of the Funds.
4. This Agreement shall become effective as of the date hereof and shall
remain in effect, with respect to each Portfolio of each Fund, until August 31,
1995 and shall continue in effect thereafter with respect to each Portfolio so
long as such continuance is specifically approved at least annually by the
affirmative vote of (i) a majority of the members of the Trustees of each Fund
who are not interested persons of such Fund, you or us, cast in person at a
meeting called for the purpose of voting on such approval; and (ii) the Trustees
of each Fund or, with respect to each Portfolio of such Fund, the holders of a
majority of the outstanding voting securities of such Portfolio. In the event
that the Trustees or security holders of fewer than all of the Portfolios of a
Fund, fail to approve this Agreement in the manner described in the preceding
sentence, this Agreement shall remain in effect only with respect to such
Portfolio as do so approve this Agreement. This Agreement may, on 60 days'
written notice, be terminated at any time without the payment of any penalty by
us, or, as to a particular Fund, by the Trustees to such Fund or by vote of
holders of a majority of the outstanding voting securities of each Portfolio, as
to a Fund, or the Portfolio, as to that Portfolio, or by you.
5. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by either party hereto. It may be amended as to any
Portfolio by mutual agreement, but only after authorization of such amendment by
the affirmative vote of (i) the holders of a majority of the outstanding voting
securities of such Portfolio; and (ii) the Trustees of each Fund, including a
majority of the Trustees of such Fund who are not interested persons of such
Fund, the Partnership, you or us, cast in person at a meeting called for the
purpose of voting on such approval.
6. This Agreement shall be construed in accordance with the laws of the
State of New York, provided, however, that nothing herein shall be construed as
being inconsistent with the Investment Company Act of 1940, as amended. As used
herein the terms "interested persons," "assignments" and "vote of a majority of
the outstanding voting securities" shall have the meanings set forth in the
Investment Company Act of 1940, as amended.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart hereof and return the same to us.
Very truly yours,
SCUDDER, STEVENS & CLARK, INC.
By: /s/David S. Lee
--------------------------------
Managing Director
The foregoing Agreement is hereby accepted as of the date first written above.
AARP FINANCIAL SERVICES CORP.
By: /s/unknown
------------------------
Title:
<PAGE>
Accepted:
AARP CASH INVESTMENT FUNDS
By: /s/Linda Coughlin
--------------------------------
Title:
AARP GROWTH TRUST
By: /s/Linda Coughlin
--------------------------------
Title:
AARP INCOME TRUST
By: /s/Linda Coughlin
--------------------------------
Title:
AARP TAX FREE INCOME TRUST
By: /s/Linda Coughlin
--------------------------------
Title:
Exhibit 9(c)
Service Mark License Agreement
SERVICE MARK LICENSE AGREEMENT, dated as of November 30, 1984, among
Scudder, Stevens & Clark ("Scudder"), American Association of Retired Persons
("AARP") and each of AARP Income Trust, AARP Insured Tax Free Income Trust, and
AARP Growth Trust (individually, a "Fund", and collectively, the "Funds").
W I T N E S S E T H :
WHEREAS, Scudder and AARP Financial Services Corp., a wholly-owned
subsidiary corporation of AARP, are general partners of AARP/Scudder Financial
Services Company (the "Partnership"), pursuant to a partnership agreement, dated
as of October 9, 1984 (the "Partnership Agreement"); and
WHEREAS, Scudder, AARP and the Partnership have entered into an
investment company service agreement, dated as of October 9, 1984 (the
"Investment Company Service Agreement"); and
WHEREAS, the Partnership has entered into an Investment Management
and Advisory Agreement as of the date hereof with each of the Funds
(collectively, the "Management Agreements"); and
<PAGE>
WHEREAS, Scudder is the owner of various service marks, certain of
which are identified in Exhibit A of this Agreement (all marks or combinations
thereof identified in said Exhibit A hereinafter being referred to both
individually and collectively as the "Scudder Marks"), which are now being used
in connection with a wide variety of investment management and advisory services
performed by Scudder and with investment company activities conducted by
investment companies advised and managed by Scudder; and
WHEREAS, AARP is the owner of various service marks, certain of
which are identified in Exhibit B of this Agreement (all marks or combinations
thereof identified in said Exhibit B hereinafter being referred to both
individually and collectively as the "AARP Marks"), which are now being used in
connection with a wide variety of services sponsored by AARP and offered by AARP
to its membership;
WHEREAS, each of the Funds wishes to use the Scudder Marks and AARP
Marks in connection with its business as an investment company and is willing to
comply with Scudder's and AARP's quality standards and other conditions
hereinafter set forth; and
2
<PAGE>
WHEREAS, Scudder and AARP are respectively willing to grant to each
of the Funds the non-exclusive right to use the Scudder Marks and AARP Marks
upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and conditions contained herein, it is agreed as follows:
ARTICLE I
Subject to the conditions herein set forth, each of Scudder and AARP
hereby grants to each of the Funds a royalty-free, non-exclusive and
non-transferable license to use, respectively, the Scudder Marks and AARP Marks
as service marks in connection with the business of each of the Funds as an
investment company. The licenses granted hereby do not include the right to
sub-license.
ARTICLE II
Each of the Funds acknowledges the exclusive ownership by,
respectively, Scudder and AARP, of the Scudder Marks and AARP Marks, and the
validity of the Scudder Marks and AARP Marks and of any registrations obtained
respectively by Scudder or AARP therefor. Each of the Funds agrees that it will
never contest, either directly or indirectly, exclusive ownership by, respec-
3
<PAGE>
tively, Scudder and AARP, of the Scudder Marks or AARP Marks. To the extent, if
any, that any rights to the Scudder Marks or AARP Marks might otherwise be
deemed to accrue to any of the Funds by operation of law by virtue of such
Fund's use of the Scudder Marks or AARP Marks while this license shall be in
effect (or for any other reason), it is hereby agreed that all such rights will
revert respectively to Scudder and AARP on termination of this Agreement. Each
of the Funds agrees that it will not use or encourage its representatives,
agents or shareholders to use any word or symbol confusingly similar to the
Scudder Marks or AARP Marks or make use of the Scudder Marks or AARP Marks other
than in accordance with the provisions of this Agreement. Each of the Funds
acknowledges that it has no rights in the Scudder Marks or AARP Marks other than
those set forth herein.
ARTICLE III
All rights granted to each of the Funds under this Agreement are
subject to the condition that each Scudder and AARP be reasonably satisfied at
all times that such Fund is conforming to high standards of ethical prudence and
integrity in the operation of its business as an investment company.
4
<PAGE>
ARTICLE IV
Each of the Funds shall use the Scudder Marks and AARP Marks only in
accordance with recognized good service mark and trademark practice and shall
not use them in such a manner as to affect adversely the validity of the
registrations or applications for registration of the Scudder Marks or AARP
Marks, as the case may be, or the exclusive ownership by Scudder or AARP thereof
or so as to depreciate the goodwill attached thereto. Each of the Funds agrees
that it shall at its expense include notices of the rights of Scudder and AARP,
respectively, to the Scudder Marks or AARP Marks or any other information or
notices that may be required by law or by Scudder or AARP on any document or
other item bearing any of the Scudder Marks or AARP Marks over which such Fund
has control. Each of the Funds agrees at its expense to take all measures which
Scudder or AARP may require to avoid any confusion of the Scudder Marks or AARP
Marks with any other trademarks or service marks owned or used by such Fund.
Each of the Funds shall submit to Scudder and AARP, respectively,
upon their written request, free of charge, and in the manner specified by them,
representative samples of any agreements, stationery, forms,
5
<PAGE>
advertisements, brochures, documents or any other items of any nature whatsoever
which bear any of the Scudder Marks or AARP Marks and which are used by such
Fund.
ARTICLE V
Each of the Funds shall promptly notify Scudder or AARP, as the case
may be, of any charge of service or trademark infringement, unfair trade
competition or service or trademark dilution made against such Fund or its
representatives as the result of the use respectively of the Scudder Marks or
AARP Marks licensed herein, and Scudder or AARP, as the case may be, will assume
the defense and expense of proceedings pursuant to any such charge. Each of the
Funds agrees to cooperate with Scudder and AARP in any such proceedings,
including without limitation, allowing Scudder or AARP, as the case may be, to
carry on litigation in such Fund's name on behalf of Scudder or AARP, as the
case may be.
ARTICLE VI
Each of Scudder and AARP may assign its respective rights and
obligations under this Agreement with respect to any or all of the Scudder Marks
or AARP Marks to any party to which it assigns, respectively, any of the Scudder
Marks or AARP Marks. No Fund shall assign
6
<PAGE>
any of its respective rights or obligations under this Agreement.
ARTICLE VII
This Agreement shall terminate upon the termination of any of the
Management Agreements, the Partnership Agreement or the Investment Company
Service Agreement. Each of the Funds, within 60 days after receipt of notice of
any such termination, unless otherwise agreed to by Scudder as to the Scudder
Marks or by AARP as to the AARP Marks, shall cease making any further use of any
of the Scudder Marks or AARP Marks or any mark confusingly similar thereto and
shall, at its expense, delete the Scudder Marks and AARP Marks from all media,
including forms, advertisements, stationery, brochures and documents, in which
they appear, within such 60 day period.
ARTICLE VIII
Neither of Scudder or AARP makes any warranties in connection with
the Scudder Marks or AARP Marks. Each of Scudder and AARP in its sole discretion
may cease its use of, and terminate its rights to, one or more of, respectively,
the Scudder Marks or AARP Marks without penalty, and each of Scudder and AARP
agree to promptly
7
<PAGE>
notify each of the Funds of its respective intention to do so. Each of Scudder
and AARP in its sole discretion may adopt new service marks.
ARTICLE IX
This Agreement shall be governed by the laws of the State of New
York. The parties hereto agree that all matters of dispute that are to be
settled by litigation, negotiation or arbitration at any time by reason of the
terms of this Agreement shall be negotiated, tried, litigated, conducted and/or
arbitrated, as the case may be, in New York, New York.
ARTICLE X
This instrument shall constitute the entire agreement between the
parties with respect to the use of the Scudder Marks and AARP Marks.
Modifications of this Agreement may be effected only by a written instrument
signed by all parties.
IN WITNESS WHEREOF, Scudder, AARP and each of
8
<PAGE>
the Funds have caused this Agreement to be executed by their duly authorized
officers or representatives.
SCUDDER, STEVENS & CLARK
By /s/ [ILLEGIBLE]
-------------------------
Title: General Partner
AMERICAN ASSOCIATION OF
RETIRED PERSONS
By /s/ Cynthia Birchfield
-------------------------
Title:
AARP INCOME TRUST
By /s/ [ILLEGIBLE]
-------------------------
Title: President
AARP INSURED TAX FREE
INCOME TRUST
By /s/ [ILLEGIBLE]
-------------------------
Title: President
AARP GROWTH TRUST
By /s/ [ILLEGIBLE]
-------------------------
Title: President
9
Exhibit 9(d)(1)
Scudder Service Corporation
Fee Information
as Shareholder Service Agent for
AARP Growth and Income Fund
General
Fees are based on an annual per shareholder account charge for account
servicing plus out-of-pocket expenses.
Fees are billable on a monthly basis at the rate of 1/12 of the annual
charge. A charge is made for an account in the month that an account
opens or closes.
Basic Annual per Account Fee $ 8.75
(per account, per year)
Out-of-Pocket Expenses
Out-of-pocket expenses include but are not limited to: postage, form,
telephone, microfilm, microfiche and expenses incurred at the specific
direction of the Fund.
Payment
The above will be charged against the Fund's custodian checking
account five (5) days after the invoice is presented for payment.
AARP Growth and Income Fund Scudder Service Corporation
By /s/ [ILLEGIBLE] By /s/ David S. Lee
------------------------ -------------------------
Title President Title President
Date June 1, 1988 Date June 1, 1988
EXHIBIT 14(a)
Appendix "A" Incorporated Into
Article IX of Agreement on
Scudder IRA Form 1-1-84
Between Custodian and Depositor
2. Depositor's Selection of Investments
Depositor directs Custodian to invest all custodial funds in investment
shares issued by the "Mutual Fund(s)," or in the other investments which have
been designated by Scudder Fund Distributors, Inc. (or its successors) as
eligible for investment hereunder, which have been selected by Depositor until
Depositor hereafter gives Custodian contrary instructions pursuant to Article
IX, paragraph ("para.") 6 below, which governs investment of the custodial
account in "Mutual Fund" shares or other investments.
3. Contributions
(a) Periodic Contributions. Periodic contributions which Depositor
intends to be tax-deductible under Internal Code section 219 shall
be in cash and are to be invested under this Agreement. Depositor
contemplates future periodic contributions within the tax-deductible
limits and in accordance with the rules for a tax-deductibility
specified in the Internal Revenue Code. Depositor assumes full and
sole responsibility for making sure that the sum of periodic
contributions during a single taxable year of Depositor do not
exceed those limits or violate those rules. Depositor should not
contribute to the custodial account after it ceases to be exempt by
reason of either section 408(e) or 415(g) of the Internal Revenue
Code.
(b) Rollover Contributions From an Individual Retirement Account or
Individual Retirement Annuity Funded Exclusively With Deductible
Contributions. A rollover contribution by Depositor from an
individual retirement account or individual retirement annuity
funded exclusively with deductible contributions shall be a deposit
in cash to be invested under this agreement, with respect to which
contribution, Depositor warrants that (1) it meets the requirements
for a rollover contribution from such an individual retirement
account or individual retirement annuity as are contained in Code
Section 408(d) and that (2) no portion of such rollover contribution
is attributable to a distribution from an employees' trust, an
employee annuity, an annuity contract or a U.S. retirement bond as
described in Internal Revenue Code
<PAGE>
section 402(a)(5), 403(a)(4), 403(b)(8), 405(d)(3), or 409(b)(3)(C).
(c) Other Rollover Contributions Attributable to Distributions From
Employer Plans. A rollover contribution by Depositor other than a
contribution described in paragraph (b) above shall be a deposit in
cash to be invested under this Agreement with respect to which
contribution Depositor warrants that (1) the amount rolled over is
attributable to a distribution from an employees' trust, an employee
annuity, an annuity contract, a qualified bond purchase plan, or a
U.S. retirement bond, which meets the requirements of Code section
402(a)(5), 403(a)(4), 403(b)(8), 405(d)(3), or 409(b)(3)(C); and (2)
Depositor will make no additional contributions to the custodial
account in which such contribution is deposited, except as otherwise
permitted by Scudder Fund Distributors, Inc.
If permitted by Scudder Fund Distributors, Inc., rollover
contributions may be received under this Agreement with respect to
qualified voluntary employee contributions as defined in Internal
Revenue Code section 219(e)(2) and such contributions shall
thereafter be held and administered hereunder by the Custodian in
accordance with all applicable law with respect to accumulated
deductible employee contributions as defined in Internal Revenue
Code section 72(o)(5)(B).
(d) Transfer from an Individual Retirement Account or Individual
Retirement Annuity. Depositor may make an opening contribution
hereunder by directing the transfer of a cash amount from a
custodian or trustee of an individual retirement account or
individual retirement annuity to the Custodian be made for
investment under this Agreement.
(1) From IRA Funded with Deductible Contributions. Where no
portion of such transferred amount is attributable to a
distribution from an employees' trust, an employee annuity, an
annuity contract or a U.S. retirement bond as described in
Internal Revenue Code section 402(a)(5), 403(a)(4), 403(b)(8),
405(d)(3), or 409(b)(3)(C), Depositor warrants that Depositor
did not inherit the account or annuity, or if Depositor did
inherit the account or annuity, that Depositor is the
surviving spouse of the individual for whose benefit the
account was originally maintained or the annuity was
originally purchased.
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(2) From IRA Funded with Distributions From an Employer Plan. With
respect to any other transferred amount, Depositor:
(A) agrees that no additional contributions will be made to
the custodial account in which such contribution is
deposited, except as otherwise permitted by Scudder Fund
Distributors, Inc.;
(B) that the entire amount of such transferred amount is
attributable to a distribution from an employees' trust,
an employee annuity, an annuity contract, a qualified
bond purchase plan, or a U.S. retirement bond, as
described in Internal Revenue Code section 402(a)(5),
403(a)(4), 403(b)(8), 405(d)(3), 409(b)(3)(C), or other
applicable law;
(3) that if the transferred amount had been a rollover
contribution, it would have complied with the requirements of
subparagraph (b) or (c) above.
4. Tax and Other Legal Matters
DEPOSITOR ACKNOWLEDGES HAVING READ THE SECTIONS ENTITLED "INSTRUCTIONS" AT
BOTTOM ON PAGE 2 OF I.R.S. FORM 5305-A (of which this is a part), which describe
some of the tax and other matters important to Depositor, and "ADDITIONAL
INSTRUCTIONS" preceding Appendix "A".
5. Custodian's Fees
(a) Custodian shall be entitled to receive such reasonable fees with
respect to the establishment and administration of this custodial
account as are established by it from time to time.
(b) Upon thirty (30) days prior written notice, Custodian may change its
fee schedule.
Custodian's fees, any income, gift, estate and inheritance taxes or other
taxes of any kind whatsoever, including transfer taxes incurred in connection
with the investment or reinvestment of the assets of the custodial account, that
may be levied or assessed in respect to such assets, and all other
administrative expenses incurred by Custodian in the performance of its duties
including fees for legal services rendered to Custodian, may be charged to the
custodial account, with the right to liquidate Mutual Fund shares or other
investments for this purpose, or (at Custodian's option) to the Depositor.
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6. Custodial Account
(a) This Agreement shall take effect only when accepted and signed by
Custodian. As directed, Custodian shall then open and maintain a
separate custodial account for Depositor and invest the initial
contribution hereunder in shares of the Mutual Fund(s) or other
investments selected by Depositor in Article IX Para. 1. "Mutual
Fund" means a regulated investment company which is defined in
Internal Revenue Code Section 851(a) and which has been designated
by Scudder Fund Distributors, Inc. (or its successors) as
appropriate for investment hereunder.
(b) Every subsequent contribution shall be invested in accordance with
instructions authorized by Depositor indicating Depositor's choice
of the Mutual Funds or other investments designated by Scudder Fund
Distributors, Inc. (or its successors) as appropriate for investment
hereunder. Depositor agrees that the listing shall not be construed
as an endorsement by Custodian of the Mutual Funds or other
investments in which contributions may be invested, final choice of
which is in the sole discretion of Depositor. The Custodian does not
undertake to render any investment advice whatsoever to Depositor;
its sole duties are those prescribed in Article IX, para. 8(c).
(c) The Custodian shall invest subsequent contributions as directed.
However, if any such instructions authorized by Depositor are not
received as required, or if received, are in the opinion of
Custodian unclear, or if the accompanying contribution would cause
the Depositor to exceed the maximum limitation on tax deductibility,
Custodian may hold or return all or a portion of the contribution
uninvested without liability for loss of income or appreciation or
for other loss, and without liability for interest, pending receipt
of written instructions or clarification.
(d) All dividends and capital gain distributions received on shares of a
Mutual Fund held in the custodial account shall (unless received in
additional such shares) be reinvested in shares of that Mutual Fund,
if available, which shall be credited to the account. If any
distribution on such shares may be received at the election of the
shareholder in additional such shares or in cash or other property,
Custodian shall elect to receive it in additional such shares. All
accumulations on account of other investments shall be reinvested in
Depositor's custodial account.
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<PAGE>
(e) All Mutual Fund shares or other investments acquired by Custodian
hereunder shall be registered in the name of Custodian (with or
without identifying Depositor) or of its nominee. Custodian shall
deliver, or cause to be executed and delivered, to Depositor all
notices, prospectuses, financial statements, proxies, and proxy
soliciting materials relating to such Mutual Fund shares or other
investments held in the custodial account. Custodian shall not vote
any such Mutual Fund shares or other investments except in
accordance with any written instructions received from Depositor.
7. Distributions
(This paragraph 7 supplements Article IV on Scudder IRA Form 1-1-84 of the
Agreement and must be read in conjunction with it.)
(a) Distribution of the custodial account assets in accordance with
Article IV shall be made in a manner set forth in subparagraph
(c)(1) or (2), whichever applies, except as Article IV otherwise
requires and at such time as Depositor (or Depositor's Beneficiary
if Depositor is deceased) shall elect by written order to Custodian,
provided that distribution (except for distribution on account of
Depositor's disability or death, return of an "excess contribution"
referred to in subparagraph (d) or a "rollover" from this account),
must be no earlier than age 59 1/2 if Depositor wants to avoid an
"early distribution additional tax" under Code section 408(f) or
other applicable law. For that purpose, Depositor will be considered
disabled if Depositor can prove, as provided in Code section
72(m)(7), that Depositor is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or be of
long-continued and indefinite duration. Depositor (or Depositor's
Beneficiary if Depositor is deceased) will order distribution in the
manner and at the time permitted or required by Article IV and this
paragraph. Custodian assumes no responsibility for the tax treatment
of any distribution from the custodial account; such responsibility
accrues solely to the person ordering the distribution.
(b) Custodian assumes (and shall have) no responsibility to make any
distribution on order of Depositor (or Depositor's Beneficiary if
Depositor is deceased) unless and until such order specifies the
occasion for such distribution, the elected manner of distribution,
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and any declaration required by Article V. Also, before making any
such distribution or before honoring any assignment of the custodial
account, Custodian shall be furnished with any and all applications,
certificates, tax waivers, signature guarantees, and other documents
(including proof of any legal representative's authority) deemed
necessary or advisable by Custodian, but Custodian shall not be
responsible for complying with an order which appears on its face to
be genuine, or for refusing to comply if not satisfied it is
genuine, and assumes no duty of further inquiry.
(c) Upon receipt of a proper written order as required above, Custodian
shall distribute the assets of the custodial account in cash or kind
as follows:
(1) Distribution to Depositor. If the distribution order calls for
the custodial account to be paid to Depositor under Article
IV, then distribution shall be made in one or more of the
following ways as specified in the order.
(A) In a lump sum.
(B) In installments pursuant to a cash withdrawal plan,
provided that such a plan suitable for prearranging the
distributions described in this subparagraph (B) is
available for Custodian's use under the rules governing
the investments held in the custodial account. A
suitable cash withdrawal plan will provide for periodic
liquidation of some of investments held in the custodial
account to yield the cash necessary to pay each
installment. Prior to January 1, 1985, a suitable cash
withdrawal plan will provide for payment of installments
over a period not longer than the life expectancy of
Depositor or the joint life and the last survivor
expectancy of Depositor and Depositor's spouse.
Subsequent to December 31, 1984, a suitable cash
withdrawal plan will provide for payment of installments
ratably over a period of not longer than the life
expectancy of the Depositor or the joint life and last
survivor expectancy of the Depositor and the Depositor's
Beneficiary (as defined in subparagraph (c)(2) of this
Para. 7). The life expectancies referred to in this
Agreement shall be determined by using applicable
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<PAGE>
Internal Revenue Service tables. The amount distributed
each year shall be at least equal to the quotient
obtained by dividing the entire custodial account
remaining at the beginning of that year by the adjusted
life expectancy of Depositor, the joint life and last
survivor expectancy of Depositor and Depositor's spouse,
or the joint life and last survivor expectancy of
Depositor's Beneficiary (whichever is applicable). Prior
to January 1, 1985, the life or joint life and last
survivor expectancy used to calculate the minimum amount
to be distributed in a given year shall be equal to the
relevant expectancy as it was determined as of when
Depositor attained age 70 1/2 reduced by the number of
whole years elapsed, if any, since Depositor attained
age 70 1/2. Subsequent to December 31, 1984, the
adjusted life or joint life and last survivor expectancy
used to calculate the minimum amount to be distributed
in a given year shall be, at the Depositor's election,
either determined by referring to the applicable
Internal Revenue Service table and determining the
relevant expectancy as of the particular year in
question or by using a previously determined expectancy
and reducing such expectancy by the number of whole
years elapsed since it was determined. Notwithstanding
any implication to the contrary in this subsection (B),
no distribution need be made in any year, or a lesser
amount may be distributed during such year, if the
aggregate amounts distributed through the end of such
year are at least equal to the aggregate of the minimum
amounts required by this subparagraph (B) to have been
so distributed. Moreover, during Depositor's lifetime
the entire custodial account remaining for distribution
at any time under this subparagraph (B) may, pursuant to
a proper supplementary written order as specified above,
be distributed to Depositor.
(C) by the purchase and distribution of a single-premium
contract meeting the requirements of Code section
408(b)(1), (3), (4) and, prior to January 1, 1985, (5)
applicable to an "individual retirement annuity".
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<PAGE>
(2) Distribution upon Death of Depositor or Depositor's Spouse.
Prior to January 1, 1985, if Custodian receives a proper
written order for distribution on account of the Depositor's
death or, if distributions were being made to the spouse over
the joint life and last survivor expectancy, the spouse's
death, Custodian shall distribute the then-remaining custodial
account to Depositor's Beneficiary within five (5) years of
Depositor's (or, if applicable, the spouse's) death either in
a lump sum or installments; provided, however, that if
distributions have already begun before Depositor's death for
a specified term, then Custodian may instead continue to make
the distribution in the same manner and without regard to the
foregoing five-year limitation; provided further, that if
Depositor's Beneficiary is Depositor's spouse and if
Depositor's Beneficiary elects to treat the account as if
Depositor's Beneficiary were the Depositor, then the Custodian
may distribute the account as directed by the Depositor's
Beneficiary as if such person were the Depositor and in
accordance with Articles IV and IX. Subsequent to December 31,
1984, if Custodian receives a a proper written order for
distribution on account of the Depositor's death or, if
distributions were being made to the Depositor's surviving
spouse, the spouse's death, then the Custodian shall
distribute the then-remaining custodial account to the
Depositor's Beneficiary over the life of the Depositor's
Beneficiary or within a period not greater than the greater of
five (5) years after the Depositor's (or, if applicable, the
spouse's) death or the life expectancy of Depositor's
Beneficiary; provided, however, that if distributions have
already begun before Depositor's (or, if applicable, the
spouse's) death for a specified term, Custodian shall continue
to distribute the custodial account over a period at least as
rapid as that specified term. The term "Depositor's
Beneficiary" means the person or persons designated as such by
the "designating person" (as defined below) on a form
acceptable to Custodian for use in connection with this
Agreement, signed by the designating person, and filed with
the Custodian in accordance with this subparagraph (2). The
form may name persons or estates to take upon the contingency
of survival. However, the term "Depositor's Beneficiary" means
the designating person's estate to the extent no such
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<PAGE>
designation of such a form effectively disposes of the
custodial account as of when such distribution is to commence.
Moreover, a form shall not become effective for that purpose
until it is filed with the Custodian during the lifetime of
the designating person. The form last accepted by Custodian
before such distribution is to commence, upon becoming
effective during the designating person's lifetime, shall be
controlling and, whether or not fully dispositive of the
custodial account, thereupon shall revoke all such forms
previously filed by that person. The term "designating person"
means Depositor; after Depositor's death, it also means the
person or persons (other than Depositor's estate) who begin to
receive a portion of the custodial account pursuant to such a
designation by Depositor, and designations by such a person
shall relate solely to the balance of that portion remaining
in the custodial account as of when distribution pursuant to a
designation by that person is to commence. The Custodian shall
accept all such forms only in the Commonwealth of
Massachusetts, and they shall be considered part of this
Agreement for purposes of Article IX, para. 13(c).
(3) Any annuity which Custodian is to purchase and distribute
under this Agreement may be fixed or variable, but Custodian
shall not be required to distribute in that manner unless the
premium for that annuity is at least $1,000.
(4) Depositor's Beneficiary shall not have the right or power to
anticipate any part of the custodial account or to sell,
assign, transfer, pledge or hypothecate any part thereof. The
custodial account shall not be liable for the debts of
Depositor's Beneficiary or subject to any seizure, attachment,
execution or other legal process in respect thereto.
(d) If during a taxable year under Article 1 a total amount is
contributed which exceeds the amount deductible for that year,
either because such amount exceeds the tax-deductible limits
specified in the Internal Revenue Code, or because of attainment of
age 70 1/2 in that year, or for some other reason, then upon
receiving written notice specifying the year in question, the amount
of the excess, the reason it is an excess, and the amount of net
income in the custodial account attributable to such excess--
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Custodian shall distribute cash to Depositor in an amount equal to
the sum of such excess and earnings. If the excess contribution did
not arise because of attainment of age 70 1/2, then (in Custodian's
discretion unless otherwise instructed by Depositor) in lieu of
being distributed, said sum shall be treated by Depositor as a
contribution in the then current or a succeeding taxable year, in
accordance with applicable law.
8. Additional Provisions Regarding the Custodian
(a) When and after distributions of the custodial account to Depositor's
Beneficiary commence, all rights and obligations assigned to
Depositor by provisions of this Agreement shall inure to, and be
enjoyed and exercised by, Depositor's Beneficiary instead of
Depositor. Until such distributions commence to such a person, the
Custodian shall not be responsible for treating such person's
predecessor to such rights and obligations as still possessing the
same.
(b) Custodian shall keep adequate records of transactions it is required
to perform hereunder. Not later than sixty (60) days after the close
of each calendar year or after the Custodian's resignation or
removal pursuant to Article IX, para. 10(a), Custodian shall render
to Depositor a written report or reports reflecting the transactions
effected by it during such period and the assets of the custodial
account at the close of the period. Sixty (60) days after rendering
such report(s), Custodian shall be forever released and discharged
from all liability and accountability to anyone with respect to its
acts and transactions shown in or reflected by such report(s),
except with respect to those as to which the recipient of such
report(s) shall have filed written objections with the Custodian
within the latter such sixty-day period.
(c) Custodian shall be an agent for Depositor to receive and invest
contributions as authorized by Depositor, hold and distribute such
investments, and keep adequate records and report thereon, all in
accordance with this Agreement. The parties do not intend to confer
any fiduciary duties on Custodian, and none shall be implied.
Custodian may perform any of its administrative duties through other
persons designated by Custodian from time to time, except that
Mutual Fund shares or other investments must be registered as stated
in para. 6(e) of this Article IX; and Custodian intends initially to
delegate all such duties to Boston Financial Data Services, Inc.,
which is par-
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<PAGE>
tially owned by Custodian's parent company; but no such delegation
or future change therein shall be considered as an amendment to this
Agreement. Custodian shall not be liable (and assumes no
responsibility) for the collection of contributions, the
deductibility of any contribution or its propriety under this
Agreement, or the purpose or propriety of any distribution ordered
in accordance with Article IX, para. 7, or made in accordance with
Article IX, para. 12, which matters are the sole responsibility of
Depositor and Depositor's Beneficiary.
(d) Depositor shall always fully indemnify Custodian and save it
harmless from any and all liability whatsoever which may arise
either (1) in connection with this Agreement and matters which it
contemplates, except that which arises due to Custodian's negligence
or willful misconduct, or (2) with respect to making or failing to
make any distribution, other than for failure to make distribution
in accordance with an order therefor which is in full compliance
with both Article IV and para. 7(a) and (b) of Article IX. Custodian
shall not be obligated or expected to commence or defend any legal
action or preceeding in connection with this Agreement or such
matters unless agreed upon by Custodian and Depositor, and unless
fully indemnified for so doing to Custodian's satisfaction.
(e) Custodian may conclusively rely upon and shall be protected in
acting upon any written order from or authorized by Depositor or
Depositor's Beneficiary or any other notice, request, consent,
certificate or other instrument, paper, or other communication
believed by it to be genuine and to have been issued in proper form
and with proper authority, and, so long as it acts in good faith, in
taking or omitting to take any other action in reliance thereon.
9. Amendment
(This paragraph 9 supplements Article VIII on Scudder IRA Form 1-1-84 of
the Agreement and must be read in conjunction with it.)
(a) Depositor retains the right to amend this Agreement in any respect
at any time, effective on a stated date which shall be a least sixty
(60) days after giving written notice of the amendment (including
its exact terms) to Custodian by registered or certified mail unless
Custodian waives such notice as to that amendment. If Custodian does
not wish to continue serving in that capacity under this Agreement
as so amended,
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it may resign in accordance with Article IX, para. 10. Depositor
also delegates, to the distributor (principal underwriter) of a
plurality of the Mutual Funds described in Article IX, para. 6(b),
Depositor's right so to amend, including retroactively, as necessary
or appropriate in the opinion of counsel satisfactory to the
distributor, in order to conform with pertinent provisions of the
Code and other laws or successor provisions of law or to obtain a
governmental ruling that such requirements are met, to adopt a
prototype or master plan (when one becomes available) for investment
in shares of such Mutual Funds or other investments, or as otherwise
may be advisable in the opinion of such counsel, provided the
distributor amends in the same manner all agreements comparable to
this one, having the same Custodian, permitting investment in shares
of such Mutual Funds or other investments, and under which such
power has been delegated to it. Such an amendment by the distributor
shall be communicated in writing to Depositor and Custodian, and
Depositor shall be deemed to have consented thereto unless, within
thirty (30) days after such communication to Depositor is mailed,
Depositor either (1) gives Custodian a proper written order for a
lump-sum distribution of the custodial account, or (2) removes
Custodian and simultaneously appoints a Successor Custodian under
Article IX, para. 10.
(b) This paragraph 9 shall not be construed to restrict Custodian's
freedom to agree with distributors of Mutual Fund shares, or others,
upon the terms by which shares of additional Mutual Funds or other
investments may be chosen for investment as contemplated in Article
IX, para. 6(b), or Custodian's freedom to change fee schedules in
the manner proved by Article IX, para. 5(b), and no such agreement
or change shall be deemed to be an amendment of this Agreement.
10. Resignation or Removal of Custodian
(a) Custodian may resign at any time upon at least thirty (30) days
prior notice in writing to Depositor, and may be removed by
Depositor at any time upon at least thirty (30) days prior notice in
writing to Custodian. Upon such resignation or removal, Depositor
shall appoint a Successor Custodian to serve under this Agreement.
Upon receipt by Custodian of written acceptance of such appointment
by the Successor Custodian, Custodian shall transfer to such
Successor the assets of the custodial account and all necessary
records (or copies thereof) pertaining thereto, provided that (if so
requested by Custodian)
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any Successor Custodian agrees not to dispose of any such records
without Custodian's consent. Custodian is authorized, however, to
reserve such a portion of such assets as it may deem advisable for
payment of all its fees, compensation, costs, and expenses, or for
payment of any other liabilities constituting a charge on or against
the assets of the custodial account or on or against Custodian, with
any balance of such reserve remaining after the payment of all such
items to be paid over to the Successor Custodian.
(b) If within thirty (30) days after Custodian's resignation or removal
or such longer time as Custodian may agree to, Depositor has not
appointed a Successor Custodian which has accepted such appointment,
Custodian shall terminate the custodial account pursuant to Article
IX, para. 11, unless within that time the distributor referred to in
Article IX, para. 9(a), appoints such Successor and gives written
notice thereof to Depositor and Custodian.
(c) Custodian shall not be liable for the acts or omissions of such
Successor.
(d) The Custodian, and every Successor Custodian appointed to serve
under this Agreement, must be a bank as defined in Code section
408(n) or such other person who qualifies to serve in the manner
prescribed by Code section 408(a)(2) and satisfies the Depositor,
distributor, or Custodian, upon request, as to such qualification.
(e) After Custodian has transferred the custodial account assets
(including any reserve balance as contemplated above) to the
Successor Custodian, Custodian shall be relieved of all further
liability with respect to this Agreement, the custodial account, and
the assets thereof.
11. Termination of Account
(a) Custodian shall terminate the custodial account if, within the time
specified in Article IX, para. 10(b), after Custodian's resignation
or removal, neither Depositor nor the distributor has appointed a
Successor Custodian which has accepted such appointment. Termination
of the custodial account shall be effected by distributing all
assets thereof in a lump sum in cash or in kind to Depositor subject
to Custodian's right to reserve funds as provided in Article IX,
para. 10(a).
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<PAGE>
(b) Upon termination of the custodial account, this Agreement shall
terminate and have no further force and effect, and Custodian shall
be relieved from all further liability with respect to this
Agreement, the custodial account, and all assets thereof so
distributed.
12. Liquidation of Account
(a) Notwithstanding anything contained in this Agreement to the
contrary, Scudder Fund Distributors, Inc. shall have the right to
direct Custodian, by written order to Custodian, to liquidate the
custodial account if the value of the account at the time of such
written order is less than a minimum value established on a
non-discriminatory basis from time to time by Scudder Fund
Distributors, Inc., and upon receipt of such written order (which
Scudder Fund Distributors, Inc. shall have no duty to make and
which, if made, may be made with respect to any specified accounts
as to which it may be made applicable singly or to all accounts as
to which it may be made applicable as a group), Custodian shall
forthwith proceed to liquidate the custodial account by distributing
all assets thereof in a lump sum in cash or in kind to Depositor,
subject to Custodian's right to reserve such a portion of such
assets as it may deem advisable for payment of all its fees,
compensation, costs, and expenses, or for payment of any other
liabilities constituting a charge on or against the assets of the
custodial account or on or against Custodian, with any balance of
such reserve remaining after the payment of all such items to be
paid over to Depositor.
(b) Neither Scudder Fund Distributors, Inc. nor Custodian shall be
liable for, or in any way responsible with respect to, any penalty
or any other loss incurred by any person with respect to a
distribution made here under and upon liquidation of the custodial
account as aforesaid, this Agreement shall terminate and have no
further force and effect, and Custodian and Scudder Fund
Distributors, Inc. shall be relieved from all further liability with
respect to this Agreement, the custodial account, and all assets
thereof so distributed.
13. Miscellaneous
(a) References herein to the "Internal Revenue Code" or "Code" and
sections thereof shall mean the same as amended from time to time
hereafter, including successors to such sections.
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<PAGE>
(b) Except where otherwise specifically required in this Agreement, any
notice from Custodian to any person provided for in this Agreement
shall be effective if sent by first-class mail to such person at
that person's last address on Custodian's records.
(c) This agreement is accepted by Custodian in, and shall be construed
and administered in accordance with the laws of the Commonwealth of
Massachusetts. This Agreement is intended to qualify under section
408 of the Code as an Individual Retirement Account and for the
Retirement Savings deduction under section 219 of the Code, and if
any provision hereof is subject to more than one interpretation or
any term used herein is subject to more than one construction, such
ambiguity shall be resolved in favor of that interpretation or
construction which is consistent with that intent. However, neither
the Custodian, nor any Mutual Fund (or company associated therewith)
shall be responsible for whether or not such intentions are achieved
through use of this Agreement, and Depositor is referred to
Depositor's attorney for any such assurances.
CUSTODIAN DISCLOSURE STATEMENT
The following information being provided to you by The State Street Bank
and Trust Company, the Custodian of the Scudder Individual Retirement Accounts,
in accordance with the requirements of the Internal Revenue Service. Please read
it together with the Individual Retirement Plan and the prospectus for the
shares of each Mutual Fund selected by you for the investment of your
contributions to that Plan, copies of which you should have already received
from the distributor of those shares. The provisions of the Plan and prospectus
must prevail over this statement in any instance where the statement is
incomplete or appears to conflict.
The Employee Retirement Income Security Act of 1974 has provided an
entirely new program that may enable you to plan for your retirement by creating
a "retirement plan" with federally tax-deductible dollars. This federal income
tax deduction is available even if you do not otherwise itemize your deductions.
In addition, any earnings on the assets held in your individual retirement
account will not be subject to federal income tax until you actually begin to
receive a distribution from your account. The state income tax treatment of your
account may differ, and details should be available from your state taxing
authority or your own tax adviser.
As with most other laws that provide special tax treatment, there are
certain restrictions and limitations involved with respect to your individual
retirement account:
-15-
<PAGE>
1. Only a limited amount of savings can qualify for the preferential tax
treatment - 100% of your compensation or earnings from self-employment up
to an annual maximum of $2,000. Under certain conditions, an individual
and his or her non-employed spouse may each open an IRA. Annual deductions
for contributions are allowable if a joint income tax return is filed and
the deductions are limited to the lesser of 100% of the employed spouse's
compensation or $2,250, and the amount contributed to either individual
retirement account may not exceed $2,000.
In the case of an individual retirement account which meets the
requirements of a so-called Simplified Employee Pension Plan, an employer
may contribute a deductible amount equal to 15% of the employee's
compensation up to an annual maximum of $30,000. The amount of such
contribution is includible in the employee's income as wages (for federal
income tax purposes) but is deductible by him or her. The employee is also
allowed an annual deduction for his or her own individual retirement
account contributions limited to the lesser or 100% of the employee's
compensation or $2,000.
There is a 6% penalty tax on any so-called "excess contribution" if you
make one, that is, on the portion of a contribution made to your IRA in
excess of the amount which can be currently deducted. Some examples of
when this can occur are when you make a contribution to your IRA in excess
of the allowable deduction limitations, or you contribute during or after
the calendar year in which you reach 70 1/2, or in the case of a spousal
IRA, if the non-employed spouse receives any compensation during the
calendar year. The 6% penalty tax on any "excess contribution" also
attaches for each following year until the excess is withdrawn or used up.
If an excess contribution plus earnings on it is withdrawn before the time
for filing the individual's tax return for the year of the contribution
(including extensions), there will be no 6% penalty tax. The amount
withdrawn will not be considered a premature distribution nor taxed as
ordinary income, except the earnings withdrawn will be included in the
income of the taxpayer. In addition, in certain cases an excess
contribution may be withdrawn after the time for filing the individual's
tax return without resulting in taxable income to the individual. Also,
excess contributions for one year may be carried forward and deducted in
the next year.
2. Contributions must be made to a Trust or Custodial Account in which the
Trustee/Custodian is either a bank or such other person who has been
approved by the Secretary of the Treasury. No part of your contribution
may be invested in life insurance or be commingled with other property
except in a common trust fund or common investment fund.
-l6-
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[page missing]
p. 17 missing
Ira knows about this
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<PAGE>
year in which you attain age 70 1/2. The distribution may be made at once
in a lump sum, or it may be made in installments. However, installment
payments cannot be scheduled to be made over a period which extends beyond
your life expectancy, or the combined life expectancy of you and your
spouse. If the amount distributed during a calendar year is less than the
minimum amount required to be distributed, the recipient would be subject
to a penalty tax equal to 50% of the difference between the amount
required to be distributed and the amount actually distributed. If you die
before the entire interest is distributed to you, similar rules require
prompt, level payments to your beneficiary.
10. If you do not attain age 70 1/2 until January 1, 1985 or later, your
entire interest in your account must be distributed, or begin to be
distributed, to you no later than the first April 1st of the year
following the later of the year in which you attain age 70 1/2 or retire.
Distribution may be made at once in a lump sum, or it may be made in
installments. However, installment payments cannot be scheduled to be made
over a period which extends beyond your life expectancy (as determined
annually), or the joint life and last survivor expectancy of you and the
beneficiary you designate (as redetermined annually, if that beneficiary
is your spouse). If the amount distributed during a calendar year is less
than the minimum amount required to be distributed, the recipient would be
subject to a penalty tax equal to 50% of the difference between the amount
required to be distributed and the amount actually distributed. If you die
before the entire interest is distributed to you, but after you have begun
to receive distributions, your entire account must be distributed to your
beneficiary over a period no longer than the last determined life
expectancy or life and last survivor expectancy over which your account
was being distributed prior to your death. If you die before the entire
interest has begun to be distributed to you and your spouse is your
beneficiary, distributions to your spouse must either (a) be completed
within 5 years of your death or (b) commence before the later of one year
after your death or the date on which you would have attained age 70 1/2,
and continue over his or her life or a period not exceeding his or her
life expectancy. If you die before the entire interest has begun to be
distributed to you and your spouse is not your beneficiary, distributions
to your beneficiary must either (a) be completed within five years of your
death or (b) commence within one year after your death and continue over
your beneficiary's life or a period not exceeding his or her life
expectancy.
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<PAGE>
11. Amounts distributed to you are includable in your gross income when you
receive them and are taxable as ordinary income without any special
lump-sum distribution privileges. However, normal four-year income
averaging may be available.
12. If you die before the end of 1984, the first $100,000 worth of
distributions paid to your beneficiary (other than your estate) are not
subject to federal estate and gift tax when they are paid in a series of
substantially equal periodic statements over the life of the beneficiary
or over a period of at least 36 months after your death. After December
31, 1984, this special federal estate and gift tax exclusion will no
longer be available.
l3. You must file Treasury Form 5329 with the Internal Revenue Service for
each calendar year during which there is an excess contribution, premature
distribution, or during which there is an insufficient distribution as
referred to in paragraphs 9 and 10 above.
l4. The Individual Retirement Account Plan has been approved as to form by the
Internal Revenue Service. This approval is a determination only as to the
form of the account and does not represent a determination of the merits
of such account.
15. Information about the shares of each mutual fund available for investment
by your individual retirement account must be furnished to you in the form
of a prospectus governed by rules of the Securities and Exchange
Commission. Please refer to the prospectus for detailed information
concerning your mutual fund.
Growth in the value of your account cannot be guaranteed or projected.
However, the income and operating expenses of a mutual fund will affect
the value of its shares, and hence the value of your account, as does any
increase or decrease in the value of the assets of the mutual fund. The
fund's prospectus contains information regarding current income and
expenses of your mutual fund.
Fees and other expenses of maintaining your account may be charged to you
or your account. The Custodian's fee schedule is referred to in Article IX
of the Plan document and is distributed to you with it.
If you have not received this Disclosure Statement at least seven calendar
days before the establishment of your Individual Retirement Account, you have
the right to revoke your Individual Retirement Account during the seven calendar
day period following the establishment of it. In order to so re-
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<PAGE>
voke your Individual Retirement Account, you must do so in writing and you must
mail or deliver your revocation to Scudder Fund Distributions, Inc., c/o State
Street Bank and Trust Company, P.O. Box 1912, Boston, Massachusetts 02105. If
your revocation is mailed, the date of the postmark (or the date of
certification or registration if sent by certified or registered mail) will be
considered your revocation date. If you so revoke your individual retirement
account during the seven day period, the entire amount of your account, without
any adjustments (for items such as administrative expenses, fees, or fluctuation
in market value) will be returned to you.
You may obtain further information from any district office of the
Internal Revenue Service.
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EXHIBIT 14(b)
HARVEST PROTOTYPE PLAN
TABLE OF CONTENTS
Page
SECTION 1 Introduction ......................................................2
SECTION 2 Definitions .......................................................2
SECTION 3 Eligibility .......................................................3
SECTION 4 Contributions .....................................................3
SECTION 5 Code Section 415 Limitations on Allocations .......................4
SECTION 6 Time and Manner of Making Contributions ...........................6
SECTION 7 Vesting ...........................................................6
SECTION 8 Distribution Upon Death ...........................................6
SECTION 9 Other Distributions................................................6
SECTION 10 Loans .............................................................7
SECTION 11 Trust Provisions ..................................................7
SECTION 12 Administration ....................................................9
SECTION 13 Fees and Expenses .................................................9
SECTION 14 Benefit Recipient Incompetent or Difficult
to Ascertain or Locate ...........................................9
SECTION 15 Designation of Beneficiary ........................................9
SECTION 16 Spendthrift Provision ............................................10
SECTION 17 Necessity of Qualification .......................................10
SECTION 18 Amendment or Termination .........................................10
SECTION 19 Transfers ........................................................10
SECTION 20 Owner-Employee Provisions ........................................10
SECTION 21 Top-Heavy Provisions .............................................10
SECTION 22 Waiver of Minimum Funding Standard ...............................11
SECTION 23 Miscellaneous ....................................................12
1
<PAGE>
SECTION 1.
INTRODUCTION
The Employer has established this Plan (the "Plan"), consisting of the
Adoption Agreement and the following provisions (the "Prototype Plan") for the
exclusive benefit of its Employees and their Beneficiaries.
SECTION 2.
DEFINITIONS
Where the following words and phrases appear in this Plan, they shall have
the respective meanings set forth below, unless their context clearly indicates
a contrary meaning. The singular herein shall include the plural, and vice
versa, and the masculine gender shall include the feminine gender, and vice
versa, where the context requires.
2.1 "Account" shall mean the Trust assets held by the Trustee for the
benefit of a Participant, which shall be the sum of the Participant's Employer
Contribution Account, Nondeductible Voluntary Contribution Account, Deductible
Voluntary Contribution Account and Rollover Account.
2.2 "Act" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
2.3 "Administrator" shall mean the person or persons specified in section
12.1.
2.4 "Adoption Agreement" shall mean the agreement by which the Employer
has most recently adopted or amended the Plan.
2.5 "Beneficiary" shall mean any person or legal representative entitled
to receive benefits on or after the death of a Participant.
2.6 "Code" shall mean the Internal Revenue Code of 1954, as amended
Reference to a section of the Code shall include any comparable section or
sections of future legislation that amends, supplements or supersedes such
section.
2.7 "Compensation" shall mean the amount paid during the Plan Year by the
Employer to the Employee for services rendered while a Participant, as
reportable to the Federal Government for the purpose of withholding Federal
income taxes but not including amounts attributable to any category specified in
the Adoption Agreement. If so specified in the Adoption Agreement, Compensation
shall also mean amounts paid to the Employee for services rendered for the
entire Plan Year in which an Employee became a Participant whether or not such
an Employee was a Participant for the entire Plan Year. In the case of a
Self-Employed Individual, the above determination of Compensation shall be made
on the basis of the Self-Employed Individual's Earned Income. Notwithstanding
the previous sentence, for the purposes of the limitations imposed by Section
4.1(a)(i)(B) below, Compensation of a Self-Employed Individual shall be
determined on the basis of the Self-Employed Individual's Earned Income
determined in accordance with the rules provided by Code Section 404(a)(8)(D).
2.8 "Current or Accumulated Earnings and Profits" of an Employer other
than a sole-proprietorship or partnership shall mean the Employer's current or
accumulated earnings and profits, as determined on the basis of the Employer's
books of account in accordance with generally accepted accounting practices,
without any deductions for Employer Contributions under the Plan (or any other
qualified plan) for the current Year or for income taxes for the current year,
and without regard to the Employer's election to be taxed as a small business
corporation, if it has so elected. If the Employer is a sole-proprietorship or
partnership, "Current or Accumulated Earnings and Profits" shall mean the net
income of such Employer before deduction for income taxes and contributions made
hereunder.
2.9 "Deductible Voluntary Contribution Account" shall mean the separate
account maintained pursuant to Section 6.3(c) hereof for the Deductible
Voluntary Contributions made by the Participant and the income, expenses, gains
and losses attributable thereto.
2.10 "Deductible Voluntary Contributions" shall mean the contributions
made by Participants in accordance with Section 4.2 hereof, which respective
contributing Participants designate as "Deductible Voluntary Contributions" at
the time of contribution, and which Comply with the requirements of Code Section
2.19.
2.11 "Designation Investment Company" shall mean a regulated investment
company for which Scudder, Stevens & Clark, its successor or any of its
affiliates, acts as investment adviser and which is designated by Scudder Fund
Distributors, Inc. or its successors, as eligible for investment under the Plan.
2.12 "Designation of Beneficiary" or "Designation" shall mean the document
executed by a Participant under Section 15.
2.13 "Disability" shall mean the inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment that can be expected to last for a continuous period of 12 months or
more, as certified by a licensed physician selected by the Participant and
approved by the Employer.
2.14 "Distributee" shall mean the Beneficiary or other person entitled to
receive the undistributed portion of the Participant's Account under Section 8
because of death or under Section 14 because of incompetency or inability to
ascertain or locate such individual.
2.15 "Distributor" shall mean Scudder Fund Distributors, Inc. or its
successor.
2.16 "Earned Income" shall mean the net earnings from self-employment in
the trade or business with respect to which the Plan is established, for which
personal services of the Owner-Employee or Self-Employed Individual are a
material income-producing factor. Net earnings will be determined without regard
to items not included in gross income and the deductions allocable to such
items. Net earnings are reduced by contributions by the Employer to a qualified
plan, including this Plan, to the extent deductible under Code Section 404.
2.17 "Effective Date" shall mean the date specified by the Employer in the
Adoption Agreement.
2.18 "Employee" shall mean an individual who performs services in the
business of the Employer in any capacity except for, (a) if specified in the
Adoption Agreement, non-resident aliens who receive no earned income from United
States sources (as described in Code Section 410(b)(3)(C)), (b) if specified in
the Adoption Agreement, individuals who are covered by a collective bargaining
contract between the Employer and a recognized bargaining agent, if contract
negotiations considered retirement benefits in good faith and unless such
contract specifically provides for participation in the Plan, and (c) such other
individuals as are excluded under the Adoption Agreement.
2.19 "Employer" shall mean the organization or other entity named as such
in the Adoption Agreement and any successor organization or entity which adopts
the Plan. Any two or more organizations or entities which are "related
businesses" within the meaning of Section 3.6 hereof may adopt and maintain the
plan as a single Plan.
2.20 "Employer Contribution Account" shall mean the separate account
maintained pursuant to Section 6.3(a) hereof for the Employer Contributions
allocated to a Participant and the income, expenses, gains and losses
attributable thereto.
2.21 "Employer Contributions" shall mean the contributions made by the
Employer in accordance with Section 4.1 hereof.
2.22 "Hour of Service" shall mean:
(a) Each hour for which an Employee is paid, or entitled to payment, for
the performance of duties for the Employer. These hours shall be credited to the
Employee for the computation period in which the duties are performed;
(b) Each hour for which an Employee is paid, or entitled to payment, by
the Employer on account of a period of time during which no duties are performed
(irrespective of whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacity (including Disability), layoff, jury
duty, military duty or leave of absence. No more than 501 Hours of Service shall
be credited under this paragraph for any single continuous period (whether or
not such period occurs in a single computation period). Hours under this
paragraph shall be calculated and credited pursuant to section 2530.200b-2 of
the Department of Labor Regulations which are incorporated herein by this
reference, and
(c) Each hour for which back pay, irrespective of mitigation of damages,
is either awarded or agreed to by the Employer. The same Hours of Service shall
not be credited both under paragraph (a) or paragraph (b), as the case may be,
and under this paragraph (c). These hours shall be credited to the Employee for
the computation period or periods to which the award or agreement pertains
rather than the computation period in which the award, agreement or payment is
made.
Where the Employer maintains the plan of a predecessor employer, service
for such predecessor employer shall be treated as Service of the Employer. Where
the Employer does not maintain the plan of a predecessor employer, employment by
a predecessor employer, upon the written election of the Employer made in a
uniform and non-discriminatory manner, shall be treated as Service for the
Employer.
2.23 "Integration Level" for a Plan Year shall mean the lesser of the
Social Security Wage Base or the dollar amount specified in the Adoption
Agreement.
2.24 "Integration Rate" for a Plan Year shall mean the lesser of the OASDI
Rate or the rate Specified in the Adoption Agreement.
2.25 "Loan Trustee" shall mean the Trustee or, if the Employer has
specified otherwise in the Adoption Agreement, the individual or individuals so
appointed to act as trustee solely for the purpose of administering the
provisions of Section 10 and holding the Trust assets to the extent that they
are invested in loans pursuant to such Section.
2.26 "Nondeductible Voluntary Contribution Account" shall mean the
separate account maintained pursuant to the Section 6.3(b) hereof for
Nondeductible Voluntary Contributions made by the Participant and the income,
expenses, gains and losses attributable thereto.
2.27 "Nondeductible Voluntary Contributions" shall mean all Contributions
by Participants which are not Deductible Voluntary Contributions, Rollover
Contributions, or contributions of accumulated deductible employee contributions
made pursuant to Section 4.2(b)(vi) hereof.
2.28 "Normal Retirement Date" or "Normal Retirement Age" shall mean the
earlier of (a) the date selected by the employer in the Adoption Agreement or,
(b) if the Employer enforces a mandatory retirement age, the first day of the
month in which the Participant reaches such age.
2.29 "OASDI Rate" for a Plan Year shall mean the tax rate applicable on
the first day of the Plan Year, to employer contributions for old age,
survivors, and disability insurance under the Social Security Act.
2.30 "One-Year Break in Service" shall mean a 12-consecutive-month period
in which an Employee does not complete more than 500 Hours of Service unless the
number of Hours of Service specified in the Adoption Agreement for purposes of
determining a Year of Service is less than 501, in which case a
12-consecutive-month period in which an Employee has fewer than that number of
Hours of Service shall be a One-Year Break in Service. The computation period
over which One-Year Breaks in Service shall be measured shall be the same period
over which Years of Service are measured as selected in the Adoption Agreement.
2.31 "Owner-Employee" shall mean an Employee who is a sole proprietor
adopting this Plan as the Employer, or who is a partner owning more than 10% of
either the capital or profits interest of a partnership adopting this Plan as
the Employer.
2.32 "Participant" shall mean in Employee who is eligible to participate
in the Plan under Section 3 and who has not since becoming a Participant died
retired otherwise terminated employment with the Employer or transferred from
[illegible] class to a class of Employees ineligible to participate in the Plan.
2.33 "Plan" shall mean the Prototype Plan and Adoption Agreement.
2.34 "Plan Year" shall mean the fiscal year of the Employer or a different
12 consecutive month period as specified in the Adoption Agreement.
2.35. "Prototype Plan" shall mean these Sections 1-23.
2.36 "Rollover Account" shall mean the separate account maintained
pursuant to Section 6.3(d) hereof for any Rollover Contributions (as described
in Section
2
<PAGE>
4.3 hereof) made by the Participant and the income, expenses, gains and losses
attributable thereto.
2.37 "Rollover Contributions" shall mean contributions made to the Trust
by Participants in accordance with Section 4.3 hereof.
2.38 "Self-Employed Individual" shall mean an Employee who has Earned
income for the Plan Year from the trade or business for which the Plan is
established, or an individual who would have had Earned Income but for the fact
that the trade or business had no Current or Accumulated Earnings and Profits
for the Plan Year.
2.39 "Service" shall mean employment by the Employer and, if the Employer
is maintaining the plan of a predecessor employer, or if the Employer is not
maintaining the plan of a predecessor employer but has so elected in the manner
described in Section 2.22 above, employment by such predecessor employer.
2.40 "Social Security Wage Base" for a Plan Year means the maximum amount
of annual earnings which may be considered wages under Code Section 3121(a)(1)
as in effect on the first day of such Plan Year.
2.41 "Sponsor" shall mean any of the organizations (a) which have
requested a favorable opinion letter from the National Office of the Internal
Revenue Service for this Plan or (b) to which a favorable opinion letter for
this Plan has been issued by the National Office of the Internal Revenue
Service.
2.42 "Trust" shall mean the trust established under Section 11 of this
Plan for investment of Trust assets.
2.43 "Trust Fund" shall mean the contributions to the Trust and any assets
into which such contributions shall be invested or reinvested in accordance with
Sections 11.1 and 11.3 of this Plan.
2.44 "Trustee" shall mean the person or persons, including any successor
or successors thereto, named in the Adoption Agreement to act as trustee of the
Trust and hold the Trust assets in accordance with Section 11 hereof.
2.45 "Valuation Date" shall mean the last day of each Plan Year.
2.46 "Vesting Years" shall be measured on the 12-consecutive-month period
specified in the Adoption Agreement. A Participant will have a Vesting Year
during such computation period only if the Participant completes the number of
Hours of Service selected in the Adoption Agreement for purposes of computing a
Year of Service or, if so specified in the Adoption Agreement, the Participant
will have a Vesting Year for each Plan Year for which the Participant shares in
the allocation of Employer Contributions for the Plan Year. However, when
determining Vesting Years, unless the Employer has otherwise specified in the
Adoption Agreement, there shall be excluded: (a) if this Plan is a continuation
of an earlier plan which would have disregarded such service, Service before the
first Plan Year to which the Act is applicable; (b) Service after a One-Year
Break in Service (but this exclusion shall apply only for the purpose of
computing the vested percentage of Employer Contributions made before such
break); (c) Service before a One-Year Break in Service, if the Participant had
no vested interest at the time of such break and the number of consecutive
One-Year Breaks in Service equals or exceeds the number of Vesting Year before
such break without counting Vesting Years excluded by an earlier application of
this provision; (d) Service before the first Plan Year in which the Participant
attained age 22; (e) Service before the Employer maintained this Plan or a
predecessor plan; and (f) Service before January 1, 1971, unless the Participant
has completed at least 3 Vesting Years after December 31, 1970.
2.47 "Year" shall mean the fiscal year of the Employer.
2.48 "Year of Service" shall mean a 12-consecutive-month period, beginning
on an Employee's initial date of employment or an anniversary thereof during
which the Employee completes the number of Hours of Service specified in the
Adoption Agreement. The initial date of employment is the first day on which the
Employee performs an Hour of Service.
SECTION 3.
ELIGIBILITY
3.1 Entry. Each Employee of the Employer, who on the Effective Date of
this Plan meets the conditions specified in the Adoption Agreement, shall become
eligible to participate in the Plan commencing with the Effective Date. Each
other Employee of the Employer, including future Employees, shall become
eligible to participate in the Plan when the eligibility requirements specified
in the Adoption Agreement are met.
3.2 Interrupted Service. All Years of Service with the Employer are
counted towards eligibility except the following:
(a) If the Employer has specified in the Adoption Agreement that more than
one Year of Service is required before becoming a Participant, and if the
individual has a One-Year Break in Service before satisfying the Plan's
eligibility requirements, Service before such break will not be taken into
account.
(b) In the case of a Participant who does not have any nonforfeitable
right to the Employer Contribution Account, Years of Service before a One-Year
Break in Service will not be taken into account in computing Years of Service
for purposes of eligibility if the number of consecutive One-Year Breaks in
Service equals or exceeds the aggregate number of such Years of Service before
such break. Such aggregate number of Years of Service before such break will not
include any Years of Service disregarded under this Section by reason of a prior
break in service.
3.3 Reentry. If a former Participant either (a) had a nonforfeitable right
to all or a portion of his or her Employer Contribution Account at the time of
termination from Service or (b) did not have any nonforfeitable right to his or
her Employer Contribution Account but does not have Service prior to the break
in Service disregarded by operation of Section 3.2(b) hereof, such former
Participant shall become a Participant immediately upon return to the employ of
the Employer as a member of an eligible class of Employees.
3.4 Transfer to Eligible Class. In the event an Employee who is not a
member of an eligible class of Employees becomes a member of an eligible class,
such Employee shall participate immediately if such Employee has satisfied the
minimum age and Service requirements and would have previously become a
Participant had he or she been a member of an eligible class throughout the
period of employ with the Employer.
3.5 Determination by Administrator. Eligibility shall be determined by the
Administrator and the Administrator shall notify each Employee upon his or her
admission as a Participant in the Plan.
3.6 Related Businesses. If the Employer is a member of (a) a controlled
group of corporations (as defined under Code Section 414(b)), (b) a group of
trades or businesses (whether or not incorporated) which are under common
control (as defined under Code Section 414(c)), or (c) an affiliated service
group (as defined under Code Section 414(m)), all service of an Employee for any
member of such a group shall be treated as if it were Service for the Employer
for purposes of the eligibility requirements of the Adoption Agreement and this
Section 3.
In addition, all service for any individual who is considered a leased
employee of the Employer under Code Section 414(n) shall be treated as if it
were Service for the Employer for purposes of the eligibility requirements of
the Adoption Agreement and this Section 3. However, qualified plan contributions
or benefits provided by the leasing organization which are attributable to
Services performed for the Employer shall be treated as provided by the
Employer. The provisions of this paragraph shall not apply to any leased
employee if such employee is covered by a money purchase pension plan maintained
by the leasing organization providing: (a) a non-integrated employer
contribution rate of at least 7 1/2% of compensation, (b) immediate
participation, and (c) full and immediate vesting. For purposes of this section
3.6, the term "leased employee" means any person who pursuant to an agreement
between the recipient and any other person ("leasing organization") has
performed services for the Employer (or for the Employer and related persons
determined in accordance with Code Section 414(n)(6)) on a substantially
full-time basis for a period of at least 1 year and such services are of a type
historically performed by employees in the business field of the Employer
SECTION 4.
CONTRIBUTIONS
4.1 Employer Contributions and Allocation.
(a) Profit Sharing Plan. If the Employer has adopted this Plan as a profit
sharing plan, the following provisions shall apply:
(i) Contribution. Beginning in the Plan Year in which the Plan is adopted,
and for each Plan Year thereafter, the Employer will contribute the amount
determined by it, in its discretion, for the Plan Year in question; provided,
however, that such Employer Contributions may not exceed the lesser of (A) the
Employer's Current or Accumulated Earnings and Profits for the Plan Year or
(B)15% (or such larger percentage as may be permitted by the Code as a current
deduction to the Employer with respect to any Plan Year) of the total
Compensation (disregarding any exclusion from Compensation specified by the
Employer in the Adoption Agreement) paid to, or accrued by the Employer for,
Participants for that Plan Year plus any unused credit carryovers from previous
Plan Years. For this purpose, a "credit carryover" is the amount by which
Employer Contributions for a previous Plan Year was less than 15% of the total
Compensation (disregarding any exclusion from Compensation specified by the
Employer in the Adoption Agreement) paid or accrued by the Employer to
Participants for such Plan Year, but such unused credit carryover shall in no
event permit the Employer Contributions for a Plan Year to exceed 25% (or such
larger percentage as may be permitted by the Code as a deduction to the
Employer) of the total Compensation (disregarding exclusion from Compensation
specified by the Employer in the Adoption Agreement) paid or accrued by the
Employer to Participants for the Plan Year in question.
(ii) Allocation Under Non-Integrated, Profit Sharing Plan. If the Employer
has adopted this Plan as a profit sharing plan under which allocations shall be
made on a non-integrated basis, Employer Contributions, plus any forfeitures
under Section 7.3, for a Plan Year shall be allocated according to the
provisions of this subsection (ii) as of the Valuation Date for such Plan Year.
Unless the Employer has specified otherwise in the Adoption Agreement, such
amount shall be allocated among the Employer Contribution Accounts of all
Participants and former Participants who were employed by the Employer during
the Plan Year. If the Employer has specified in the Adoption Agreement that a
minimum number of Hours of Service are necessary to share in the allocation of
Employer Contributions and forfeitures for a Plan Year in which the Plan is not
Top Heavy Participants and former Participants, as the case may be, who fail to
complete the required number of Hours of Service during such a Plan Year shall
not share in the allocation. If the Employer has so specified in the Adoption
Agreement Employer Contributions and forfeitures shall be allocated only among
otherwise entitled Participants who are employed by the Employer on such
Valuation Date. Employer Contributions and forfeitures shall be allocated to
Participants entitled to share in the allocation of Employer Contributions and
forfeitures for that Plan Year in proportion to their Compensation for such Plan
Year.
(iii) Allocation Under Integrated, Profit Sharing Plan. If the Employer
has adopted this Plan as a profit sharing plan under which allocations shall be
made on a nonintegrated basis, Employer Contributions, plus any forfeitures
under Section [illegible] for a Plan Year shall be allocated according to the
provisions of this subsection [illegible] as of the Valuation Date for such Plan
Year. Unless the Employer has specified otherwise in the Adoption Agreement,
such amount shall be allocated among all Participants and former Participants
who were employed by the Employer during the Plan Year. If the Employer has
specified in the Adoption Agreement that a minimum number of Hours of Service
are necessary to share in the allocation of Employer Contributions and
forfeitures for a Plan Year in which the Plan is not Top Heavy, Participants and
former Participants, as the case may be, who fail to complete the required
number of Hours of Service during such a Plan Year shall not share in the
allocation. If the Employer has so specified in the Adoption Agreement, Employer
Contributions and forfeitures shall be allocated only among otherwise entitled
Participants who are employed by the Employer on such Valuation Date. Employer
Contributions and forfeitures shall be allocated to Participants
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entitled to share in the allocation of Employer Contributions and forfeitures
for that Plan Year as follows:
(A) First, Employer Contributions and forfeitures will be allocated
to the Employer Contribution Account of each Participant entitled to share
in the allocation of such amounts in the ratio that each such
Participant's Compensation for the Plan Year in excess of the Integration
Level bears to the Compensation in excess of the Integration Level for all
such Participants, provided that the amount so credited to any such
Participant's Employer Contribution Account for the Plan Year shall not
exceed the product of the Integration Rate times the Participant's
Compensation in excess of the Integration Level.
(B) Next, any remaining Employer Contributions or forfeitures will
be allocated to to the Employer Contribution Accounts of all Participants
entitled to Share in the allocation of the Employer Contributions for the
Plan Year in the ratio that each such Participant's Compensation for the
Plan Year bears to all such Participants' Compensation for that Plan Year.
(b) Money Purchase Pension Plan. If the Employer has adopted this Plan as
a money purchase pension plan, the Employer will, beginning for the Plan Year in
which the Plan is adopted, and for each Plan Year thereafter, contribute, for
allocation to the Employer Contribution Account of each Participant entitled to
share in the allocation of Employer Contributions, the amount specified in the
Adoption Agreement reduced by any forfeitures arising during the preceding Plan
Year pursuant to Section 7.3 hereafter.
(i) Employer has specified otherwise in the Adoption Agreement, the
amount of the Employer Contribution shall be calculated on the basis of
the Compensation of all Participants and former Participants who were
employed by the Employer during the Plan Year. If the Employer has
specified in the Adoption Agreement that a minimum number of Hours of
Service are necessary to receive an Employer Contribution in a Plan Year
in which the Plan is not Top Heavy, Participants and former Participants,
as the case may be, who fail to complete the required number of Hours of
Service during such a Plan Year shall not be considered when calculating
the amount of the Employer Contribution. If the Employer has so specified
in the Adoption Agreement, only Participants who are employed by the
Employer on such Valuation Date and who are otherwise entitled to receive
an allocation shall be considered when calculating the amount of the
Employer Contribution. Employer Contributions shall be allocated to the
Employer Contribution Accounts of only those Participants who were
included in the calculation of the amount of the Employer Contribution.
(ii) To the extent that the Employer Contribution for a Plan Year is
reduced by forfeitures, such forfeitures shall be added to such Employer
Contribution and allocated as a part thereof.
(iii) Any excess forfeitures not allocated pursuant to this Section
4.1(b) shall be carried over to future Plan Years.
4.2 Participant Contributions. If, in the Adoption Agreement, the Employer
has specified that Participants may make either Deductible Voluntary
Contributions or Nondeductible Voluntary Contributions, or both, a Participant
may make such permitted contributions to his or her Account; provided, however,
that a Participant's right to make such contribution(s) shall be subject to the
conditions and limitations specified below.
(a) The following conditions and limitations shall apply if the Employer
has specified that Participants may make Nondeductible Voluntary Contributions:
(i) The aggregate amount of a Participant's Nondeductible Voluntary
Contributions, plus any nondeductible voluntary contributions he or she
makes under any other qualified retirement plan maintained by the
Employer, shall not exceed 10% of his or her Compensation (disregarding
any exclusions from Compensation specified by the Employer in the Adoption
Agreement) for the period in which he or she has been a Participant in the
Plan.
(ii) The aggregate amount of a Participant's Nondeductible Voluntary
Contributions shall not cause the Annual Addition (as defined in Section
5.5(a) hereof) to his or her Account to exceed the limitations set forth
in Section 5.
(iii) A Participant's Nondeductible Voluntary Contributions shall he
allocated to his or her Nondeductible Voluntary Contribution Account under
Section 6.3 hereof.
(iv) A Participant's right to his or her Nondeductible Voluntary
Contribution Account shall be nonforfeitable and the Participant may
withdraw all or a portion of his or her Nondeductible Voluntary
Contribution Account upon 30 days written notice to the Administrator.
(b) The following conditions and limitations shall apply if the Employer
has specified that Participants may make Deductible Voluntary Contributions:
(i) The aggregate amount of a Participant's Deductible Voluntary
Contributions in any calendar year may not exceed the lesser of (1) $2,000
or (2) the Participant's compensation for calendar year for which the
contribution is made. Compensation for this purpose means all wages,
salaries, earned income and other amounts received or derived from
personal services actually rendered and includible in gross income, but
does not include amounts derived from or received as earnings or profits
from property or amounts received as a pension or annuity or as deferred
compensation. This limitation applies to all the Participants' Deductible
Voluntary Contributions made for the calendar year to all qualified
retirement plans maintained by the Employer.
(ii) A Participant may not make Deductible Voluntary Contributions
for the calendar year in which he or she attains age 70 1/2 or any
calendar year thereafter.
(iii) A Deductible Voluntary Contribution will be considered
contributed for the calendar year in which it is actually made. However,
if a Participant makes a Deductible Voluntary Contribution on or before
April 15, he or she may notify the Administrator at the time the
Deductible Voluntary Contribution is made that it is made for the
preceding calendar year. A Deductible Voluntary Contribution may only be
made for a calendar year in which the Employee was a Participant, and in
no event may a Deductible Voluntary Contribution be made by an Employee
after he or she has ceased to be a Participant.
(iv) A Participant's Deductible Voluntary Contributions shall be
allocated to his or her Deductible Voluntary Contribution Account under
Section 6.3 hereof.
(v) A Participant's right to his or her Deductible Voluntary
Contribution Account shall be nonforfeitable and the Participant may
withdraw all or a portion of his or her Deductible Voluntary Contribution
Account upon written application to the Administrator. However, if at the
time the Participant receives the withdrawal, he or she has not attained
age 59 1/2 and is not disabled, the Participant will be subject to a
federal income tax penalty unless he or she rolls aver the amount
withdrawn to a qualified retirement plan or individual retirement plan
within 60 days of the date he or she receives it.
(vi) The Administrator may, in its discretion, accept accumulated
deductible employee contributions (as defined in Code Section 72(o)(5))
that were distributed from a qualified retirement plan and rolled over
pursuant to Code Sections 402(a)(5), 402(a)(7), 403(a)(4), or 408(d)(3).
The rolled over amount will be added to the Participant's Deductible
Voluntary Contribution Account, but will not be taken into account in
applying the restrictions specified in Section 4.2(b) (i) and (ii) above.
In no case may the Administrator authorize the Plan to accept rollovers of
accumulated deductible employee contributions from a qualified plan under
which the Participant was covered as a Self-Employed Individual.
4.3 Rollover Contributions. The Administrator may, in its discretion,
direct the Trustee to accept a Rollover Contribution upon the express request of
the Participant wishing to make such Rollover Contribution, the same to he held,
administered and distributed by the Trustee in accordance with the terms of this
Plan, provided that the Trustee consents if the contribution includes property
other than cash. A Rollover Contribution shall only be a contribution, comprised
of money and/or property, which is a "rollover amount" within the meaning of
Code Section 402(a)(5) or a "rollover contribution" within the meaning of Code
Section 408(d)(3)(A)(ii) (as modified by Code Section 408(d)(3)(C)) with respect
to which both of the following conditions are met:
(a) The transfer of such amount is being made within 60 days of its
receipt by the Participant and
(b) No part of such amount is attributable to contributions made on behalf
of the Participant while he or she was a Key Employee (as defined in Section
21.2(a) and applied to such other employer) in a Top-Heavy Plan (as defined in
Section 21.2(b) and applied to such other plan).
All Rollover Contributions made under this Section 4.3 must be accepted by
the Trustee within the 60-day period referred to in paragraph (a) above. A
Participant's Rollover Contribution shall at no time be included in the
computation of the maximum allocation to a Participant's Account as set forth in
Section5 hereof. Each Rollover Contribution made by a Participant shall be
allocated to his or her Rollover Account pursuant to Section 6.3(d) hereof. Such
Rollover Account shall be invested by the Trustee as part of the Trust Fund,
pursuant to Section 11 hereafter, except as it may be held in kind as permitted
above. A Participant may withdraw all or a portion of his or her Rollover
Account upon 30 days' written notice to the Administrator.
4.4 Transfers from other Qualified Plans. The Administrator may, in its
discretion, direct the Trustee to accept the transfer of any assets held for a
Participant's benefit under a qualified retirement plan of a former employer of
such Participant. Such a transfer shall be made directly between the trustee or
custodian of the former employer's plan and the Trustee in the form of cash or
its equivalent, and shall be accompanied by written instruction showing
separately the portion of the transfer attributable to contributions by the
former employer and by the Participant respectively. To the extent that the
amount transferred is attributable to contributions by the former employer, it
shall be maintained in a Participant's Rollover Account. To the extent that the
amount transferred is attributable to contributions by the Participant, it shall
be maintained in the Participant's Nondeductible Voluntary Contribution Account
or Deductible Voluntary Contribution Account as is appropriate.
SECTION 5
CODE SECTION 415 LIMITATIONS ON ALLOCATIONS
5.1 Employers Maintaining No Other Plan.
(a) If a Participant does not participate in, and has never participated
in another qualified plan maintained by the Employer, the amount of the Annual
Addition which may be credited to the Participant's Account for any Limitation
Year shall not exceed the lesser of the Maximum Permissible Amount or any other
limitation contained in the Plan.
(b) If the Employer Contribution that would otherwise be allocated to a
Participant's Account would cause the Annual Addition for the Limitation Year to
exceed the Maximum Permissible Amount, the amount allocated will be reduced so
that any Excess Amount shall be eliminated and, consequently, the Annual
Addition for the Limitation Year will equal the Maximum Permissible Amount.
(c) Any Excess Amount shall be eliminated pursuant to the follow
procedure:
(i) The portion of the Excess Amount consisting of Nondeductible
Voluntary Contributions which are a part of the Annual Addition (as
defined in Section 5.5(a)) shall be returned to the Participant as soon as
administratively feasible;
(ii) If after the application of subparagraph (i) an Excess Amount
still exists and the Participant is covered by the Plan at the end of the
Limitation Year, the Excess Amount in the Participant's Account will be
used to reduce Employer Contributions (including any allocation of
forfeitures) for such Participant in the next Limitation Year, and each
succeeding Limitation Year if necessary;
(iii) If after the application of subparagraph (i) an Excess Amount
still exists and the Participant is not covered by the Plan at the end of
the Limitation Year, the Excess Amount will be held unallocated in a
suspense account. The
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suspense account will be applied to reduce proportionately future Employer
Contributions (including any allocation of forfeitures) for all remaining
Participants in the next Limitation Year, and each succeeding Limitation
Year, if necessary. If a suspense account is in existence at any time
during the Limitation Year pursuant to this subparagraph, it will not
participate in the allocation of the Trust's investment gains and losses.
In the event of termination of the Plan, the suspense account shall revert
to the Employer to the extent it may not then be allocated to any
Participant's Account.
(d) Notwithstanding any other provision in subsections (a) through (c),
the Employer shall not contribute any amount that would cause an allocation to
the suspense account as of the date the contribution is allocated.
5.2 Employers Maintaining Other Master or Prototype Defined Contribution
Plans.
(a) This Section applies if, in addition to this Plan, a Participant is
covered under another qualified Master or Prototype defined contribution plan
maintained by the Employer during any Limitation Year. The Annual Addition which
may be allocated to any Participant's Account for any such Limitation Year shall
not exceed the Maximum Permissible Amount, reduced by the sum of any portion of
the Annual Addition credited to the Participant's account under other such plans
for the same Limitation Year.
(b) If the Annual Addition with respect to a Participant under other
defined contribution plans maintained by the Employer of what would be portions
of the Annual Addition (if the allocations were made under the Plan) are less
than the Maximum Permissible Amount and the Employer Contribution that would
otherwise be contributed or allocated to the Participant's Account under this
Plan would cause the Annual Addition for the Limitation Year to exceed this
limitation, the amount contributed or allocated will be reduced so that the
Annual Addition under all such plans for the Limitation Year will equal the
Maximum Permissible Amount.
(c) If the Annual Addition with respect to the Participant under such
other defined contribution plans in the aggregate are equal to or greater than
the Maximum Permissible Amount, no amount will be contributed or allocated to
the Participant's Account under this Plan for the Limitation Year.
(d) If an Excess Amount was allocated to a Participant under this Plan on
a date which coincides with the date an allocation was made under another plan,
the Excess Amount attributed to this Plan will be the product of,
(i) the total Excess Amount allocated as of such date, multiplied by
(ii) the quotient obtained by dividing
(A) the portion of the Annual Addition allocated to the
Participant for the Limitation Year as of such date by
(B) the total would-be and actual Annual Addition allocations
to the Participant for the Limitation Year as of such date under
this and all the other qualified Master or Prototype defined
contribution plans maintained by the Employer.
(e) Any Excess Amount attributed to the Plan will be disposed in the
manner described in Section 5.1.
5.3 Employers Maintaining Other Defined Contribution Plans. If a
Participant is covered under another qualified defined contribution plan which
is not a Master or Prototype plan, the Annual Addition credited to the
Participant's Account under this Plan for any Limitation Year will be limited in
accordance with the provisions of Section 5.2 as though the plan were a Master
or Prototype Plan, unless the Employer provides other limitations pursuant to
the Adoption Agreement.
5.4 Employers Maintaining Defined Benefit Plans. If the Employer
maintains, or at any time maintained, a qualified defined benefit plan covering
any Participant in this Plan, the sum of the Participant's Defined Benefit Plan
Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any
Limitation Year. The Annual Addition which may be credited to the Participant's
Account under this Plan for any Limitation Year will be limited in accordance
with the provisions of Section 5.2 unless the Employer provides other
limitations pursuant to the Adoption Agreement.
5.5 Definitions. For purposes of this Section 5, the following terms shall
be defined as follows:
(a) Annual Addition. With respect to any Participant, the "Annual
Addition" shall be the sum of the following amounts credited to a Participant's
Account for the Limitation Year:
(i) Employer Contributions;
(ii) forfeitures; and
(iii) the lesser of
(A) one-half (1/2) the allocated Nondeductible Voluntary
Contributions or
(B) the amount of allocated Nondeductible Voluntary
Contributions in excess of 6% the Participant's Compensation for the
Limitation Year.
Any Excess Amount applied under subparagraphs (ii) or (iii) of subsection (c) of
Section 5.1 or subsection (e) of Section 5.2 in a Limitation Year to reduce
Employer Contributions will be considered part of the Annual Addition for such
Limitation Year.
(b) Compensation. For the purposes of this Section 5, a Participant's
"Compensation" shall include any earned income, wages, salaries and fees for
professional services and other amounts received for personal services actually
rendered in the course of employment with the Employer maintaining the Plan
(including, but not limited to commissions paid salesmen, compensation for
services on the basis of a percentage of profits, commissions on insurance
premiums, tips and bonuses), and excluding the following:
(i) Employer contributions to a plan of deferred compensation which
are not includible in the Participant's gross income for the taxable year
in which contributed, or Employer contributions under a simplified
employee pension plan to the extent such contributions are deductible by
the Participant, or any distributions from a plan of deferred
compensation;
(ii) Amounts realized from the exercise of a nonqualified stock
option, or when restricted property held by the Participant either becomes
freely transferable or is no longer subject to a substantial risk of
forfeiture;
(iii) Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option; and
(iv) other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity described in Code
Section 403(b) (whether or not the amounts are actually excludable from
the gross income of the Participant).
For purposes of applying the limitations of this Section 5, Compensation
for a Limitation Year is the Compensation actually paid or includible in gross
income during such year.
Notwithstanding the preceding sentence, Compensation for a Participant who
is permanently and totally disabled (as defined in Code Section 37(e)(3)) is the
Compensation such Participant would have received for the Limitation Year if the
Participant was paid at the rate of Compensation paid immediately before
becoming permanently and totally disabled; such imputed compensation for the
disabled Participant may be taken into account only if the Participant is not an
officer, an owner, or highly compensated, and contributions made on behalf of
such a Participant are nonforfeitable when made.
(c) Defined Benefit Fraction. The "Defined Benefit Fraction" shall be a
fraction, the numerator of which is the sum of the Participant's Projected
Annual Benefits under all the defined benefit plans (whether or not terminated)
maintained by the Employer, and the denominator of which is the lesser of 125%
of the dollar limitation in effect for the Limitation Year under Code Section
415(b)(1)(A) or 140% of the Participant's Highest Average Compensation.
Notwithstanding the above, if the Participant was a participant in one or
more defined benefit plans maintained by the Employer which were in existence on
July 1, 1982, the denominator of this fraction will not be less than 125% of the
sum of the annual benefits under such plans which the Participant had accrued as
of the later of the end of the last Limitation Year beginning before January 1,
1983. The preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of Code Section 415
as in effect at the end of the 1982 Limitation Year. For purposes of this
paragraph, a Master or Prototype plan with an opinion letter issued before
January 1, 1983, which was adopted by the Employer on or before June 30, 1983,
is treated as a plan in existence on July 1, 1982.
(d) Defined Contribution Fraction. The "Defined Contribution Fraction"
shall be a fraction, the numerator of which is the sum of the Annual Additions
to the Participant's account under all the defined contribution plans (whether
or not terminated) maintained by the Employer for the current and all prior
Limitation Years, (including the Annual Additions attributable to the
Participant's nondeductible employee contributions to all defined benefit plans,
whether or not terminated, maintained by the Employer), and the denominator of
which is the sum of the Maximum Aggregate Amounts for the current and all prior
Limitation Years of service with the Employer (regardless of whether a defined
contribution plan was maintained by the Employer). The Maximum Aggregate Amount
in any Limitation Year is the lesser of 125% of the dollar limitation in effect
under Code Section 415(c)(1)(A) or 35% of the Participant's Compensation for
such year.
If the Participant was a participant in one or more defined contribution
plans maintained by the Employer which were in existence on July 1, l982, the
numerator of this fraction will be adjusted if the sum of this Defined
Contribution Fraction and the Defined Benefit Fraction would otherwise exceed
1.0 under the terms of this Plan. Under the adjustment, an amount equal to the
product of
(i) the excess of the sum of the fractions over 1.0, multiplied by
(ii) the denominator of this Defined Contribution Fraction will be
permanently subtracted from the numerator of this fraction. The adjustment
is calculated using the fractions as they would be computed as of the
later of the end of the last Limitation Year beginning before January 1,
1983 or September 30, 1983. This adjustment also will be made if at the
end of the last Limitation Year beginning before January 1, 1984, the sum
of the fractions exceeds 1.0 because of accruals or additions that were
made before the limitations of this Section 5 became effective to any
plans of the Employer in existence on July 1, 1982. For purposes of this
paragraph, a Master or Prototype plan with an opinion letter issued before
January 1, 1983, which is adopted by the Employer on or before September
30, 1983, is treated as a plan in existence on July 1, 1982.
(e) Employer. "Employer" means the Employer that adopts this Plan and all
members of (i) a controlled group of corporations (as defined in Code Section
414(b) as modified by Code Section 415(h)), (ii) commonly controlled trades or
businesses (whether or not incorporated) (as defined in Code Section 414(c) as
modified by Code Section 415(h)), or (iii) affiliated service groups (as defined
in Code Section 414(m)) of which the Employer is a part.
(f) Excess Amount. The "Excess Amount" is the excess of what would
otherwise be a Participant's Annual Addition for the Limitation Year over the
Maximum Permissible Amount. If at the end of a Limitation Year when the Maximum
Permissible Amount is determined on the basis of the Participant's actual
Compensation for the year, an Excess Amount results, the Excess Amount will be
deemed to consist of the portion of the Annual Addition last allocated.
(g) Highest Average Compensation. A Participant's "Highest Average
Compensation" is his or her average Compensation for the 3 consecutive Years of
Service with the Employer that produces the highest average. A Year of Service
with the Employer is the 12-consecutive-month period defined in the Adoption
Agreement.
(h) Limitation Year. A Limitation Year is the Plan Year or any other
12-consecutive-month period specified by the Employer in the Adoption Agreement.
All qualified plans maintained by the Employer must use the same Limitation
Year. If the Limitation Year is amended to a different 12-consecutive-month
period the new Limitation Year must begin on a date within the Limitation Year
in which the amendment is made.
(i) Master or Prototype Plan. A "Master or Prototype" plan is a plan the
form of which is the subject of a favorable opinion letter from the Internal
Revenue Service.
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(j) Maximum Permissible Amount. For a Limitation Year, the "Maximum
Permissible Amount" with respect to any Participant shall be the lesser of
(i) $30,000 (or beginning January 1, 1986, such larger amount
determined by the Commissioner of Internal Revenue for the Limitation
Year) or
(ii) 25% of the Participant's Compensation for the Limitation Year.
If a short Limitation Year is created because of an amendment changing the
Limitation Year to a different 12-consecutive-month period, the Maximum
Permissible Amount will not exceed the quotient determined by first
multiplying $30,000 by the number of months in the short Limitation Year
and then dividing the product by 12. Prior to determining the
Participant's actual Compensation for the Limitation Year, the Employer
may determine the Maximum Permissible Amount for a Participant on the
basis of a reasonable estimation of the Participant's Compensation for the
Limitation Year, uniformly determined for all Participants similarly
situated. As soon as is administratively feasible after the end of each
Limitation Year, the Maximum Permissible Amount for the Limitation Year
will be determined on the basis of Participants' actual Compensation for
the Limitation Year.
(k) Projected Annual Benefit. The "Projected Annual Benefit" is the annual
retirement benefit (adjusted to an actuarially equivalent straight life annuity
if such benefit is expressed in a form other than a straight life annuity or
qualified joint and survivor annuity) to which the Participant would be entitled
under the terms of the plan assuming:
(i) the Participant will continue employment until normal retirement
date under the plan (or current age, if later), and
(ii) the Participant's compensation for the current Limitation Year
and all other relevant factors used to determine benefits under the plan
will remain constant for all future Limitation Years.
SECTION 6.
TIME AND MANNER OF MAKING CONTRIBUTIONS
6.1 Manner. Unless otherwise agreed to by the Trustee, contributions to
said Trustee shall be made only in cash. All contributions may be made in one or
more installments.
6.2 Time. Employer Contributions and Participant Contributions with
respect to a Plan Year shall be made before the time limit, including extensions
thereof, for filing the Employer's federal income tax returns for the Year with
or within which the particular Plan Year ends (or such later time as is
permitted by regulations authorized by the Secretary of the Treasury or
delegate). Rollover Contributions may be made at any time acceptable to the
Administrator in accordance with Section 4.3 hereof. All contributions shall be
paid to the Administrator for transfer to the Trustee, as soon as possible, or,
if acceptable to the Administrator and the Trustee, such contributions may be
paid directly to the Trustee. The Administrator shall transfer such
contributions to the Trustee as soon as possible. The Administrator may
establish a payroll deduction system or other procedure to assist the making of
Participant Contributions to the Trust, and the Administrator may from time to
time adopt rules or policies governing the manner in which such contributions
may be made so that the Plan may be conveniently administered.
6.3 Separate Accounts. For each Participant, a separate account shall be
maintained for each of the following types of contributions and the income,
expenses, gains and losses attributable thereto:
(a) Employer Contributions;
(b) Nondeductible Voluntary Contributions, if selected in the Adoption
Agreement;
(c) Deductible Voluntary Contributions, if selected in the Adoption
Agreement; and
(d) Rollover Contributions, if the Administrator accepts such
contributions pursuant to Section 4.3 hereof.
Notwithstanding the above, if a Participant's rights to Employer Contributions
are immediately and fully nonforfeitable, Employer Contributions allocated on
behalf of such Participant and his or her Nondeductible Voluntary Contributions
may be maintained in a single account.
SECTION 7.
VESTING
7.1 When Vested. A Participant's interest in his or her Nondeductible
Voluntary Contribution Account, Deductible Voluntary Contribution Account and
Rollover Account shall always be fully vested and nonforfeitable. A
Participant's interest in his or her Employer Contribution Account shall be
vested and nonforfeitable at Normal Retirement Date, death, Disability, upon
termination (including a complete discontinuance of Employer Contributions) or
partial termination of the Plan and otherwise only to the extent specified in
the Adoption Agreement.
7.2 Amendment of Vesting Schedule. If the Adoption Agreement has been
executed as an amendment to an existing plan, Participants with 5 or more
Vesting Years before the expiration of the election period described in the next
sentence shall have the right to elect the vesting schedule in effect on the day
before the election period. The election period shall commence on the date the
amendment is adopted and end on the latest of (a) 60 days after the amendment is
adopted, (b) 60 days after the Effective Date, or (c) 60 days after the
Participant is issued written notice of the amendment by the Administrator.
Failure to so elect shall be treated as a rejection and such election or
rejection shall be final.
7.3 Forfeitures. If a Participant's employment with the Employer is
terminated before his or her Employer Contribution Account is fully vested in
accordance with Section 7.1 hereof, the portion of the Employer Contribution
Account which is not vested shall be held in suspense until the Participant
becomes reemployed, dies, becomes disabled or completes a One-Year Break in
Service, whichever occurs first. If the Participant is reemployed, dies or
becomes disabled before a One-Year Break in Service, the amount held in suspense
shall be restored to the Employer Contribution Account. If the Participant is
reemployed by the Employer before a One-Year Break in Service and thereafter has
a One-Year Break in Service before the Employer Contribution Account has become
fully vested, the portion of the Employer Contribution Account which is then
vested shall be determined by adding to the then value of the Employer
Contribution Account, the amount, if any, previously distributed, applying the
vesting percentage then applicable, and then subtracting the amount previously
distributed. If a One-Year Break occurs before reemployment with the Employer,
death or Disability, the portion of the Participant's Employer Contribution
Account held in suspense shall be forfeited and (a) if this Plan is adopted as a
profit sharing plan, allocated as of the next Valuation Date in the same manner,
and to the same Participant's Employer Contribution Accounts as the Employer
Contribution for that Plan Year is allocated pursuant to Section 4.1 hereof, or
(b) if this Plan is adopted as a money purchase pension plan, applied to reduce
the Employer Contributions for the next Plan Year.
SECTION 8.
DISTRIBUTION UPON DEATH
8.1 Distribution to Beneficiary. If a Participant's employment terminates
because of death, the Trustee shall, upon the direction of the Administrator,
distribute the Participant's Account or the undistributed remainder thereof, as
the case may be, in accordance with the provisions of Section 8.2, to the
Beneficiary or Beneficiaries validly named in the most recent Designation of
Beneficiary form filed by the Participant with the Trustee before death in
compliance with Section 15. The Administrator's direction shall include
notification of the Participant's death, the identity of the Beneficiary or
Beneficiaries so named, and the appropriate manner of distribution.
8.2 Manner of Distribution. A distribution made under this Section 8 shall
be made in such manner as the Participant shall in his or her most recent
Designation of Beneficiary have validly elected. In the absence of such an
election, such distribution shall be made in such manner as the Participant's
Beneficiary (or Beneficiaries) may elect, or in the absence of such an election,
in such manner as the Administrator shall determine. If a Participant dies
before benefits commence and the surviving spouse is not the Beneficiary, the
Participant's entire Account balance must be distributed to the Participant's
Beneficiary within 5 years. However, if distributions have commenced to the
Participant before the Participant's death, distributions to the Participant's
surviving spouse, Beneficiary or estate may continue over the period selected by
the Participant.
SECTION 9.
OTHER DISTRIBUTIONS
9.1 Normal Distribution. The Account of any Participant, to the extent
vested pursuant to Section 7.1 hereof, will normally be distributed in monthly
installments which must commence at or within 60 days after the end of the Plan
Year in which occurs his or her Normal Retirement Date or in which his or her
Employment ceases, whichever is later, to continue over a period of 120 months;
provided, however, that in the case of a Participant who is a Key Employee (as
defined in Section 21.2 hereafter), monthly installments to such a Participant
must commence no later than the last day of the Participant's taxable year in
which such Participant attains age 70 1/2, but only if this Plan is Top-Heavy
(as defined in Section 21.2 hereafter). The monthly amount shall normally be the
vested balance of the Participant's Account divided by the remaining number of
months in such 120 months, all rounded to the nearest cent. However, the amount
of each monthly installment may be recomputed and adjusted from time to time no
more frequently than monthly as the Trustee may reasonably determine.
9.2 Optional Distribution. All Participants may request the Administrator
to approve, in its sole discretion, any of the following variations from the
normal pattern of distribution:
(a) Distribution made or commencing before the Participant's Normal
Retirement Date.
(b) Distributions made or commencing after the normal time of distribution
described in Section 9.1; provided, however, that any such deferred distribution
must commence no later than the last day of the Participant's taxable year in
which the Participant attains age 70 1/2.
(c) Distribution of the Participant's entire Account at one time.
(d) Installment payments of a fixed amount, such payments to be made until
exhaustion of the Participant's Account.
(e) Distribution in kind.
(f) Any reasonable combination of the foregoing or any reasonable time or
manner of distribution within the above stated limitations.
Notwithstanding the above, if this Plan is adopted as an integrated profit
sharing plan, such distribution may not commence before termination of Service.
Furthermore, the minimum distribution to be made each calendar year shall be the
amount equal to the quotient obtained by dividing the Participant's Account
balance at the beginning of the year by the greater of the life expectancy of
the Participant or the joint life and last survivor expectancy of the
Participant and spouse. For purposes of this minimum distribution rule, life
expectancy and joint life and last survivor expectancy shall be determined as of
the date the Participant attained age 70, reduced by one for each calendar year
commencing after the Participant's attainment of age 70 1/2. In the case of a
Participant who becomes a Key Employee (as defined in Section 21.2 hereafter)
after age 70 1/2 but before termination of Employment, and if this Plan is
Top-Heavy (as defined in Section 21.2 hereafter), such Participant must begin to
receive distribution of his or her Account by the end of the calendar year in
which Participant becomes such a Key Employee.
9.3 Special One-Time Distribution Election. Notwithstanding any Plan
provision to the contrary, distribution on behalf of any Employee, including a
Key Employee (as defined in Section 21.2(a) below) in a Plan Year in which this
Plan is Top-Heavy, may be made in accordance with the following requirements
(regardless of when such distribution commences):
(a) The distribution is one which would not have disqualified the Plan
under Code Section 401(a)(9) as it was in effect prior to its amendment by the
Tax Equity
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and Fiscal Responsibility Act Of 1982.
(b) The distribution is in accordance with a method of distribution
designated by the Participant whose interest in the Plan is being distributed
or, if the Participant has died, by a beneficiary of such Participant.
(c) Such designation was in writing, was signed by the Participant or the
beneficiary, and was made before January 1, 1984.
(d) The Participant had accrued a benefit under the Plan as of December
31, 1983.
(e) The method of distribution designated by the Participant or the
beneficiary specifies the time at which distribution will commence, the period
over which distributions will be made, and in the case of any distribution upon
the Participant's death, the Beneficiaries of the Participant are listed in
order of priority. A distribution upon death will not be covered by this Section
9.3 unless the information in the designation contains the required information
described above with respect to the distributions to be made upon the death of
the Participant.
For any distribution which commences before January 1, 1984, but continues
after December 31, 1983, the Participant, or the Beneficiary, to whom such
distribution is being made, will be presumed to have designated the method of
distribution under which the distribution is being made if the method of
distribution was specified in writing and the distribution satisfies the
requirement in subsection (a) above.
If a designation is revoked, any subsequent distribution must satisfy the
requirements of Code Section 401(a)(9) as amended by the Tax Equity and Fiscal
Responsibility Act of 1982. Any changes in the designation will be considered to
be a revocation of the designation. However, the mere substitution or addition
of another Beneficiary (one not named in the designation) under the designation
will not be considered to be a revocation of the designation, so long as such
substitution or addition does not alter the period over which distributions are
to be made under the designation, directly or indirectly (for example, by
altering the relevant measuring life).
SECTION 10.
LOANS
10.1 Availability of Loans. If, in the Adoption Agreement, the Employer
has specified that loans to Participants are permitted, the Loan Trustee shall,
upon the direction of the Administrator, make one or more loans, including any
renewal thereof, to a Participant (other than a Participant who is an
Owner-Employee). Any such loan shall be subject to such terms and conditions as
the Administrator shall determine pursuant to a uniform policy adopted by the
Administrator for this purpose, which policy shall be at least as restrictive as
required by this Section 10.
10.2 Equivalent Basis. No such loan may be made to a disqualified Person
within the meaning of Code Section 4975(e), unless such loans are available to
all Participants on a reasonably equivalent basis and are not made available to
officers, shareholders or highly paid Participants in an amount which, when
stated as a percentage of such Participant's Account, is greater than is
available to other Participants.
10.3 Limitation on Amount. The amount of any such loan, when added to the
outstanding balance of all other loans from the Plan (and any other qualified
retirement plans of the Employer's) to the Participant, shall not exceed the
following:
Participant's Vested Maximum Amount
Account Balance of Loan
- ---------------------- -------------------------------
$0-$10,000 100% of vested Account balance
$10,000-$20,000 $10,000
$20,000-$100,000 50% of vested Account balance
over $100,000 $50,000
The value of the Participant's Account balance shall be as determined by the
Administrator; provided, however, that such determination shall in no event take
into account the portion of the Participant's Account attributable to the
Participant's Deductible Voluntary Contribution Account.
10.4 Maximum Term. The term of any such loan shall not exceed 5 years:
provided, however, that such limitation shall not apply to any loan used to
acquire, construct, reconstruct, or substantially rehabilitate any dwelling unit
which within a reasonable time is to be used (determined at the time the loan is
made) as a principal residence of the Participant or a member of the
Participant's family (within the meaning of Code Section 267(c)(4)).
10.5 Promissory Note. Any such loan shall be evidenced by a promissory
note executed by the Participant and payable to the Loan Trustee, on the
earliest of (i) a fixed maturity date meeting the requirements of Section 10.4
above, but in no event later than the Participant's Normal Retirement Date,
(ii) the Participant's death, or (iii) when distribution hereunder is to be
made to the Participant (other than a withdrawal which will not reduce the value
of his or her Account to the extent that the aggregate amount owing could not be
made as a new loan within the limitation set forth in Section 10.3 above). Such
promissory note shall be secured by an assignment of the Participant' Account to
the Loan Trustee. Such promissory note shall evidence such terms as are required
by this Section 10.
10.6 Interest. Any such loan shall be subject to a reasonable rate of
interest.
10.7 Repayment. If a note is not paid when the Participant's benefits
hereunder are to be distributed, then any unpaid portion of such loan and unpaid
interest thereon shall be deducted by the Loan Trustee from the Participant's
Account before benefits are paid from or purchased out of the Account. Such
deduction shall, to the extent thereof, cancel the indebtedness of the
Participant. If a note is not paid when it otherwise becomes payable under
Section 10.5, or if at any time the Administrator determines that the aggregate
amounts owing by a Participant upon such notes exceed the vested value of the
Participant's Account, the Participant shall be promptly notified in writing
that unless such loan or excess is repaid within 30 days, action will be taken
to collect the same plus any cost of collections.
10.8 Accounting. Loans shall be made only from the Account of the
Participant (exclusive of that portion of the Account attributable to the
Participant's Deductible Voluntary Contribution Account) requesting the loan,
and shall be treated as an investment of such Account. All interest payments
made with respect to such loan shall be credited to the Participant's Account.
10.9 Precedence. This Section 10 overrides Section 16 below.
SECTION 11.
TRUST PROVISIONS
11.1 Manner of Investment. All contributions to the Account of a
Participant shall be held in trust by the Trustee designated in the Adoption
Agreement. Except to the extent that a Participant's Account is invested in a
loan pursuant to Section 10 hereof, the Account of a Participant may only be
invested and reinvested in shares of Designated Investment Companies, unless the
Distributor permits less than 100% of the Trust assets to be so invested. If the
Administrator or the Participant, as the case may be, has elected to have a
portion of an Account invested in other than shares of Designated Investment
Companies and the Distributor has authorized the investment of less than 100% of
Trust assets in such shares, the Trustee shall invest such amount in such
investments as it is empowered to invest in under Section 11.3 hereof. The
Designated Investment Companies available for investment may be limited by the
Employer. Investment in the shares of more than one Designated Investment
Company is not permitted unless the value of the Participant's Account and the
value of the investment in each additional Designated Investment Company exceed
amounts from time to time determined by the Distributor.
11.2 Investment Decision.
(a) The decision as to the investment of an Account shall be made by the
person designated in the Adoption Agreement, and the Trustee shall have no
responsibility for determining how an Account is to be invested or to see that
investment directions communicated to it comply with the terms of the Plan. If
the decision is made by the Participant, the Participant shall convey investment
instructions to the Administrator and the Administrator shall promptly transmit
those instructions to the Trustee. Further, if the decision is to be made by the
Participant, the right to make such a decision shall remain with the Participant
upon retirement and shall pass to the Distributee upon death.
(b) The person designated to make the decision as to the investment of an
Account may direct that the investment medium of an Account be changed, provided
that no such change may be made from or to an investment other than a Designated
Investment Company except to the extent permitted under Section 11.1 above and
by the terms of that other investment vehicle. If the Distributor determines in
its own judgment that there has been trading of shares of Designated Investment
Companies in the Accounts of the Participants, any Designated Investment Company
may refuse to sell its shares to such Accounts. When an investment is being made
or changed, the person designated to do so shall specify the type of Account to
which the change refers.
(c) If any decision as to investments is to be made by the Administrator,
it shall be made on a uniform basis with respect to all Participants.
(d) The Administrator and the Trustee may adopt procedures permitting
Participants to convey their investment instructions directly to the Trustee or
to the transfer agent for the Designated Investment Company or Companies or for
any other investment permitted by the Distributor.
(e) Whenever a Participant is the person designated to make the decision
as to the investment of an Account, the Administrator shall ascertain that the
Participant has received a copy of the current prospectus relating to the shares
of any Designated Investment Company in which such Account is to be invested
plus, where required by any state or federal law, the current prospectus
relating to any other investment in which the Account is to be invested. With
respect to contributions designated for investment by a Participant, by
remitting such a contribution to the Trustee, the Administrator shall be deemed
to warrant to the Trustee that the Participant has received all such
prospectuses. By remitting any other contribution to the Trustee, the
Administrator shall be deemed to warrant to the Trustee that the Administrator
has received a current prospectus of any Designated Investment Company in which
the contribution is to be invested, plus, where required by any state or federal
law, the current prospectus relating to any other investment in which
contributions are to be invested.
11.3 Investment Powers. To the extent that a portion of the Trust assets
are invested other than in shares of Designated Investment Companies pursuant to
Section 11.1 above, the Trustee is hereby granted full power and authority to
invest and reinvest the Trust assets in any property of any kind or nature
whatsoever (speculative or otherwise) or in any rights or interests therein, or
in any evidences or indicia thereof and whether real, personal or mixed, or
whether tangible or intangible (including for illustration but not to be limited
to the following or anything of a similar kind, character or class common or
preferred stocks evidences or ownership in so-called Massachusetts business
trusts, fees, beneficial interests, leaseholds, bonds, mortgages, leases, notes
or obligations, oil and gas payments, oil and gas contracts and other
securities, instruments or commodities without regard to any rule of law or
statute of the state of the Trustee designating investments eligible for trust
funds, and without respect to any custom or practice either as to types of
investments or diversification of investments and [Illegible] cash uninvested at
any time and from time to time in such amounts to such extent as the Trustee in
its own uncontrolled discretion and judgment deems advisable; provided, however,
that the Trustee is to act with the care, skill and diligence, under the
circumstances then prevailing, which would characterize the actions of a prudent
man who is acting as such a Trustee and who is familiar with the duties of such
a Trustee; further provided that the Trustee shall diversify the investments of
the Trust Fund so as to minimize the risk of large losses unless under the
circumstances, such diversification would not be prudent, further provided that
the Trustee is not empowered to enter into any investment which would be
prohibited under the Act or otherwise by the provisions of this Plan
7
<PAGE>
Notwithstanding the above, the following restrictions on the investment of a
Participant's Account shall apply:
(a) No part of a Participant's Deductible Voluntary Contribution Account
may be used to purchase life insurance.
(b) No more than one-half of the aggregate Employer Contributions
allocated to a Participant's Employer Contribution Account may be used to pay
premiums attributable to the purchase of ordinary life insurance contracts (life
insurance contracts with both nondecreasing death benefits and nonincreasing
premiums).
(c) No more than one-quarter of aggregate Employer Contributions allocated
to a Participant's Employer Contribution Account may be used to pay premiums on
term life insurance contracts, universal life insurance contracts, and all other
life insurance contracts which are not ordinary life insurance contracts.
(d) One-half of the amount used to pay premiums on ordinary life insurance
contracts plus the amount used to pay premiums on all other life insurance
contracts may not exceed an amount equal to one-quarter of the aggregate
Employer Contributions allocated to a Participant's Employer Contribution
Account.
11.4 Appointment of Investment Manager. To the extent that a portion of
the Trust assets is invested other than in shares of Designated Investment
Companies pursuant to Sections 11.1 and 11.3 above, the Employer may designate
Scudder, Stevens & Clark, or its successor or any affiliate, to act as
investment manager (within the meaning of the Act), and may at any time revoke
such designation. If an investment manager is so designated, the trustee shall
follow all investment directions given by the investment manager with respect to
the retention, investment and reinvestment of the Plan assets to the extent they
are under the control of such investment manager. If permitted by the Trustee,
the investment manager may issue orders for the purchase and sale of securities,
including orders through any affiliate of such investment manager. Such an
investment manager is specifically allowed to direct or make investments in
shares of any Designated Investment Company. The Trustee shall not be liable for
following any direction given by, or any actions of, an investment manager so
appointed.
11.5 Trustee: Number, Qualifications and Majority Action.
(a) The number of Trustees shall be one, two or three. Any natural person
and any corporation having power under applicable law to act as a trustee of a
pension or profitsharing plan may be a Trustee. No person shall be disqualified
from being a Trustee by being employed by the Employer, by being the
Administrator, by being a trustee under any other qualified retirement plan of
the Employer or by being a Participant in this Plan or such other qualified
plan.
(b) A Trustee holding office as sole Trustee hereunder shall have all the
powers and duties herein given the Trustees. When the number of Trustees
hereunder is three, any two of them may act, but the third Trustee shall be
promptly informed of the action. When there are two or three Trustees hereunder,
they may, by written instrument communicated to the Employer and the
Administrator, allocate among themselves the powers and duties herein given to
the Trustee hereunder. If such an allocation is made, to the extent permitted by
applicable law, no Trustee shall be liable either individually or as a trustee
for loss to the Plan from the acts or omissions of another Trustee with respect
to duties allocated to such other Trustee.
11.6 Change of Trustee.
(a) Any Trustee may resign as Trustee upon notice in writing to the
Employer, and the Employer may remove any Trustee upon notice in writing to each
Trustee. The removal of a Trustee shall be effective immediately, except that a
corporation serving as a Trustee shall be entitled to 60 days' notice which it
may waive, and the resignation of a Trustee shall be effective immediately,
provided that, if the Trustee is the sole Trustee, neither a removal nor a
resignation of a Trustee shall be effective until a successor Trustee has been
appointed and has accepted the appointment. If within 60 days of the delivery of
the written resignation or removal of a sole Trustee another Trustee shall not
have been appointed and have accepted, the resigning or removed Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee or may terminate the Plan pursuant to Section 18 of the Prototype Plan.
The Trustee shall not be liable for the acts and omissions of any successor
trustee.
(b) At any time when the number of Trustees is one or two the Employer may
but need not appoint one or two additional Trustees, provided that the number of
Trustees shall not be more than three. Such an appointment and the acceptance
thereof shall be in writing, and shall take effect upon the delivery of written
notice thereof to all the Trustees and the Administrator and such acceptance by
the appointed Trustee, provided that if a corporation is a Trustee then in the
absence of its consent, such an appointment of an additional or successor
Trustee shall not become effective until 60 days after its receipt of notice.
(c) Although any Employer adopting the Plan may choose any Trustee who is
willing to accept the Trust, the Distributor or its successor may make or may
have made tentative standard arrangements with any bank or trust company with
the expectation it will be used as the Trustee by a substantial group of
Employers. It is also contemplated that more favorable results can be obtained
with a substantial volume of business, and that it may become advisable to
remove such bank or trust company as Trustee and substitute another Trustee.
Therefore, anything in the prior two subsections of this Section 11.6
notwithstanding, each Employer adopting this Plan hereby agrees that the
Distributor may, upon a date specified in a notice of at least 30 days to the
affected Employer and in the absence of written objection by the Employer
received by the Distributor before such date, (i) remove any such Trustee and in
that case, or if such a Trustee has resigned as to a group of Employers, (ii)
appoint such a successor Trustee, provided such action is taken with respect to
all Employers similarly circumstanced of which the Distributor has knowledge,
and provided such notice is given in writing mailed postage prepaid to the
Employer at the latest address furnished to the Distributor directly or supplied
to it by such Trustee which is to be succeeded. If within 60 days after such
Trustee's resignation or removal, the Employer has not appointed a successor
which has accepted such appointment (unless the appointment of a successor
Trustee is waiting for action by the Distributor pursuant to the next preceding
sentence according to notice which has been given), the Trustee may petition an
appropriate court for the appointment of its successor. The Trustee shall not be
liable for the acts and omissions of such successor.
(d) Successor Trustees qualifying under this Section 11.5 shall have all
rights and powers and all the duties and obligations of original Trustees.
11.7 Valuation. Annually, on the Valuation Date, or more frequently in the
discretion of the Trustee, the assets of the Trust shall be revalued at fair
market value and the accounts of the Trust shall be proportionately adjusted to
reflect income, gains, losses or expenses, if the system of accounting does not
directly accomplish all such adjustments. The Trust Fund shall be administered
separately from, and shall not include any assets being administered under, any
other plan of an Employer. Interim valuations, if any, shall be applied
uniformly and in a non-discriminatory manner for all Employees.
11.8 Registration. Any assets in the Trust Fund may be registered in the
name of the Trustee or any nominee designated by the Trustee.
11.9 Certifications and Instructions.
(a) Any pertinent vote or resolution of the Board of Directors of the
Employer (if it is a corporation) shall be certified to the Trustee over the
signature of the Secretary or an Assistant Secretary of the Employer and under
its corporate seal. The Employer shall promptly furnish to the Trustee
appropriate certification evidencing the appointment and termination of the
individual or individuals serving as Administrator under Section 12.1 of the
Plan.
(b) The Administrator shall furnish to the Trustee appropriate
certification of the individual or individuals authorized to give notice on
behalf of the Administrator and providing specimens of their signatures. All
requests, directions, requisitions for money and instructions by the
Administrator to the Trustee shall be in writing and signed. There may be
standing requests, directions, requisitions or instructions to the extent
acceptable to the Trustee.
11.10 Accounts and Approval
(a) The Trustee shall keep accurate and detailed accounts of all
investments, receipts and disbursements and other transactions hereunder, and
all books and records relating thereto shall be open at all reasonable times to
inspection and audit by any person or persons designated by the Administrator or
by the Employer.
(b) Within 90 days following the close of each Plan Year the Trustee may,
and upon the request of the Employer or the Administrator shall, file with the
Administrator and the Employer a written report setting forth all securities or
other investments (including insurance contracts) purchased and sold, all
receipts, disbursements and other transactions effected by it during the period
since the date covered by the next prior report, and showing the securities and
other property held at the end of such period, and such other information about
the Trust Fund as the Administrator shall request. Unless the Employer or
Administrator, within 90 days from the date of mailing of such report, objects
to the contents of such report, the report shall be deemed approved. Any such
objections shall set forth the specific grounds on which they are based.
11.11 Taxes. The Trustee may assume that any taxes assessed on or in
respect of the Trust Fund are lawfully assessed unless the Administrator shall
in writing advise the Trustee that in the opinion of counsel for the Employer
such taxes are not lawfully assessed. In the event that the Administrator shall
so advise the Trustee, the Trustee, if so requested by the Administrator and
suitable provision for their indemnity having been made, shall contest the
validity of such taxes in any manner deemed appropriate by the Administrator or
counsel for the Employer. The word "taxes" in this Section 11 shall be deemed to
include any interest or penalties that may be levied or imposed in respect to
any taxes assessed. Any taxes, including transfer taxes incurred in connection
with the investment or reinvestment of the assets of the Trust Fund that may be
levied or assessed in respect to such assets shall, if allocable to the Accounts
of specific Participants, be charged to such Accounts, and it not go allocable,
they shall be equitably apportioned among all such Participants' Accounts.
11.12 Employment of Counsel. The Trustee may employ legal counsel (who may
be counsel for the Employer) and shall be fully protected in acting or
refraining from acting, upon such counsel's advice in respect to any legal
questions.
11.13 Compensation of Trustee. An individual Trustee who is an Employee of
the Employer shall not be compensated for services as Trustee. A corporation or
an individual who is not an Employee of the Employer, serving as a Trustee shall
be entitled to reasonable compensation for services; such compensation shall be
paid in accordance with Section 13.
11.14 Limitation of Trustee's Liability.
(a) The Trustee shall have no duty to take any action other than as herein
specified, unless the Administrator shall furnish it with instructions in proper
form and such instructions shall have been specifically agreed to by it or to
defend or engage in any suit unless it shall have first agreed in writing to do
so and shall have been fully indemnified to its satisfaction.
(b) The Trustee may conclusively rely upon and shall be protected in
acting in good faith upon any written representation or order from the
Administrator or any other notice, request, consent, certificate or other
instrument or paper believed by the Trustee to be genuine and properly executed,
or instrument or paper if the Trustee believes the signature thereon to be
genuine.
(c) The Trustee shall not be liable for interest on any reasonable cash
balances maintained in the Trust.
(d) The Trustee shall not be obligated to, but may, in its discretion
receive a contribution from a Participant unless forwarded by the Administrator.
11.15 Successor Trustee. Any corporation into which a corporation acting
as a Trustee hereunder may be merged or with which it may be consolidated
[Illegible] corporation resulting from any merger, reorganization or
consolidation [Illegible] such Trustee may be a party, shall be the successor of
the Trustee [Illegible] without the necessity of any appointment or other
action, provided the Trustee does not resign and is not removed.
11.16 Enforcement of Provisions. To the extent permitted by applicable
law, the Employer and the Administrator shall have the exclusive right to
enforce any and all provisions of this Agreement on behalf of all Employees or
former Employees of the Employer or their Beneficiaries or other persons having
or claiming to have
8
<PAGE>
an interest in the Trust Fund or under the Plan. In any action or proceeding
affecting the Trust Fund or any property constituting a part or all thereof, or
the administration thereof or for instructions to the Trustee, the Employer, the
Administrator and the Trustee shall be the only necessary parties and shall be
solely entitled to any notice of process in connection therewith; any judgment
that may be entered in such action or proceeding shall be binding and conclusive
on all persons having or claiming to have any interest in the Trust Fund or
under the Plan.
11.17 Voting. The Trustee shall deliver, or cause to be executed and
delivered, to the Administrator all notices, prospectuses, financial statements,
proxies and proxy soliciting materials received by the Trustee relating to
securities held by the Trust. The Administrator shall deliver these to the
appropriate Participant or Beneficiary of a deceased Participant, but only if
the Employer has specified in the Adoption Agreement that investment decisions
shall be made by Participants pursuant to Section 11.2 hereof. The Trustee shall
not vote any securities held by the Trust except in accordance with the written
instructions of the person or persons entitled to make investment decisions
pursuant to Section 11.2.
11.18 Applicability to Loan Trustee. Where appropriate, the foregoing
provisions of this Section 11 shall apply to the Loan Trustee on the same basis
as if the Loan Trustee were the Trustee.
SECTION 12.
ADMINISTRATION
12.1 Appointment of Administrator. From time to time, the Employer may, by
identifying such person(s) in writing to both the Trustee and the Participants,
appoint one or more persons as Administrator (hereinafter referred to in the
singular). Such Administrator shall have all power and authority necessary to
carry out the terms of the Plan. A person appointed as Administrator may also
serve in any other fiduciary capacity, including that of Trustee, with respect
to the Plan. The Administrator may resign upon 15 days advance written notice to
the Employer, and the Employer may at any time revoke the appointment of the
Administrator with or without cause. The Employer shall exercise the power and
fulfill the duties of the Administrator if at any time, an Administrator has not
been properly appointed in accordance with this Section 12.1 or the position is
otherwise vacant.
12.2 Named Fiduciaries. The "Named Fiduciaries" within the meaning of the
Act shall be the Administrator and the Trustee.
12.3 Allocation of Responsibilities. Responsibilities under the Plan shall
be allocated among the Trustee, the Administrator and the Employer as follows:
(a) Trustee: The Trustee shall have exclusive responsibility to hold,
manage and invest, pursuant to instructions communicated to it in accordance
with Section 11.2 above, the funds received by it subject to the powers granted
to it under Section 11 hereof. To the extent that loans are made to Participants
in accordance with Section 10 hereof, these responsibilities shall fall to the
Loan Trustee.
(b) The Administrator: The Administrator shall have the responsibility and
authority to control the operation and administration of the Plan in accordance
with its terms including, without limiting the generality of the foregoing, (i)
any investment decisions assigned to it under the Adoption Agreement or
transmission to the Trustee of any Participant investment decision under Section
11.2; (ii) interpretation of the Plan, conclusive determination of all questions
of eligibility, status, benefits and rights under the Plan and certification to
the Trustee of all benefit payments under the Plan; (iii) hiring of persons to
provide necessary services to the Plan not provided by Employees; (iv)
preparation and filing of all statements, returns and reports required to be
filed by the Plan with any agency of Government; (v) compliance with all
disclosure requirements of all state or federal law; (vi) maintenance and
retention of all Plan records as required by law, except those required to be
maintained by the Trustee; and (vii) all functions otherwise assigned to it
under the terms of the Plan.
(c) Employer: The Employer shall be responsible for the design of the
Plan, as adopted or amended, the designation of the Administrator and Trustee
(and, if appropriate, the Loan Trustee) as provided in the Plan, the delivery to
the Administrator and the Trustee of Employee information necessary for
operation of the Plan, the timely making of the Employer Contributions pursuant
to Section 4.1 hereof, and the exercise of all functions provided in or
necessary to the Plan except those assigned in the Plan to other persons.
(d) This Section 12.3 is intended to allocate individual responsibility
for the prudent execution of the functions assigned to each of the Trustees, the
Loan Trustee, the Administrator and the Employer and none of such
responsibilities or any other responsibility shall be shared among them unless
specifically provided in the Plan. Whenever one such person is required by the
Plan to follow the directions of another, the two shall not be deemed to share
responsibility, but the person who gives the direction shall be responsible for
giving it and the responsibility of the person receiving the direction shall be
to follow it insofar as it is on its face proper under applicable law.
12.4 More Than One Administrator. If more than one individual is appointed
as Administrator under Section 12.1, such individuals shall either exercise the
duties of the Administrator in concert, acting by a majority vote or allocate
such duties among themselves by written agreement delivered to the Employer and
the Trustee. In such a case, the Trustee may rely upon the instruction of any
one of the individuals appointed as Administrator regardless of the allocation
of duties among them.
12.5 No Compensation. The Administrator shall not be entitled to receive
any compensation from the funds held under the Plan for its services in that
capacity unless so determined by the Employer or required by law.
12.6 Record of Acts. The Administrator shall keep a record of all its
proceedings, acts and decisions, and all such records and all instruments
pertaining to Plan administration shall be subject to inspection by the Employer
at any time. The Employer shall supply, and the Administrator may rely on the
accuracy of, all Employee data and other information needed to administer the
Plan.
12.7 Bond. The Administrator shall be required to give bond for the
faithful performance of its duties to the extent, if any, required by the Act,
the expense to be borne by the Employer.
12.8 Agent for Service of Legal Process. The Administrator shall be agent
for service of legal process on the Plan.
12.9 Rules. The Administrator may adopt or amend and shall publish to the
Employees such rules and forms for the administration of the Plan, and may
employ or retain such attorneys, accountants, physicians, investment advisors,
consultants and other persons to assist in the administration of the Plan as it
deems necessary or advisable.
12.16 Delegation. To the extent permitted by applicable law, the
Administrator may delegate all or part of its responsibilities hereunder and at
any time revoke such delegation, by written statement communicated to the
delegate and the Employer. The Trustee may, but need not, act on the
instructions of such a delegate. The Administrator shall annually review the
performance of all such delegates.
12.11 Claims Procedure. It is anticipated that the Administrator will
administer the Plan to provide Plan benefits without waiting for them to be
claimed, but the following procedure is established to provide additional
protection to govern unless and until a different procedure is established by
the Administrator and published to the Participants and Beneficiaries.
(a) Manner of Making Claim. A claim for benefits by a Participant or
Beneficiary to be effective under this procedure must he made to the
Administrator and must be in writing unless the Administrator formally or by
course of conduct waives such requirements.
(b) Notice of Reason for Denial. If an effective claim is wholly or
partially denied, the Administrator shall furnish such Participant or
Beneficiary, with written notice of the denial within 60 days after the original
claim was filed. This notice or denial shall set forth in a manner calculated to
be understood by the claimant (i) the reason or reasons for denial, (ii)
specific reference to pertinent plan provisions on which the denial is based,
(iii) a description of any additional information needed to perfect the claim
and an explanation of why such information is necessary, and (iv) an explanation
of the Plan's claim procedure.
(c) The Participant or Beneficiary shall have 60 days from receipt of the
denial notice in which to make written application for review by the
Administrator. The Participant or Beneficiary may request that the review be in
the nature of a hearing. The Participant or Beneficiary shall have the rights
(i) to have representation, (ii) to review pertinent documents, and (iii) to
submit comments in writing.
(d) The Administrator shall issue a decision on such review within 60 days
after receipt of an application for review, except that such period may be
extended for a period of time not to exceed an additional 60 days if the
Administrator determines that special circumstances (such as the need to hold a
hearing) requires such extension. The decision on review shall be in writing and
shall include specific reasons for the decision, written in a manner calculated
to be understood by the claimant, and specific references to the pertinent Plan
provisions on which the decision is based
SECTION 13.
FEES AND EXPENSES
All reasonable fees and expenses of the Administrator or Trustee incurred
in the performance of their duties hereunder or under the Trust shall be paid by
the Employer; and to the extent not so paid by the Employer, said fees and
expenses shall be deemed to be an expense of the Trust and the Trustee is
authorized to charge the same to the Accounts of the Participants, and unless
allocable to the Accounts of specific Participants, they shall be charged
against the respective accounts of all or a reasonable group of Participants in
such reasonable manner as the Trustee shall determine.
SECTION 14.
BENEFIT RECIPIENT INCOMPETENT OR DIFFICULT TO
ASCERTAIN OR LOCATE
14.1 Incompetency. If any portion of the Trust Fund becomes distributable
to a minor or to a Participant or Beneficiary who, as determined in the sole
discretion of the Administrator, is physically or mentally incapable of handling
his or her financial affairs, the Administrator may direct the Trustee to make
such distributions either to the legal representative or custodian of, or any of
the relatives and friends of, the incompetent or to apply such distribution
directly for the incompetent's support and maintenance. Payments which are made
in good faith shall completely discharge the Employer, Administrator and Trustee
from liability therefore.
14.2 Difficulty to Ascertain or Locate. If it is impossible or difficult
to ascertain the person who is entitled to receive any benefit under the Plan,
the Administrator in its discretion may direct that such benefit be (i) paid to
another person in order to carry out the Plan's purposes; or (ii) retained in
the Trust; or (iii) paid to a court pending judicial determination of the right
thereto.
SECTION 15.
DESIGNATION OF BENEFICIARY
Each Participant may submit to the Trustee a properly executed Designation
of Beneficiary form. In order to be effective, such Designation must have been
properly executed and submitted to the Trustee before the death of the
Participant. The last effective Designation accepted by the Trustee shall be
controlling and whether or not fully dispositive of the Participant's Account,
thereupon shall [Illegible] all Designations previously submitted by the
Participant. Each such executed Designation is hereby specifically incorporated
herein by reference and shall be construed and enforced in accordance with the
laws of the state in which the Employer has its principal place of business. To
the extent that any portion of an Account of
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a deceased Participant is not governed by an effective Designation which names
at least one living Beneficiary designated by the Participant, that portion of
the Account Shall be distributed to the deceased Participant's surviving spouse,
or if that is not possible, to the estate of the deceased Participant.
SECTION 16.
SPENDTHRIFT PROVISION
No interest of any Participant or Beneficiary shall be assigned,
anticipated or alienated in any manner nor shall it be subject to attachment,
bankruptcy proceedings or to any other legal process or to the interference or
control of creditors or others, except to the extent that Participants may
secure loans from the Trust with their Accounts pursuant to Section 10 hereof.
SECTION 17.
NECESSITY OF QUALIFICATION
This Plan is established with the intent that it shall qualify under Code
Section 401(a) as that Section exists at the time the Plan is established. If
the Plan as adopted by the Employer fails to attain such qualification, the Plan
will no longer participate in this Prototype Plan and will be considered an
individually designed plan. If that the Plan as adopted by the Employer fails to
attain or retain such qualification, the Employer shall promptly either amend
the Plan under Code Section 401(b) so that it does qualify, or direct the
Trustee to terminate the Plan and distribute all the assets of the Trust
equitably among the contributors thereto in proportion to their contributions,
and the Plan shall be considered to be rescinded and of no force and effect.
SECTION 18.
AMENDMENT OR TERMINATION
18.1 Amendment or Termination. The Employer may at any time, and from time
to time amend this Prototype Plan and the Adoption Agreement (including a change
in any election it has made in the Adoption Agreement), or suspend or terminate
this Plan by giving written notice to the Trustee, but the Trust may not thereby
be diverted from the exclusive benefit of the Participants, their Beneficiaries,
survivors or estates, or the administrative expenses of the Plan, nor revert to
the Employer, nor may an allocation or contribution theretofore made be changed
thereby, nor may any amendment directly or indirectly deprive a Participant of
such Participant's nonforfeitable rights to benefits accrued to the date of the
amendment, nor may any amendment otherwise operate retroactively beyond the
first day of the Plan Year in which such amendment is made except as the same
may be deemed necessary in order to make the Plan quality under Code Section
401(a). An amendment shall be deemed necessary for this purpose if counsel for
the Employer certifies and advises that in its opinion the written ruling of the
Commissioner of Internal Revenue that the Plan meets such requirements can be
obtained within a reasonable time only with such retroactive amendment. Any
amendment by the Employer which is other than the amendment of the Employer's
prior designation of an option or provision set forth or referred to in the
Adoption Agreement will constitute a substitution by the Employer of an
individually designed plan for this Prototype Plan and the general amendment
procedure of the Internal Revenue Service governing individually designed plans
will be applicable. Nothing contained herein shall constitute an agreement or
representation by the Distributor that it will continue to maintain its
sponsorship of the Plan indefinitely.
18.2 Delegation. The Employer hereby delegates to the Sponsor the
authority to amend so much of the Adoption Agreement and this Prototype Plan as
is in prototype form and, to the extent to which the Employer could effect such
amendment, the Employer shall be deemed to have consented to any amendment so
made. The Sponsor, in turn, delegates to the Distributor such authority to amend
so much of the Adoption Agreement and this Prototype Plan as is in prototype
form and, to the extent to which the Sponsor could effect such amendment, it
shall be deemed to have consented to any amendment so made. When an election
within the prototype form has been made by the Employer, it shall be deemed to
continue after amendment of the prototype form unless and until the Employer
expressly further amends the election, notwithstanding that the provision for
the election in the amended prototype form is in a different form or place;
provided, however, that if the amended form inadvertently fails to provide means
to duplicate exactly the earlier election, such earlier election shall continue
until such further amendment. The immediately preceding sentence is subject to
the qualification that each Employer hereby delegates to the Distributor, in the
event of such an amendment of the prototype form, authority to determine
conclusively that such a continuation of an earlier election by the Employer is
not advisable and to make the election for the Employer in the amended prototype
form which in the judgment of the Distributor most nearly corresponds with the
election made by the Employer before the amendment of the prototype form,
provided the following procedure is followed: the election for the Employer may
be made with respect to any specified Employers as to whom it may be made
applicable singly, or such election may be made with respect to all Employers as
to whom it may be made applicable as a group; and the election shall be made as
of an effective date which has been specified in a notice mailed or delivered at
the last address(es) of the Employer(s) on the records of the Distributor, to
the Employer(s) at least 20 days before the end of the remedial amendment
period. Such notice may be mailed to Employers to whom it cannot be applicable
by reason of a previous election made by the Employer or otherwise, but it shall
be effective only as to those Employers who have received the notice and have
not themselves made a new election with respect to that item since the amendment
of the prototype form and previous to the effective date of such election by the
Distributor. The foregoing delegations of authority to make elections, or to
make amendments, shall not impose any duty on the Distributor to make them nor
shall it affect the interpretation of the Plan if they are not used.
18.3 Distribution of Accounts Upon Termination. Upon termination of the
Plan or complete discontinuance of Employer Contributions under it, the
Administrator shall determine whether to pay the interests of Participants,
former Participants and Beneficiaries immediately, to retain such interest in
the Trust and pay them in the future according to Section 9 or to use what other
methods the Administrator deems advisable in order to furnish whatever benefits
file Trust will provide, subject to the limitations of Section 9.2 limiting the
length of the period over which an Account can be paid.
SECTION 19.
TRANSFERS
Nothing contained herein shall prevent the merger or consolidation of the
Plan with, or transfer of assets or liabilities of the Plan to, another plan
meeting the requirements of Code Section 401(a) or the transfer to the Plan or
assets or liabilities of another such plan so qualified under the Code. Any such
merger, consolidation or transfer shall be accompanied by the transfer of such
existing records and information as may be necessary to properly allocate such
assets among Participants, including any tax or other information necessary for
the Participants or persons administering the plan which is receiving the
assets. The terms of such merger, consolidation or transfer must be such that if
this Plan is then terminated. each Participant would receive a benefit
immediately after the merger, consolidation or transfer equal to or greater than
the benefit he or she would have received if the Plan had terminated
immediately, before the merger, consolidation or transfer.
SECTION 20.
OWNER-EMPLOYEE PROVISIONS
20.1 Purpose of Section. This Section is intended to insure that the Plan
complies with Code Section 401(d). Any ambiguity herein will be construed to
that end, and this Section 20 will override any other provision of the Plan with
which it may be inconsistent.
20.2 Control. For purposes of this Section 20, "Control" means the
ownership directly or indirectly of more than 50% of either the capital interest
or the profits interest in a partnership or on unincorporated trade or business.
20.3 Limitations. No benefits shall be provided to an Owner-Employee
under this Plan unless:
(a) if an Owner-Employer or group of Owner-Employees Controls the trade or
business covered by this Plan and also Control as an Owner-Employee or
Owner-Employees one or more other trades or businesses, this Plan and the plans
established for such other trades or businesses, when taken together, form a
single plan which satisfies the requirements of Sections 401(a) and (d) of the
Code with respect to the employees of all the controlled trades or businesses;,
and
(b) if an Owner-Employee or group of Owner-Employees controls another
trade or business but does not control the trade or business covered by this
Plan, the employees or such other trades or businesses are included in a plan
which satisfies the requirements of Sections 401(a) and (d) of the Code and
which provides contributions and benefits for such employees which are not less
favorable than those provided for Owner-Employees under this Plan.
SECTION 21.
TOP-HEAVY PROVISIONS
21.1 Purposes of Section. This Section is intended to insure that the Plan
complies with Code Section 416. If the Plan is or becomes Top-Heavy in any Plan
Year beginning after December 31, 1983, the provisions of this Section will
supersede any conflicting provision in the Plan.
21.2 Definitions. The terms used in this Section shall have the following
meanings:
(a) Key Employee: Any Employee or former Employee (and the Beneficiaries
of such Employee) who at any time during the determination period was an officer
of the Employer having an annual compensation greater than 1.5 multiple by the
amount in effect under Code Section 415(c)(1)(A) for the Plan Year, an owner (or
considered an owner under Code Section 318) of 1 of the 10 largest interests in
the Employer if such individual's compensation exceeds the dollar limitation
under Code Section 415(c)(1)(A), a five-percent owner of the Employer or a
one-percent owner of the Employer who has an annual compensation of more than
$150,000. The determination period is the Plan Year containing the Determination
Date and the 4 preceding Plan Years. The determination of is a Key Employee will
be made in accordance with Code Section 416 (i)(1) and the regulation there
under.
(b) Top-Heavy Plan. For any Plan Year beginning after December 31, 1983
this Plan is Top-Heavy if any of the following conditions exists:
(i) If the Top-Heavy Ratio for this Plan exceeds 60% and this Plan
is not part of any Required Aggregation Group or Permissive Aggregation
Group of plans.
(ii) If this Plan is a part of a Required Aggregation Group of plan
but not part of a Permissive Aggregation Group and the Top-Heavy Ratio of
the Required Aggregation Group of plans exceeds 60%.
(iii) If this Plan is a part of a Required Aggregation Group and
part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio of
the Permissive Aggregation Group exceeds 60%.
(c) Top-Heavy Ratio.
(i) If the Employer maintains one or more defined contribution plans
(including any Simplified Employee Pension Plan within the meaning of Code
Section 408(k)) and the Employer has never maintained any defined benefit
plan which has covered or could cover a Participant in this Plan the
Top-Heavy Ratio is a fraction, the numerator of which is the sum of the
account balances of all Key Employees under all of the plans as of the
Determination
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Date (including any part of any account balance distributed in the
five-year period ending on the Determination Date), and the denominator of
which is the sum of all account balances (including any part of any
account balance distributed in the five-year period ending on the
Determination Date) of all Participants as of the Determination Date. Both
the numerator and denominator of the Top-Heavy Ratio are adjusted to
reflect any contribution which is due but unpaid as of the Determination
Date.
(ii) If the Employer maintains one or more defined contribution
plans (including any simplified Employee Pension Plan within the meaning
of Code Section 408(K)) and the Employer maintains or has maintained one
or more defined benefit plans which have covered or could cover a
Participant in this Plan, the Top-Heavy Ratio is a fraction, the numerator
of which is the sum of account balances under the defined contribution
plans for all Key Employees and the present value of accrued benefits
under the defined benefit plans for all Key Employees, and the denominator
of which is the sum of the account balances under the defined contribution
plans for all participants and the present value of accrued benefits under
the defined benefit plans for all participants. Both the numerator and
denominator of the Top-Heavy Ratio are adjusted for any distribution of an
account balance or an accrued benefit made in the five-year period ending
on the Determination Date and any contribution due but unpaid as of the
Determination Date.
(iii) For purposes of (i) and (ii) above, the value of account
balances and the present value of accrued benefits will be determined as
of the most recent Valuation Date and falls within or ends with the
twelve-month period ending on the Determination Date. The account balances
and accrued benefits of a Participant who is not a Key Employee but who
was a Key Employee in a prior Plan Year will be disregarded. The
calculation of the Top-Heavy Ratio and the extent to which distributions,
rollovers, and transfers are taken into account will be made in accordance
with Code Section 416 and the regulations thereunder. Deductible
Voluntary Contributions and any deductible employee contributions under
any other qualified plan maintained by the Employer will not be taken into
account for purposes of computing the Top-Heavy Ratio. When aggregating
plans the value of account balances and accrued benefits will be
calculated with reference to the Determination Dates that fall within the
same calendar year.
(d) Permissive Aggregation Group. The Required Aggregation Group of Plans
plus any other plan or plans of the Employer which, when considered as a group
with the Required Aggregation Group, would continue to satisfy the requirements
of Code Sections 401(a)(4) and 410.
(e) Required Aggregation Group. (i) Each qualified plan or the Employer in
which at least one Key Employee participates, and (ii) any other qualified plan
of the Employer which enables a plan described in (i) to meet the requirements
of Code Sections 401(a)(4) and 410.
(f) Determination Date. For any Plan Year subsequent to the first Plan
Year, the last day of the preceding Plan Year. For the first Plan Year of the
Plan, the last day of that Year.
(g) Valuation Date. See Section 2.45.
(h) Present Value. Present value shall be based only on the interest rate
employed as of the date in question by the Pension Benefit Guaranty Corporation
to value immediate annuities and the mortality rate specified in Table LN at
Treas Reg. ss.20.2031-10, unless otherwise specified in the most recently
adopted or amended defined benefit plan maintained by the Employer.
21.3 Minimum Allocation.
(a) In any Plan Year in which this Plan is Top-Heavy, except as otherwise
provided in (d), (e) and (f) below, the Employer Contributions and forefeitures
allocated on behalf of any Participant who is not a Key Employee shall not be
less than the lesser of 3% of such Participant's Compensation or, in the case
where the Employer has no defined benefit plan which designates this Plan to
satisfy Code Section 401, the largest percentage of Employer Contributions and
forfeitures stated as a percentage of the first $200,000 of a Key Employee's
Compensation, allocated on behalf of any Key Employee for that Plan Year The
minimum allocation is determined without regard to any Social Security
contribution by the Employer.
(b) For purposes of computing the minimum allocation, "Compensation" will
have the same meaning as in Section 2.7, disregarding any exclusion from
Compensation specified by the Employer in the Adoption Agreement.
(c) During any Plan Year for which a minimum allocation is required under
subsections (a) or (f) to a plan under which allocations shall be made on an
integrated basis, Employer Contributions and forfeitures will be allocated to
each Participant's Employer Contribution Account in the ratio that each
Participant's Compensation for the Plan Year bears to all Participants
Compensation for the Plan Year but not in excess of 3% of such Compensation. The
provisions of this Section 21.3(c) shall take precedence over any conflicting
Provisions of Section 4.1. To the extent any amount of Employer Contributions
and forfeitures remains unallocated after the application of this Subsection
(c), such amount shall be allocated in accordance with the provisions of Section
4.1 hereof.
(d) The Provision in subsection (a) above shall not apply to any
Participant who was not employed by the Employer on the last day of the Plan
Year.
(e) The provision in subsection (a) above shall not apply to any
Participant to the extent the Participant is covered under any other plan (other
than a plan which incorporates this Prototype Plan) or plans of the Employer,
and the Employer has provided in the Adoption Agreement that the minimum
allocation or benefit requirement applicable to Top-Heavy Plans will be met in
such other plan or plans.
(f) The provision in subsection (a) above shall not apply in the case of a
Participant who as an Employee of an Employer who has adopted both a profit
sharing plan and a money purchase pension plan which incorporate this Prototype
Plan. In such case, the aggregate total of the Employer Contributions and
forfeitures under both Plans allocated to the Employer Contribution Account of a
Participant who is not a Key Employee shall not be less than 3% of such
Participant's Compensation. Unless the Employer has specified otherwise in the
Adoption Agreement and such specification is sufficient to satisfy the minimum
allocation requirement referred to in the preceding sentence, subsection (c)
above shall apply to the allocation of Employer Contributions and forfeitures
under the money purchase pension plan and, only to the extent that such
allocation is insufficient to satisfy the minimum allocation requirement
referred to in the preceding sentence, the profit sharing plan.
21.4 Non-forfeitability of Minimum Allocation. The minimum allocation
required (to the extent required to be nonforfeitable under Code Section 416(b))
may not be forfeited under Code Section 411(a)(3)(B) or 411(A)(3)(D).
21.5 Limitation On Compensation. For any Plan Year in which the Plan is
Top-Heavy, only the first $200,000 (or such larger amount as may be prescribed
by the Secretary of the Treasury or his or her delegate) of a Participant's
Compensation for the Plan Year shall be taken into account for purposes of
allocation Employer Contributions under the Plan.
21.6 Minimum Vesting Schedule. Unless the Employer has specified a more
rapid vesting schedule in the Adoption Agreement, for any Plan Year in which
this Plan is Top-Heavy, the following minimum vesting schedule shall apply:
Nonforfeitable Percentage
Vesting Years of Employer Contribution Account
- --------------------------- ----------------------------------------
1 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
The minimum vesting schedule applies to all benefits within the meaning of Code
Section 411(a)(7) attributable to Employer Contributions and forfeitures,
including benefits accrued before the effective date of Code Section 416 and
benefits accrued before the Plan became Top-Heavy. Further, no reduction in
vested benefits may occur in the event the Plan's status as Top-Heavy changes
for any Plan Year. However, this Section 21.6 does not apply to the Employer
Contribution Account balances of any former Participant who does not have an
Hour of Service after the Plan has initially become Top-Heavy and such former
Participant's vested Employer Contribution Account balance will be determined
without regard to this Section.
21.7 Effect on Code Section 415 Limitations. Notwithstanding anything to
the contrary in Section 5 above, the following provisions apply if the Plan is
Top-Heavy.
(a) In any Plan Year in which the Top-Heavy ratio exceeds 90% (and the
Plan therefore becomes super Top-Heavy) the denominators of the Defined Benefit
Fraction (as defined in Section 5.5(c) above) and the Defined Contribution
Fraction (as defined in Section 5.5(d) above) shall be computed using 100% of
the dollar limitation stated therein instead of 125%.
(b) In any Plan Year in which the Top-Heavy Ratio exceeds 60%, but is less
than 90%, the denominators of the Defined Benefit Fraction (as defined in
Section 5.5(c) above) and the Defined Contribution Fraction (as defined in
Section 5.5(d) above) shall be computed using 100% of the dollar limitation
described therein instead of 125%, unless the Employer has specified in the
Adoption Agreement that the minimum allocation provisions of Section 21.3 above
shall be computed using 4% of a Participant's Compensation instead of 3%, in
which case the dollar limitations of the Defined Benefit Fraction (as defined in
Section 5.5(c) above) and the Defined Contribution Fraction (as defined in
Section 5.5(d) above shall continue to be computed using 125% of the dollar
limitations.
21.8 Termination of Top-Heavy Status. If the Plan ceases to be Top-Heavy
for any Plan Year and it the Employer has not specified otherwise in the
Adoption Agreement, the minimum vesting schedule described in Section 21.6 shall
continue to apply. If the Employer has specified in the Adoption Agreement that
upon conversion of the Plan to non-Top-Heavy status, Participants vested benefit
are to be determined according a schedule other than the minimum vesting
schedule described in Section 21.6, such change in vesting schedules shall be
treated as an amendment, and the election referred to in Section 7.2 hereof
shall apply.
SECTION 22.
WAIVER OF MINIMUM FUNDING STANDARD
If an Employer who has adopted this Prototype Plan as a money purchase
pension plan is unable to satisfy the minimum funding standard (as described in
Code Section 412) for a given Plan Year, it may apply to the Internal Revenue
Service for a waiver of such minimum funding standard. If the waiver is granted,
the following provisions apply:
(a) An adjusted Account balance shall be maintained for each Participant
whose actual Account balance is less than or equal to his or her adjusted
Account balance.
(i) For the Plan Year for which the first waiver is granted, the
adjusted account balance as of the Valuation Date for each affected
Participant equals
(A) the Participant's actual Account balance, plus
(B) the amount that such Participant would have received if
the amount waived had been contributed.
(ii) For each Plan Year following the Plan Year for which a waiver
is granted, the adjusted Account balance for each Participant affected by
such waiver (calculated as of the Valuation Date for that Plan Year)
equals:
(A) the adjusted Account balance as of the Valuation Date in
the prior Plan Year, plus
(B) the amount equal to the actual investment return credited
or charged to the Participant's actual Account balance, plus
(C) the amount equal to 5% of the excess of the amount in (A)
over the Participant's actual Account balance calculated as of the
same date, plus
(D) the amount equal to such Participant's allocated share of
the
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required Employer Contribution (whether or not waived) for the Plan
Year (determined without regard to adjusted waiver Payments and
discretionary Employer Contributions), minus
(E) the amount Of the Participant's adjusted Account balance
forfeited during the Plan Year under the Plan's Provisions.
(b) For a given Plan Year, the Employer is required to contribute a
certain amount in order to satisfy the minimum funding standard for such Plan
Year. For each Plan Year which follows a Plan Year for which a waiver of the
minimum funding standard was granted the amount equals:
(i) the amount due as determined under Section 4.1(b) above (without
regard to this Section), plus
(ii) the adjusted waiver amount.
(c) The adjusted waiver amount for given Plan Year equals:
(i) the sum of the amounts necessary to amortize each waived funding
deficiency over a period of 15 Plan Years (measured from the Valuation
Date of the Plan year for which the corresponding waiver was granted) at
5% interest, compounded annually, minus
(ii) the sum of the amounts necessary to amortize the total of each
Plan Year's forfeitures (which have arisen since the first waiver was
granted) over a period of 15 Plan Years (measured from the Valuation Date
of the Plan Year in which the corresponding forfeitures arose) at 5%
interest, compounded annually.
(d) An amount equal to the adjusted waiver amount must be contributed only
until each Participant's actual Account balance equals the Participant's
adjusted Account balance.
(e) Any Plan provision which provides that Employer Contributions shall be
reduced immediately by forfeitures is revoked until each Participant's actual
Account balance equals that Participant's adjusted Account balance
(f) Discretionary Employer Contributions, which are in addition to the
amounts contributed to satisfy the minimum funding standard, can be made in any
given Plan Year. However, the total Employer Contribution for the Plan Year
cannot exceed the then remaining underfunded amount (the sum of Participants
adjusted Account balances minus total Plan assets).
(g) The adjusted waiver payments, discretionary Employer contributions and
the forfeitures of actual Account balances for the current Plan Year shall be
allocated as of that Plan Year's Valuation Date to the actual Account balances
of the affected Participants.
(h) Each time a waiver is granted, an original waiver amount ("OWA") will
be determined for each affected Participant. The OWA equals the Participant's
portion of the amount which was waived.
(i) Commencing with the Valuation Date of the Plan Year for which a waiver
is granted, a remaining original waiver amount ("ROWA") must be calculated for
each affected Participant. As of such Valuation Date the OWA equals the ROWA. On
the Valuation Date of a succeeding Plan Year the ROWA equals the prior Plan
Year's ROWA multiplied by 1.05, minus the forfeiture of amounts in the prior
Plan Year's ROWA incurred in the current Plan Year. For each waiver that is
granted one OWA and a corresponding ROWA will be established for each affected
Participant.
(j) The sum of the adjusted waiver payments, discretionary Employer
Contributions and forfeitures of actual Account balances for a given Plan Year
are allocated to those Participants who have ROWAs by multiplying the sum of
these three amounts by the fraction:
(i) the numerator of which equals the sum of OWAs for a particular
Participant, and
(ii) the denominator of which equals the sum of the OWAs for all
Participants.
To determine the portion of this allocation which is to be assigned to a given
ROWA, multiply the allocation by the corresponding OWA, then divide by the sum
of the OWAs for the particular Participant.
(k) If the calculation of a ROWA results in a value which is less than
zero, then
(i) the ROWA is set equal to zero,
(ii) the corresponding OWA is set equal to zero, and
(iii) the excess payments will be reallocated to the remaining ROWAs.
(l) A distribution is determined by multiplying a Participant's vested
percentage by his or her adjusted Account balance. However, distributions from
the Plan may not exceed a Participant's actual Account balance. If so limited,
plan Participants shall receive subsequent distributions derived from future
adjusted waiver payments.
SECTION 23.
MISCELLANEOUS
23.1 Misrepresentation. Notwithstanding any other provision herein, if an
Employee misrepresents his or her age or any other fact, any benefit payable
hereunder shall be the smaller of: (i) the amount that would be payable if no
facts had been misrepresented, or (ii) the amount that would be payable if the
facts were as misrepresented.
23.2 Legal or Equitable Action. If any legal or equitable action with
respect to the Plan is brought by or maintained against any person, and the
results of such action are adverse to that person, attorney's fees and all other
costs to the Employer, the Administrator or the Trust of defending or bringing
such action shall be charged against the interest, if any, of such person under
the Plan.
23.3 No Enlargement of Plan Rights. It is a condition of the Plan, and
each Participant by participating herein expressly agrees, that he or she shall
look solely to the assets of the Trust for the payment of any benefit under the
Plan.
23.4 No Enlargement of Employment Rights. Nothing appearing in or done
pursuant to the Plan shall be construed (a) to give any person a legal or
equitable right or interest in the assets of the Trust or distribution
therefrom, nor against the Employer, except as expressly provided herein or (b)
to create or modify any contract of employment between the Employer and any
Employee or obligate the Employer to continue the services of any Employee.
23.5 Written Orders. In taking or omitting to take any action under this
Plan, the Trustee may conclusively rely upon and shall be protected in acting
upon any written orders from or determinations by the Employer or the
Administrator as appropriate, or upon any other notices, requests, consents,
certificates or other instruments or papers believed by it to be genuine and to
have been properly executed, and so long as it acts in good faith, in taking or
omitting to take any other action.
23.6 No Release from Liability. Nothing in the Plan shall relieve any
person from liability for any responsibility under Part 4 of Title I of the Act.
Subject thereto, neither the Trustee, the Loan Trustee, or the Administrator nor
any other person shall have any liability under the Plan, except as a result of
negligence or wilful misconduct, and in any event the Employer shall fully
indemnify and save harmless all persons from any liability except that resulting
from their negligence or wilful misconduct.
23.7 Discretionary Actions. Any discretionary action, including the
granting of a loan pursuant to Section 10 hereof, to be taken by the Employer or
the Administrator under this Plan shall be non-discriminatory in nature and all
Employees similarly situated shall be treated in a uniform manner.
23.8 Headings. Headings herein are primarily for convenience of reference,
and if they conflict with the text, the text shall control.
23.9 Applicable Law. This Plan shall, to the extent state law is
applicable, be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the state in which (a) if the Trustee
is a corporation the Trustee has its principal place of business; (b) if the
Trustee is an individual, the Trustee resides; or (c) if the Trustee is
individuals, where a majority of the individuals serving as Trustee reside. The
Employer's execution of the Adoption Agreement may be acknowledged where
required by applicable law.
23.10 No Reversion. Notwithstanding any other contrary provision of the
Plan, but subject nevertheless to Sections 5 and 16, no part of the assets in
the Trust shall revert to the Employer, and no part of such assets, other than
that amount required to pay taxes or administrative expenses, shall be used for
any purpose other than exclusive benefit of Employees or their Beneficiaries.
23.11 Notices. The Employer will provide the notice to other interested
parties contemplated under Code Section 7476 before requesting a determination
by the Secretary of the Treasury or his or her delegate with respect to the
qualification of the Plan.
23.12 Conflict. In the event of any conflict between the provisions of
this Plan and the terms of any contract or agreement issued thereunder or with
respect thereto, the provisions of the Plan shall control.
12
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Aarp
High Quality Bond Annual Report for the fiscal year ended 3/31/97 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER>3
<NAME> AARP High Quality Bond
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 463,026,267
<INVESTMENTS-AT-VALUE> 454,297,440
<RECEIVABLES> 14,745,772
<ASSETS-OTHER> 12,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 469,055,819
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,134,526
<TOTAL-LIABILITIES> 2,134,526
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 484,703,754
<SHARES-COMMON-STOCK> 29,823,311
<SHARES-COMMON-PRIOR> 32,366,706
<ACCUMULATED-NII-CURRENT> 176,290
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,229,924)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,728,827)
<NET-ASSETS> 466,921,293
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,606,863
<OTHER-INCOME> 0
<EXPENSES-NET> 2,308,659
<NET-INVESTMENT-INCOME> 14,298,204
<REALIZED-GAINS-CURRENT> (291,833)
<APPREC-INCREASE-CURRENT> (4,158,883)
<NET-CHANGE-FROM-OPS> 9,847,488
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,298,204)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,230,021
<NUMBER-OF-SHARES-REDEEMED> (4,397,610)
<SHARES-REINVESTED> 624,194
<NET-CHANGE-IN-ASSETS> (44,983,873)
<ACCUMULATED-NII-PRIOR> 176,290
<ACCUMULATED-GAINS-PRIOR> (8,938,091)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,193,580
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 498,590,504
<PER-SHARE-NAV-BEGIN> 15.82
<PER-SHARE-NII> (0.46)
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> 0.46
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.66
<EXPENSE-RATIO> 0.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND>
This schedule contains summary financial information extracted from the AARP
GNMA FUND and U.S. Treasury Fund Annual Report for the 6 MONTHS ended 3/31/97
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER>2
<NAME> AARP GNMA and U.S. Treasury Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 4,633,588,338
<INVESTMENTS-AT-VALUE> 4,611,569,158
<RECEIVABLES> 39,891,917
<ASSETS-OTHER> 138,998
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,651,600,073
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19,682,695
<TOTAL-LIABILITIES> 19,682,695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,983,608,286
<SHARES-COMMON-STOCK> 312,536,423
<SHARES-COMMON-PRIOR> 328,879,292
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (329,671,729)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (22,019,179)
<NET-ASSETS> 4,631,917,378
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 171,669,357
<OTHER-INCOME> 0
<EXPENSES-NET> 15,673,721
<NET-INVESTMENT-INCOME> 155,995,636
<REALIZED-GAINS-CURRENT> (7,236,210)
<APPREC-INCREASE-CURRENT> (19,591,637)
<NET-CHANGE-FROM-OPS> 129,167,789
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (155,995,636)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,535,440
<NUMBER-OF-SHARES-REDEEMED> (31,821,859)
<SHARES-REINVESTED> 5,943,550
<NET-CHANGE-IN-ASSETS> (272,522,466)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (322,435,519)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,866,205
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 4,825,151,201
<PER-SHARE-NAV-BEGIN> 14.91
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> (0.09)
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.82
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND>
This schedule contains summary financial information extracted from the
Aarp Bond Fund For Income Annual Report for the fiscal year ended
3/31/97 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME>AARP Bond Fund for Income
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 13,614,130
<INVESTMENTS-AT-VALUE> 13,442,916
<RECEIVABLES> 564,435
<ASSETS-OTHER> 14,034
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,021,385
<PAYABLE-FOR-SECURITIES> 1,499,652
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104,995
<TOTAL-LIABILITIES> 1,604,647
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,595,424
<SHARES-COMMON-STOCK> 10,843,514
<SHARES-COMMON-PRIOR> 10,000,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,472)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (171,214)
<NET-ASSETS> 12,416,738
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 62,666
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 62,666
<REALIZED-GAINS-CURRENT> (7,472)
<APPREC-INCREASE-CURRENT> (171,214)
<NET-CHANGE-FROM-OPS> (116,020)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (62,666)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 845,796
<NUMBER-OF-SHARES-REDEEMED> (5,803)
<SHARES-REINVESTED> 3,521
<NET-CHANGE-IN-ASSETS> 12,416,738
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,172
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 5,413,589
<PER-SHARE-NAV-BEGIN> 15.00
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> (0.28)
<PER-SHARE-DIVIDEND> 0.16
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.72
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
