AARP Investment Program
from SCUDDER
Annual
Report to
Shareholders
September 1998
Creating a Legacy
INCLUDES A SPECIAL SECTION ON THE AARP INVESTMENT PROGRAM'S
LEGACY PLANNING SERVICE
<PAGE>
HOW TO NAVIGATE THIS REPORT
To make this annual report easy to navigate, we have divided it into numbered
sections. The summaries below show each section title and number. The first
page of each section is marked
with the section number, as
shown to the left.
PRINTED DOCUMENT CONTAINS A GRAPHIC HERE
SHOWING SECTION NUMBER EXAMPLE.
/4/
--------------------------------
ANNUAL REVIEW /1/
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A message from Linda C. Coughlin, Chairperson,
AARP Investment Program from Scudder.
SPECIAL SECTION /2/
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Overview of the newly introduced Legacy Planning
Service from the AARP Investment Program.
AARP MARKET COMMENTARY AND INDIVIDUAL PORTFOLIO REVIEWS /3/
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Overview of the financial markets for the past
year and how they impacted the AARP Funds, by
Cornelia Small, President and Investment Director,
followed by an individual review of each AARP
investment portfolio for the period.
AARP FUNDS' INVESTMENT PORTFOLIOS /4/
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A detailed listing of portfolio holdings for each
Fund, in addition to the actual cost paid for each
holding.
FINANCIAL STATEMENTS, HIGHLIGHTS, AND NOTES /5/
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Financial records of the Investment Program. This
section also includes the Financial Highlights
which details statistical per share income and
ratio(s) from operations and dividends paid to
shareholders, expense ratios, and other financial
information. The Notes to Financial Statements
include detailed information regarding expenses,
organization cost, transactions, and management
fees.
OFFICERS AND TRUSTEES /6/
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A list of the current officers and trustees is provided
in this section.
INVESTOR SERVICES /7/
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Information on services available to shareholders from the
AARP Investment Program from Scudder.
GLOSSARY /8/
--------------------------------------------------------------
Frequently used words and phrases associated with mutual
fund investing. All glossary terms used in the report
are highlighted for your easy reference to this section.
(inside front cover)
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
ANNUAL REVIEW-- A MESSAGE FROM LINDA C. COUGHLIN 2 /1/
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SPECIAL SECTION 7 /2/
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AARP MARKET COMMENTARY AND INDIVIDUAL PORTFOLIO REVIEWS 13 /3/
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MARKET COMMENTARY FOR THE 12-MONTH PERIOD ENDING SEPTEMBER 30, 1998 14
MONEY MARKET FUNDS
AARP HIGH QUALITY MONEY FUND 18
AARP HIGH QUALITY TAX FREE MONEY FUND 19
INC0ME FUNDS
AARP HIGH QUALITY SHORT TERM BOND FUND 20
AARP GNMA AND U.S. TREASURY FUND 22
AARP INSURED TAX FREE GENERAL BOND FUND 24
AARP BOND FUND FOR INCOME 26
GROWTH AND INCOME FUNDS
AARP BALANCED STOCK AND BOND FUND 28
AARP GROWTH AND INCOME FUND 30
AARP U.S. STOCK INDEX FUND 32
U.S. GROWTH FUNDS
AARP CAPITAL GROWTH FUND 34
AARP SMALL COMPANY STOCK FUND 36
WORLDWIDE GROWTH FUNDS
AARP GLOBAL GROWTH FUND 38
AARP INTERNATIONAL GROWTH AND INCOME FUND 40
ASSET ALLOCATION FUNDS
AARP MANAGED INVESTMENT PORTFOLIOS 42
AARP FUNDS' INVESTMENT PORTFOLIOS 45 /4/
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FINANCIAL STATEMENTS 127 /5/
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FINANCIAL HIGHLIGHTS 145 /5/
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NOTES TO FINANCIAL STATEMENTS 155 /5/
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REPORT OF INDEPENDENT ACCOUNTANTS 165
TAX INFORMATION 166
OFFICERS AND TRUSTEES 167 /6/
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INVESTOR SERVICES 171 /7/
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GLOSSARY 175 /8/
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</TABLE>
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AARP Investment Program
from SCUDDER
THE PRINTED DOCUMENT
CONTAINS A PHOTOGRAPH
OF LINDA C. COUGHLIN
HERE
Linda C. Coughlin
Annual Review Chairperson
A Message from Linda C. Coughlin, Chairperson
AARP Investment Program from Scudder
Dear Fellow Shareholder,
It is an honor to present to you the 1998 Annual Report for the period
October 1, 1997 through September 30, 1998. As most of you would agree, the past
year has been an eventful one. In terms of worldwide financial markets, we
continue to endure a period of increased volatility. As a result, our energies
have been focused on providing you with timely, instructive information, helping
you continue to build and protect your assets.
As you may know, we employ an investment management process designed to
deliver competitive returns with less risk. This is in response to your
continuing feedback that achievement of competitive returns is important, but
not at the expense of excessive risk. With this in mind, our Fund managers
remain committed to the goal of competitive risk-managed investment performance.
During the period, market conditions favored certain investment styles and
specific industries, while severely punishing others, as is evidenced by the
performance of some of the Funds. A more in-depth analysis of investment
performance is provided later in this report.
The returns of your mutual funds are also significantly affected by
expenses. I am pleased to report that our Funds' expenses remained highly
competitive during the period. As of September 30, 1998, the average expense
ratio of the AARP Fund Family was 33% lower than other fund families, according
to Lipper Analytical Services, an independent rating firm of mutual funds.
Fund Performance
Overall, the performance of the AARP Mutual Funds mirrored that which
occurred in the financial markets. From a total return standpoint, some of the
Funds outperformed their relevant indices; others lagged. This is due to unusual
market conditions that at once rewarded certain investment styles and severely
punished others. It is also attributable to the Program's investment process, to
seek competitive returns with less downside fluctuation than comparable mutual
funds.
An outcome of the Program's investment process is that the AARP Funds can
be expected to lag their relevant indices in strong markets and lead in weaker
markets. This outperform/underperform relationship of the AARP Mutual Funds has
in fact occurred over most longer periods of time, although there have
2
<PAGE>
been exceptions. The performance of the AARP Growth and Income Fund, a popular
choice of AARP member investors, is one such example.
The Fund has in fact over time outperformed other growth and income funds
in both "bull" and "bear" markets. As an example, during the prolonged bull
market of October 1990 through January 1998, the Fund's cumulative return was
273.4%. This compares extremely favorably to the cumulative return of its Lipper
peer group of 233.4%. The same has held true during most market downturns. From
May 1990 through October 1990, for example, the Fund suffered along with other
growth and income funds, returning -7.7% (cumulatively). However, its Lipper
peer group, for the same period, was down almost twice as much at -14.4%.
During the more recent downturn which began in July 1998 through September
30, the end of the current reporting period, the Fund has underperformed its
peer group. This is due to the extraordinary divergence in performance of
large-cap stocks, which comprise approximately 55% of the unmanaged S&P 500
Index, and value stocks, in which the Fund primarily invests, resulting in a
disappointing one-year average return as of September 30, 1998 of -4.22%. This
compares to its five-year, ten-year, and since inception (11/30/84) performance
of 16.07%, 15.39%, and 15.29%, respectively.
The Fund's portfolio management team believes the recent performance is an
anomaly, not a precursor of future performance. In fact, early signs of reversal
have started to appear since the beginning of the new fiscal year. Moreover, we
are confident that the Fund's investment discipline -- one that the portfolio
management team has honed over many years -- is sound. The team is well
positioned to deliver performance that satisfies your goal of competitive
returns with less risk than comparable funds over the long term.
The Portfolio Review section, which begins with a commentary by Cornelia
Small, Investment Director, provides an in-depth review of the performance of
the individual AARP Mutual Funds.
AARP Program Enhancements
Our commitment to educating you, our shareholders, has never been stronger.
In this regard we have acknowledged your growing diversity, realizing that the
needs of a 50-year-old shareholder will vary from those of a 75-year-old, if not
a 75-year-old widow or widower. We have, for example, begun development of a
library of educational materials on topics that are relevant to the many and
varied life events you may experience that could have a significant impact on
your financial affairs. By the end of the year, you will have access to
approximately 35 booklets on subjects like Preparing for Tax Season, IRAs Past
70, Planning for the Death of A Loved One, and Accepting Financial Risk. We plan
to substantially enhance the Program's library in 1999 with easy-to-read,
topical publications as you plan for later stages of life.
3
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In 1998, we are especially proud to have announced the introduction of the
Program's Legacy Planning Service. Since its introduction, our Mutual Fund
Representatives and our specially trained Legacy Planning Specialists have
fielded more than 80,000 inquiries on the topic -- signalling the importance you
place on the organization of your financial affairs in the event of death or
incapacitation of yourself or a loved one. Legacy planning is also the subject
of this year's Special Section. Regardless of your age, I trust you will find
the information to be timely and relevant.
As we pledge to be committed to all of our shareholders' needs, we thought
it appropriate to address the topic of women and investing. As a result, we are
proud to offer the Financial Planning for Women guide. This easy-to-read
investment guide is designed for women investors in the AARP Investment Program
from Scudder who want to increase their investment knowledge and improve their
personal financial management skills. For now, you can obtain your own copy of
the Financial Planning for Women guide by contacting one of our Mutual Fund
Representatives. Details are provided in the Investor Services section (Section
7, page 172) of this report. We plan on expanding our library of information and
level of service regarding this topic in 1999.
We also made significant additions to our staff of AARP Investment Program
Mutual Fund Representatives in anticipation of a greater need on your part to
communicate with us, which in fact materialized. We handled 11% more telephone
calls during the period October 1, 1997 through September 30, 1998, as compared
to the same period a year prior.
Many of you were interested in talking to our representatives about the
market climate and how it may have affected your portfolios. Most importantly
and encouraging to us during the last few months is that you sought guidance on
how to navigate these particularly trying times, rather than abandoning
investment plans altogether. These responses speak volumes of your commitment to
investing for the long term and staying informed as the environment changes.
Perhaps most importantly, you have avoided overreaction to unsettling market
fluctuations.
Annual Report Enhancements
Over time, many of you have provided us with excellent suggestions as we
strive to continuously improve the readability of the Annual and Semiannual
Reports. You will therefore notice a series of enhancements to the Annual
Report, beginning with a more informative Table of Contents. We believe this new
approach will help you more easily navigate the report, directing you to
sections of importance and of interest. We have also taken a new approach to the
organization and presentation of information. Finally, we have provided clearer
explanations of certain investment concepts and portfolio management processes.
Breaking from tradition, the message from Cornelia Small, President and
Investment Director, is now located in the Portfolio Review Section (Section 3,
page , where her review of the financial markets serves as a backdrop for the
analysis of the AARP Mutual Funds' performance during the period).
4
<PAGE>
For Funds that have at least a three-year history, we have represented
their risk managed performance compared to similar funds in an easy-to-read
chart. For all of the Funds, including those that have been in existence less
than three years, we have provided total returns and a "Growth of a $10,000
Investment" chart since each Fund's inception.
Looking Ahead
While it is impossible to predict the future of the financial markets, we
can say with great conviction that our focus on the achievement of competitive
returns with less downside risk than comparable funds has never been greater. We
cannot guarantee the accomplishment of this objective at all times, especially
during shorter periods. We can, however, assure you that all of the AARP Funds
that have share price fluctuation are being aggressively managed with this goal
in mind. As we are intensifying our efforts to provide you with the information
and services you need to be educated and confident investors, we encourage you
to call our highly trained Mutual Fund Representatives with questions or
concerns regarding the Program or your account(s).
Above all else, we remind you of our primary commitments: providing you
with a distinct, manageable choice of low cost mutual funds, access to timely,
life-stage relevant, easy to understand information regarding investing, and
state of the art investor services. On behalf of my colleagues at the AARP
Investment Program from Scudder, we thank you for the opportunity to serve your
investment needs, now and in the future.
Our best,
/s/Lin Coughlin
Linda C. Coughlin
Chairperson
5
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This page
intentionally
left blank.
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Special Section:
The Special Section appears in the Annual Report and
highlights a service or topic that the AARP Investment
Program from Scudder believes to be both informative
and educational for shareholders. This year's section
features the Legacy Planning Service, a program
developed to help shareholders feel confident that
their investments will pass to their spouse or other
heirs the way they intended.
The Service was created in response to the growing
number of people experiencing widowhood as America
ages. It is also an outgrowth of the outstanding
community service work done by AARP with the Widowed
Persons Service.
The Service consists of highly trained Legacy
Specialists who can help family members in the event of
death or incapacitation by offering both emotional
support and practical information concerning a loved
one's account. The Service also includes easy-to-use
"how to" guides for both shareholders and their
families who are interested in organizing their
financial affairs.
7
<PAGE>
The Legacy Planning Service
Helping you plan for your family's financial future
Realizing the many emotional issues associated with a death and the
financial issues associated with the subsequent transfer of an estate, the
Legacy Planning Service was developed in cooperation with AARP to help
shareholders feel confident that their investments will pass along easily to
their spouse or heirs in the way they intended. This service presents yet
another avenue for the AARP Investment Program to provide education and
practical help when people need it most. By calling the AARP Investment
Program's 800 number, surviving family members can speak with one of our highly
trained Legacy Planning Specialists. In addition to offering practical advice
concerning a deceased member's account, each Specialist is trained to offer
emotional support during what is often a very painful and confusing time.
- --------------------------------------------------------------------------------
CALLOUT:
The Legacy Planning Service from the AARP Investment Program was designed to
help you preserve your investments while passing control of them to your heirs.
- --------------------------------------------------------------------------------
In addition, the Legacy Planning Service also provides informative,
general "how to" guides to help members put their financial affairs in order. Of
course, you should consult an attorney or a financial planner regarding your
particular situation.
The following information is from the Legacy Transfer Guide and The
Legacy Planner kit -- two publications from the AARP Investment Program devoted
to the topic of planning for your future and your legacy. By organizing both
legal and financial matters during your lifetime, you may avoid the probability
of excessive taxes being levied on your estate. You will also be providing your
heirs a great service by minimizing unnecessary confusion concerning your
legacy.
Creating Your Legacy File -- What You Can Do Today
You can begin putting your affairs in order by first creating what we refer to
as a "Legacy File," quite literally a place in your home where you will keep
copies of all the important documents in your life.
Step One:
Begin by choosing a location in your home to store your Legacy File.
Any place that is easily accessible, an empty desk drawer for example, is an
appropriate location. Before you begin, it is important to remember that your
Legacy File should only contain copies of original documents and important phone
numbers and instructions on how to access the originals. Do not store originals
of any documents in your Legacy File. The actual documents and records should be
kept in a bank safe deposit box, a fireproof box, or a safe in your home.
(Note: Items such as wills, trusts, and powers of attorney should not be kept in
safe deposit boxes; rather, they can be held by your attorney for safe keeping.)
The following types of documents and information should be maintained
in your Legacy File. However, do not feel limited to the items on this list:
o insurance policy information, including home, car, life
8
<PAGE>
o copies of birth certificates, social security numbers
o copies of individual stocks or bonds
o statements of your mutual funds
o information concerning your retirement accounts (pensions,
401(k)s or 403(b)s)
o copies of deed(s) to property
o copies of titles to cars, boats, etc.
o bank account numbers
o information concerning credit cards
o copies of recent income tax returns
o location of safe deposit box(es)
o copies of wills
o copies of trusts
o any other items of importance to your estate
Step Two:
Create a "Master List" where you list all of the contents of your file.
As you build your master list, label a file folder for each document, record,
etc. and arrange in the order in which it appears on your Master List. The
following is an example of the types of information you may include on your
Master List.
MASTER LIST for John and Mary Smith
-------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Category Document Account or Policy #, Company Contact, Location, Beneficiary
or Item Owner(s) Phone Number Last Updated or Purpose
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Auto Policy for 1234-56-C01 National John R. Jones Original: safe
Insurance Buick John M. Smith (800)123-4567 deposit box.
Copy: Legacy File,
8/98
- ----------------------------------------------------------------------------------------------------------------------------------
Home Homeowners 4444558 American Sue Jenson Original: safe
Insurance Policy John M. And Mary E.Smith (542)333-4455 deposit box.
Copy: Legacy file,
8/98
- ----------------------------------------------------------------------------------------------------------------------------------
Life 100K Whole WL1717650 American Sue Jenson Original: safe Retirement
Insurance Life Policy Mary E. Smith (542)333-4455 deposit box.
on Copy: Legacy file,
John M. Smith 8/98
- ----------------------------------------------------------------------------------------------------------------------------------
Investment: 100 Shares John M. Smith Broker: ACME 1-800-ACMEINV Original: with Grandchildren's
Individual of IBM acct. # 12345 Investments broker college fund
Stock Copy: Legacy file,
12/97
- ----------------------------------------------------------------------------------------------------------------------------------
Investment: AARP Growth Mary E. Smith AARP 1-800-253-2277 Statements in Retirement
Mutual & Income Fund acct. #45678 Investment Legacy File, 12/97
Fund Program
- ----------------------------------------------------------------------------------------------------------------------------------
401(k) Plan Plan for John M. Smith ACME (542)333-5566 Statements in Retirement
John M. employee #55112 Construction Legacy File, 12/97
Smith Corporation
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Don't be discouraged if the process of building your file seems to be
taking a long time. For the average person, it takes weeks to track down all of
the important accounts, policy numbers, people to contact, and copies which
should be included in a Legacy File.
9
<PAGE>
Before getting frustrated, remember that you are doing this for sound
reasons. Just think how difficult it would be for someone who is not intimately
familiar with your personal details to track down this information. Be assured
that as you put together your Legacy File, you will have many opportunities to
share your progress with your family. This may result in a new understanding and
respect on their part for the financial decisions you made during your lifetime.
Step Three:
After you have located all of your important documents, it is important
to record the person in whose name the particular account is owned. Don't assume
that each of your investments is separately owned by you, or co-owned by you and
your spouse. Why does this matter? The ownership of an investment impacts the
transfer of that asset. For your planning purposes, it is important to
understand the definitions of each type of ownership. Examples of different
types of ownership include:
Individual or Sole Ownership: Assets are registered in one person's
name alone and transfer at the time of death according to the owner's will, or
other planning document such as a Transfer on Death (TOD) registration. (The
AARP Investment Program allows you to establish a TOD Registration on all AARP
Mutual Funds, except funds in IRAs. For more information, contact an AARP Mutual
Fund Representative.)
Joint Tenancy with Right of Survivorship (equal ownership between two
or more people): The portion of the investment belonging to the deceased tenant
transfers automatically at death to the surviving joint owner -- even if the
deceased tenant's will instructs differently.
Tenants in Common (equal or unequal ownership between two or more
people): The transfer of the deceased person's portion of ownership is
determined by his or her will. Transfer of Ownership does not automatically go
to the deceased person's spouse or to the other tenant(s).
Community Property (equal ownership between a married couple, only
available in certain states): The portion of the deceased spouse's assets
transfer at death according to the deceased person's will -- not necessarily to
the surviving spouse.
Named Beneficiary: Some investment accounts, such as IRAs, allow a
beneficiary to be named to inherit after death of the owner. If a death occurs
and the beneficiary designation is out of date, heirs may have difficulty in
getting it updated. (This is especially important for families where there have
been prior marriages.)
CALLOUT IN A BOX:
- --------------------------------------------------------------------------------
Check with an estate planning professional to be sure all your assets are titled
the way you want and that they will pass to your heirs the way you have planned,
with minimal tax consequences.
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Ownership and Taxes
Any time there is a change in ownership through sale, gift, or
inheritance, state and federal taxes may be due. Even if taxes are not due
currently, liability may be established for future years.
The following details how taxes impact property and investments:
Income taxes: Income taxes are due when appreciated assets are sold.
When appreciated assets are transferred or distributed to a beneficiary,
however, they could be deemed tax free, such as insurance proceeds. Other
transfers or distributions may be considered fully taxable -- the distribution
of assets from a Traditional IRA, for example. State taxes must also be
considered. State laws may vary from federal law.
Estate and Inheritance taxes: It is important to note that your estate,
and not your heirs, is responsible for any fees or taxes due as a result of the
probate process (all estates ordinarily must be settled in a court of law --
estate and inheritance taxes may be levied on the value of the estate passing to
heirs). Fees and taxes will be taken out before the assets are distributed to
heirs. Generally, if the estate is worth less than $625,000 for 1998 (this limit
is increasing every year), no estate taxes are due. The spouse and heirs will
not have to claim inheritances as taxable income. If they decide to sell their
inherited assets or the distributions from retirement accounts, however, income
taxes may be due. Other taxes, such as generation-skipping tax and gift tax, may
also apply. State taxes must also be considered (which may vary from federal
law). Remember, we want to assist you in a number of ways in planning your
legacy, but we are not in a position to give you legal or tax advice. For that
advice, you must consult with your own personal adviser.
Step Four:
Once you have established your Legacy File and have stored all original
documents in a safe place, you should feel a great sense of accomplishment! You
have just completed the time-consuming, but important task of getting your
financial affairs in order. Going forward, it is important to set aside time to
review your Legacy File. Once a year is usually sufficient, unless changes in
the status of any information in your file occur. If you have not already done
so, you should help your spouse become familiar with your Legacy File. In
addition, you should introduce both your spouse and your heirs to your financial
and legal advisors. By encouraging personal relationships, you will help to put
everyone at ease and prevent "opportunists" from having any undue influence at a
time when your family may be most vulnerable.
- --------------------------------------------------------------------------------
In the Event of Disability or Death
While the Legacy File is designed to help you plan appropriately for
the transfer of your estate to your heirs, the AARP Investment Program from
Scudder also offers family members guidance in dealing with immediate financial
matters at the time of a loved one's disability or death. Immediate decisions
required at this time include the assurance of uninterrupted income for a
surviving spouse, applying for insurance or retirement benefits, and managing
unforeseen expenses.
11
<PAGE>
What To Do First?
If your loved one prepared a Legacy File, then most of the questions
you may be faced with now can be answered by accessing the file, including the
existence of a will, which you will need to review in order to begin managing
the transfer of assets.
One of the most common concerns at this time is the immediate need for
cash, especially if you are a surviving spouse. If your regular source of income
has stopped, it is important to identify the appropriate new sources of income.
The following is a list of common income sources, which may apply to your
situation. Before calling any of the contacts listed, keep in mind that each
will have its own procedures and requirements. Most, however, will require a
certified copy of the death certificate before any claim or benefits can be
processed. You may want to order multiple copies of the death certificate in
order to facilitate your claims (your funeral director can help you with this).
Final Paycheck -- If the deceased spouse was still employed, you will
need to contact his or her employer immediately. It is important to discuss when
you can expect the paycheck, in addition to the inclusion of pay for unused
vacation days, bonuses, overtime, etc.
Monthly Retirement/Pension Check -- If the deceased was receiving a
retirement or pension check, you will need to contact the employer or
institution that issues the check. Discuss the different types of "survivor"
options you may have with the benefits administrator.
Social Security Benefit -- If you are already receiving Social Security
benefits, it is important to contact the Social Security Administration and
alert them to your new circumstances. If you do not yet receive any Social
Security benefits, you should also contact them to determine what, if any,
benefits are available to you now, or in the future. You can visit a local
Social Security office, or call 1-800-772-1213.
Insurance -- If the deceased was covered by an insurance policy, make
sure you have the policy number ready when you are calling the insurer. You can
expect a six to eight week processing period before you receive any payments on
the policy. This may be a good time to discuss the payment options with a
trusted advisor.
Retirement Savings Plan -- If you are the beneficiary of a retirement
savings plan such as a pension, profit sharing, or 401(k), SEP-IRA, Keogh, stock
purchase plan, 403(b), or annuity program, contact the employer or previous
employer to determine what options are available to you for receiving the
distribution. (Note: receiving payment from any of these plans usually takes
months, and payments are usually taxable. You should consult with a tax advisor
before making any requests regarding them.)
Call Us
If you have any questions concerning your investments in the AARP
Investment Program from Scudder, or concerning the Legacy Planning Service,
please do not hesitate to call one of our knowledgeable AARP Mutual Fund
Representatives for assistance. For family members who have experienced a death
and are facing the many questions that may ensue, our Legacy Planning
Specialists are waiting to offer guidance and information and can be contacted
by calling the Program's toll-free number.
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AARP MARKET
COMMENTARY AND
INDIVIDUAL
PORTFOLIO REVIEWS
Cornelia Small, President and Investment Director,
begins this section with an overview of the financial
markets for the past year and how they impacted the
AARP Funds.
An individual review of all AARP Funds from Scudder
follows the Market Commentary. Each Fund report details
individual Fund objectives, performance, portfolio
composition, asset allocations, sector
diversifications, as well as a risk/return analysis
chart and hypothetical growth chart. In addition, each
portfolio management team comments on how their Fund
performed during the period in relation to the market.
Because some of the investment terms used in various
reviews require additional explanation, we have
highlighted certain words which appear in the Glossary
on page 175. We hope this helps you to better
understand the Portfolio Reviews.
13
<PAGE>
Market Commentary for the 12-month
period ending September 30, 1998
By Cornelia Small, President and
Investment Director THE PRINTED DOCUMENT
CONTAINS A PHOTOGRAPH
OF CORNELIA SMALL HERE
Cornelia Small
President and
Investment Director
The volatility that characterized the beginning of the period has only
increased in the past several months. During the early months of 1998, we
witnessed historic highs in the financial markets, only to be followed by a
dramatic decline in stock prices -- and the drama was not isolated to one sector
or country. Instead, almost every economy on the global stage has been affected
in one way or another.
A Global Perspective
The first signs of uncertainty appeared in mid-1997, as investors worldwide
witnessed the beginnings of the Asian crisis, a domino effect trend that had
started with the devaluation of Thailand's currency in July. Soon to enter the
turmoil were Indonesia, Korea, and Malaysia, where problems such as weakening
banking structures and excessive debt wreaked havoc on the respective economies.
As 1998 began, financial instability in other economies began to compound,
including Japan, and more recently Russia and Latin America. Much of the turmoil
can be traced to the availability of credit to these emerging market countries.
A prime example is Russia, to which many foreign banks lent money to help its
faltering economy, believing that reform on all levels was on the horizon. What
became apparent in the past few months, however, is that very little had
actually changed in Russia and that the old ways of doing business were slow to
reform. What we are left with for now is a country unable to repay its lenders
- -- a crisis that has already had a negative ripple effect on markets around the
world.
The Impact on the U.S. Stock Market
Viewed as an "island of prosperity" for the first half of 1998, the United
States eventually fell victim to global pressures. While fundamentals such as
low unemployment and confident consumer spending were still present, the global
economic crises finally found their way to certain sectors of our economy.
Profits have been dampened, foreign orders have been curtailed, and credit
problems overseas have hit U.S. financial institutions. This is not to say that
the severe market volatility was solely a result of foreign influence. Large
segments of the U.S. stock market had been weakening in price all year. However,
most of the market drops were viewed enthusiastically as buying opportunities,
as was evident by the ongoing cash flows into mutual funds. Late in the period,
however, the response to the volatility was far more cautious.
14
<PAGE>
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
THE STOCK MARKET
CHART PERIOD:
1993-1998
CHART DATA:
MSCI EAFE Russell 2000 S&P 500
Index Index Index
----- ----- -----
1993-1994 8.28% 1.25% 0.82%
1994-1995 4.11 21.19 26.31
1995-1996 6.92 11.60 17.61
1996-1997 10.48 31.01 37.82
1997-1998 -9.71 -19.88 7.36
CAPTION TO PRECEDING CHART:
The stock market total return for the annual periods 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.
------
The Bond Market
In this time of stock market turmoil, the bond market has been viewed as a
relatively safe haven. In an environment where recession and deflation were
being seriously discussed, a "flight to quality" occurred, with investors buying
Treasury securities for the creditworthiness and liquidity they provided. Bonds
issued by strong foreign governments such as Germany also attracted investor
interest. However, dramatic declines occurred in the prices of less creditworthy
bonds, such as low quality corporate debt and emerging market debt, as the
credit concerns that beset the global stock markets also permeated the world of
fixed income instruments.
Performance of the AARP Funds
Due to the far-reaching effects of global financial problems, both our
domestic and global funds experienced a challenging 12-month period. Until late
summer, the U.S. stock market provided highly divergent performance. Stock
prices of very large, high-quality growth companies were very strong while the
prices of many other sectors declined. As a result, some of the AARP equity
funds, which are diversified across sectors and avoid excessive valuations,
struggled to keep ahead of the market averages. Others, such as the AARP U.S.
Stock Index Fund, performed well when compared to similarly managed funds, with
a return of 9.39% for the period versus the unmanaged S&P 500 Index, which
returned 9.04% for the period.
Of particular concern to many of you was the performance of the AARP Growth
and Income Fund. While Lin Coughlin addresses the Fund's recent performance in
the context of its historical record in her opening letter, allow me to add a
few observations with regard to the recent performance, beginning with a review
of the Fund's investment objective.
15
<PAGE>
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
THE U.S. BOND MARKET
CHART PERIOD:
1993-1998
CHART DATA:
Lehman Brothers Lehman Brothers Merrill Lynch Master
Aggregate Bond Index Municipal Bond Index Mortgage Index
-------------------- -------------------- --------------
1993-1994 2.37% 2.32% -0.882%
1994-1995 4.99 7.43 13.858
1995-1996 10.79 8.38 5.713
1996-1997 4.91 5.45 10.060
1997-1998 11.50 8.71 8.694
CAPTION TO PRECEDING CHART:
The U.S. Bond market yield for the annual periods September 30 to September 30,
as measured by the Lehman Brothers Aggregate Bond Index, the Lehman Brothers
Municipal Bond Index and the Merrill Lynch Master Mortgage Index.
------
In keeping with its investment objective to provide long-term growth of
capital with less downside fluctuation than other growth and income funds, as
well as to offer investors a stream of dividend income, the Fund invests
primarily in stocks of companies that pay above average dividends and
fixed-income securities convertible into common stocks -- common characteristics
of a value-oriented style, not a growth style. Over time, our research has shown
that above average yielding stocks as a group tend to outperform lower yielding
stocks with lower volatility. This investment discipline, however, does not
outperform during every discrete time period. During the second quarter and
year-to-date, our style was severely out of favor, as it was the largest of the
growth companies that outperformed for most of the period versus all other
groups.
Many industry watchers attribute this outperformance to, among other
factors, the financial crises affecting multiple foreign markets. Because of the
integration of the global economy, market conditions around the world have
heavily affected our economy. Often, rising perceptions of economic and
financial risks set into motion a trend known as "flight to quality." Simply
put, investors seek the apparent safety of well established, high-quality growth
companies during times of uncertainty, in hopes that the turmoil will pass. This
is not to say that value stocks are not considered "quality" stocks, but rather,
many investors simply have been willing to pay a greater premium for the
perception of less risk until conditions improve in other sectors. The result
has been an extreme divergence in the returns, as well as valuations, of growth
stocks versus value stocks.
Periods of extreme dichotomies like this appear from time to time and since
the beginning of the fiscal year, early signs of reversal have started to
appear.
16
<PAGE>
The international funds benefited from the strong performance of European
markets early in the year. Since the summer, however, the global shivers
emanating from emerging markets have managed to affect markets worldwide and as
a result, have negatively impacted the value of some of your Funds. The AARP
International Growth and Income Fund returned -3.16% for the 12-month period,
outperforming the unmanaged MSCI EAFE Index, which returned -8.35%.
Our more conservative funds, mainly those that invest in bonds, fared
better for the period, as investors viewed bonds as a safe haven from the recent
turmoil in the equity markets. Funds that fared well on a relative basis during
the period included the AARP GNMA and U.S. Treasury Fund. The performances of
the bond funds have benefited from the overall decline in interest rates as well
as their bias toward areas of stronger credit quality. The bond funds avoided
much of the recent pain which occurred as the credit spread between high- and
low-quality credits widened.
In addition, the AARP High Quality Money Fund saw an increase in assets, as
it can help provide shelter from the storms in the equity markets for many
investors during the period.
Looking Ahead
While the U.S. economy may be heading into some cyclical weakness, we
believe that the fundamentals of many U.S. and foreign companies are in good
shape. In the last 10 years, many U.S. companies have positioned themselves to
prosper in today's changing world; Europe is not far behind. How economies such
as Japan and those of Southeast Asia resolve their problems is still of major
concern. However, we believe these countries cannot keep the rest of the world
economy from the emerging path of healthy, deflationary growth. Our best
suggestion is to maintain a healthy perspective concerning performance
expectations and believe that despite near-term risks, the volatility that has
characterized global markets over the past several months will subside at some
point in the future.
17
<PAGE>
AARP HIGH QUALITY MONEY FUND
----------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP High Quality Money Fund seeks 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.
FOR WHOM THE
FUND IS DESIGNED
This Fund may be appropriate for investors who have short-term needs or who do
not want the risks associated with investing in stocks or bonds. These investors
include those seeking money market income to help meet regular day-to-day needs,
those who need immediate access to their assets through free checkwriting, those
who want to diversify their investments with an investment designed to provide a
degree of safety and stability, and those seeking a short-term investment prior
to making longer-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
Frank J. Rachwalski, Jr.
Lead Portfolio Manager
John W. Stuebe
Portfolio Manager
- ------------------------------------------------------------------------------
INVESTMENT STRATEGY
The performance of the AARP High Quality Money Fund mirrored the movement
of short-term interest rates during the past 12 months. Since March of 1997
through September 29, 1998, the Federal Funds rate remained at 5.5% and was
subsequently lowered on the 29th of September to 5.25%. In anticipation of the
recent easing, the short-term yield curve became inverted beyond maturities of
45 days. An inverted yield curve indicates that the market expects interest
rates to decline. As a result, we adjusted the average life of our holdings by
shortening average maturities to take advantage of market fluctuations in a
volatile market.
All securities purchased during the period were rated within the two
highest quality ranges of at least one of the three leading national independent
rating firms: Fitch Investors Service, Inc., Moody's Investors Service, Inc., or
Standard & Poor's Corporation (S&P). We also complied with the guidelines to
maintain a AAA rating from S&P, the highest rating available* (approximately 5%
of money funds are rated, which provides an added degree of assurance for
discriminating investors). In addition, within the universe of securities that
fit within the S&P criteria, Scudder Kemper credit analysts adhere to even
stricter guidelines, approving only a small percentage. Thus the universe of
securities from which we construct the Fund's portfolio is smaller and generally
of better quality than most other money funds.
------------------------------
PORTFOLIO STATISTICS
Number of Issues 29
7-Day Current Yield 4.84%
Average Maturity 32 days
Average Quality AAAm
------------------------------
PORTFOLIO RETURNS
One-Year Cumulative
Total Return 4.86%
Five-Year Average
Annual Total Return 4.40%
Ten-Year Average
Annual Total Return 5.02%
Five-Year Cumulative
Total Return 24.05%
Ten-Year Cumulative
Total Return 63.26%
------------------------------
OUTLOOK
The AARP High Quality Money Fund can be an excellent vehicle for investors
seeking to preserve capital and grow their investment, while striving to
maintain a potentially favorable investment return. In the current economic
environment, the Fund is expected to meet its goal of favorable investment
returns with a high degree of safety.
- ---------
* The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
18
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
-------------------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP High Quality Tax Free Money Fund seeks to provide current income free
from federal taxes.^1 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.
FOR WHOM THE
FUND IS DESIGNED
This Fund may be appropriate for investors seeking tax-free income or those who
do not want the risks associated with investing in stocks or bonds. These
investors include those seeking tax-free money market income to meet regular
day-to-day expenses, those needing immediate access to their assets through free
checkwriting, those creating a diversified portfolio who want a portion of their
assets in a conservative investment designed to offer stability, and those
seeking a short-term investment prior to making longer-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
Frank J. Rachwalski, Jr.
Lead Portfolio Manager
Jerri I. Cohen
Portfolio Manager
^1 It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Capital gains may be
subject to taxes as well.
- ------------------------------------------------------------------------------
INVESTMENT STRATEGY
The performance of the AARP High Quality Tax Free Money Fund mirrored the
movement of short-term interest rates during the past 12 months. We adjusted the
portfolio's average life to take advantage of seasonal pressures and other
similar market fluctuations in a very stable market. In anticipation of the
recent easing in monetary policy by the Federal Reserve, the short-term yield
curve flattened and recently became inverted, or negative (when short-term rates
are higher than longer-term rates) beyond maturities of 45 days (for an
explanation of "inverted yield curve," please see the Investment Strategy
section of the AARP High Quality Money Fund). Overall, we bought securities that
had shorter-term maturities, as it would allow us greater flexibility in a
volatile market. Going forward, we expect to maintain an average life of our
holdings typically within the 20- to 50-day range.
All securities purchased during the period were rated within the two
highest quality ranges of at least one of the three leading national independent
rating firms: Fitch Investors Service, Inc., Moody's Investors Service, Inc., or
Standard & Poor's Corporation (S&P). We also complied with the guidelines to
maintain a AAAm rating from S&P, the highest rating available* (approximately 5%
of money funds are rated AAAm, which provides an added degree of assurance for
discriminating investors). In addition, within the universe of securities that
fit within the S&P criteria, Scudder Kemper credit analysts adhere to even
stricter guidelines, approving only a small percentage of such securities. Thus
the universe of securities from which we construct the Fund's portfolio is
smaller and generally of better quality than most other tax-free money funds.
- ------------------------------
PORTFOLIO STATISTICS
Number of Issues 53
7-Day Current Yield 2.96%
Average Maturity 15 Days
Average Quality AAAm
- ------------------------------
PORTFOLIO RETURNS
One-Year Cumulative
Total Return 2.82%
Five-Year Average
Annual Total Return 2.63%
Ten-Year Average
Annual Total Return 3.43%
Five-Year Cumulative
Total Return 13.88%
Ten-Year Cumulative
Total Return 40.17%
- ------------------------------
OUTLOOK
The AARP High Quality Tax Free Money Fund can be an excellent vehicle for
investors seeking to preserve capital and grow their investments, while striving
for a potentially favorable investment return. In the current economic
environment, the Fund is expected to meet its goal of favorable investment
returns with an added degree of safety.
- ---------
* The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
19
<PAGE>
AARP HIGH QUALITY SHORT TERM BOND FUND
--------------------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP High Quality Short Term Bond Fund seeks 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. The Fund pursues this objective by investing
primarily in high-quality, short-term U.S. government, corporate, and other
fixed-income securities. The Fund modified its investment objective on
February 1, 1998 and changed its name from the AARP High Quality Bond Fund.
The previous objective was to invest in high-quality securities, regardless of
length of maturity.
PORTFOLIO
MANAGEMENT TEAM
Stephen A. Wohler
Lead Portfolio Manager
Robert S. Cessine
Portfolio Manager
-------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 7.90% 11.50%
5 yr. 30.24% 41.64%
10 yr. 117.93% 143.34%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. 7.90% 11.50%
5 yr. 5.43% 7.21%
10 yr. 8.10% 9.29%
-------------------------------
- ------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP High Quality Short Term Bond Fund's total return for the
one-year period ending September 30, 1998 was 7.90% (representing 6.04% in
distributions of income and 1.86% in capital change). In February of 1998, the
Fund changed both its name and objective. At that time, we focused on
shortening the Fund's duration (the measure of a portfolio's sensitivity to
changes in interest rates) which can be accomplished by altering the
portfolio's mix of securities.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP HIGH QUALITY LEHMAN BROTHERS
SHORT TERM BOND AGGREGATE BOND
FUND INDEX+
----------------- ---------------
88 10000 10000
89 11038 11127
90 11614 11965
91 13407 13878
92 14956 15621
93 16733 17180
94 15805 16625
95 17856 18963
96 18676 19888
97 20198 21824
98 21793 24334
THE FUND'S INVESTMENT STRATEGY
The Fund continues on its moderate pace of restructuring with an eye
toward improving portfolio yield. We seek to accomplish this by shortening the
Fund's duration to under three years. This active management of duration is
integral to the Fund's search for income and relative price stability.
Essentially, the shorter a portfolio's duration, the less its net asset value
will be adversely affected by an increase in interest rates. On the flip side,
a short duration may also restrict the portfolio from participating in market
rallies. For the period, portfolio duration was maintained at approximately
2.4 years, about 20% longer than our target duration of two years, but an
improvement over the mid-year average duration of 2.98 years. We accomplished
this by investing primarily in bonds with maturities of five years or less.
In seeking investments which meet our criteria, our emphasis has been on
short-term issues with call protection (which would help provide upside price
potential in the event of a steepening yield curve). New purchases include
Simon Property Group, Enron, USA Waste, Comdisco, and Detroit Edison. In
addition, we purchased some AAA-rated asset-backed and Collateralized Mortgage
Obligation (CMO) securities.
As of September 30, 1998, the portfolio consisted primarily of
corporate bonds and asset-backed securities. At present, 30% of the possible
35% is invested in issues rated below AA. With the Fund's exposure to
- ------------------------------------------------------------------------------
+ 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.
20
<PAGE>
interest rates larger than its peer universe, the Fund performed at the
top of its universe for the months of April, May, and July, as the market
rallied. June and August proved to be more difficult periods, as the corporate
bond market was adversely affected by the turmoil in emerging markets debt and
U.S. high yield bonds.
OUTLOOK
We believe the Fund should continue to provide shareholders with high
income potential and less downside risk than comparable short-term bond funds.
Our emphasis remains on shortening the Fund's duration to limit exposure to
interest rate risk. In doing so, we seek to deliver high current income from a
high credit-quality, diversified portfolio.
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
MATURITY STRUCTURE
As of September 30, 1998
PIE CHART DATA:
Under 2 Years 34.0%
2 to 3 Years 26.2%
3 to 4 Years 12.2%
4 to 5 Years 23.2%
5 to 7 Years 1.8%
Over 7 Years 2.6%
-----
100%
=====
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors who want high current income from a
portfolio of high-quality short-term debt securities. Investors should be
seeking to invest for at least three years and be comfortable with fluctuation
in the value of their principal and yield.
- ------------------------------
PORTFOLIO DIVERSIFICATION
As of September 30, 1998
Corporate Bonds 52%
Asset-Backed 20%
U.S. Government-Agency
Pass-Throughs 12%
Cash Equivalents 10%
U.S. Treasury Obligations 5%
Government National
Mortgage Association 1%
----
100%
====
- ------------------------------
PORTFOLIO STATISTICS
Number of Issues 58
30-Day SEC Yield 5.13%
Average Coupon 6.65%
Yield to Maturity 4.08%
Average Maturity 2.92 Years
Average Duration 2.38 Years
Average Quality AA
- ------------------------------
21
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
--------------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP GNMA and U.S. Treasury Fund seeks to provide a high level of current
income, but with less risk of loss to the Fund's portfolio than other GNMA
mutual funds. Although your principal is not guaranteed, the Fund is managed to
moderate downside loss compared to other GNMA mutual funds. While the securities
in the Fund are guaranteed as to the timely payment of principal and interest,
the guarantee does not apply to the Fund's yield or share price, both of which
will fluctuate daily.
PORTFOLIO
MANAGEMENT TEAM
Richard L. Vandenberg
Lead Portfolio Manager
Scott E. Dolan
Portfolio Manager
------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 8.40% 8.37%
5 yr. 33.36% 42.57%
10 yr. 110.99% 140.52%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. 8.40% 8.37%
5 yr. 5.93% 7.35%
10 yr. 7.75% 9.17%
------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP GNMA and U.S. Treasury Fund's total return for the one-year period
ending September 30, 1998 was 8.40% (representing 6.82% in distributions of
income and 1.58% in capital change). The 30-day SEC yield as of September 30 was
5.96%. Its benchmark index, the unmanaged Lehman Brothers Mortgage GNMA Index,
returned 8.37% for the same period. The Fund outperformed the Index even though
the Index return does not reflect investment in cash or shorter-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 PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP GNMA AND LEHMAN BROTHERS
U.S. TREASURY FUND MORTGAGE GNMA INDEX+
------------------ --------------------
88 10000 10000
89 10817 11131
90 11775 12181
91 13438 14204
92 14941 15826
93 15821 16870
94 15520 16666
95 17121 19010
96 17940 20127
97 19463 22195
98 21100 24052
THE FUND'S INVESTMENT STRATEGY
The past twelve months were truly rewarding to bond investors, as interest
rates declined dramatically. Interest rates moved lower as the economic
situation in Japan and Asia continued to weaken, the Russian government
defaulted, and investors flocked to U.S. Treasuries. Stock market volatility
further caused investors to shift assets toward bonds, as uncertainty regarding
U.S. economic growth dampened earnings prospects. During the
THE PRINTED DOCUMENT CONTAINS A MATRIX CHART HERE, SHOWING A
THREE-YEAR RISK/RETURN PERFORMANCE OF THE FUND
TITLE:
AARP GNMA and U.S. Treasury Fund
Three-Year Risk/Return Performance
CHART DATA: (AARP Fund noted by XXXX)
<TABLE>
<S> <C> <C> <C> <C> <C>
----------------------------------
Lipper Over three years, this Fund is in
GNMA Peer the Best 25% of similar funds for
Return Group* Risk Monthly Downside Risk, and in the
---------------------------------- fourth quartile of similar funds
Highest Lowest for Total Return.
Return Best 25% XXXX Risk
------------ ----------- The monthly averages for risk and
return are for 21 similar funds
Next 25% for the period October 1, 1995
------------ ----------- through September 30, 1998.
Next 25%
------------ -----------
Lowest Highest
Return XXXX Worst 25% Risk
------------ -----------
</TABLE>
* Lipper Analytical Services, Inc. is the source for the peer group information
of similar funds.
- --------------------------------------------------------------------------------
+ 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.
22
<PAGE>
period, 30-year Treasury yields declined over 140 basis points to less than 5%.
In late September, the Federal Reserve responded to the growing economic risks
by lowering the Federal Funds rate by a 1/4% to 5.25%.
As interest rates moved lower during the year, the prepayment risk
associated with GNMAs increased, as homeowners took advantage of the
historically low mortgage rates to refinance their homes. In response to this
risk, we modestly reduced our exposure to GNMAs in favor of U.S. Treasury
issues. In addition, positions in GNMA 8%, 9.5%, and 10% coupons were reduced in
favor of lower coupons with less prepayment risk. In an effort to preserve the
Fund's duration, or sensitivity to interest rates, we purchased intermediate and
long term Treasuries thus allowing the Fund to participate in the price gains
associated with the declining interest rates.
OUTLOOK
Looking forward, we believe you should be comfortable with your investment
in the AARP GNMA and U.S. Treasury Fund, as the Fund is designed for most
investment environments. We further feel the current blend of GNMA and Treasury
obligations in the Fund's portfolio will continue to provide a competitive
stream of income consistent with less share price volatility than other GNMA
funds.
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for conservative investors who want relatively high current
income with less interest rate risk than long-term bonds. 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, 1998
Government National
Mortgage Association 90%
U.S. Treasury Obligations 7%
Cash Equivalents 3%
----
100%
====
- ------------------------------
PORTFOLIO STATISTICS
Number of Issues 1844
30-Day Yield 5.96%
Average Coupon 6.93%
Yield to Maturity 6.02%
Average Maturity 6.91 Years
Average Duration 2.46 Years
Average Quality AAA
- ------------------------------
23
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
---------------------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP Insured Tax Free General Bond Fund seeks a high level of current income
free from federal income taxes^1 but with less risk of loss to its portfolio
than other insured tax-free bond mutual funds. The Fund pursues a high level of
current income by investing primarily in high-quality, federally tax-exempt
municipal securities that are insured against default by the municipality. This
insurance does not apply to the value of your shares or the yield of the Fund,
both of which will fluctuate daily.
PORTFOLIO
MANAGEMENT TEAM
Philip G. Condon
Lead Portfolio Manager
M. Ashton Patton
Portfolio Manager
------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 7.57% 8.72%
5 yr. 30.19% 36.35%
10 yr. 116.35% 123.11%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. 7.57% 8.72%
5 yr. 5.42% 6.39%
10 yr. 8.02% 8.35%
------------------------------
^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. Gains on sales of
Fund shares and distributions of capital gains generally will be subject to
federal, state, and local taxes.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP Insured Tax Free General Bond Fund's total return for the one-year
period ending September 30, 1998 was 7.57% (representing 4.96% in distributions
of income and 2.61% in capital change). Its 30-day SEC yield as of September 30,
1998 was 3.82%. This is a taxable equivalent yield of 6.32% for shareholders in
the 39.6% tax bracket.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP INSURED TAX FREE LEHMAN BROTHERS
GENERAL BOND FUND MUNICIPAL BOND INDEX+
88 10000 10000
89 11066 10868
90 11606 11608
91 13214 13138
92 14538 14514
93 16618 16363
94 15875 15964
95 17496 17750
96 18526 18821
97 20113 20522
98 21636 22311
Owing to the Fund's investment strategy aimed at moderating downside risk,
its performance may lag behind similar funds and the Index, especially during
periods when the bond market has rallied. Its benchmark index, the unmanaged
Lehman Brothers Municipal Bond Index, returned 8.72% for the same period. It is
important to note that the Index return does not reflect investment in cash or
the deduction of any servicing, investment management, or administrative
expenses, as that of a mutual fund does.
THE PRINTED DOCUMENT CONTAINS A MATRIX CHART HERE, SHOWING A
THREE-YEAR RISK/RETURN PERFORMANCE OF THE FUND
TITLE:
AARP Insured Tax Free General Bond Fund
Three-Year Risk/Return Performance
CHART DATA: (AARP Fund noted by XXXX)
<TABLE>
<S> <C> <C> <C> <C> <C>
----------------------------------
Lipper Over three years, this Fund is in
Insured Muni the Best 25% of similar funds for
Return Debt Peer Risk Monthly Downside Risk, and in the
Group* Best 50% of similar funds for
---------------------------------- Total Return.
Highest Lowest
Return Best 25% XXXX Risk The monthly averages for risk and
------------ ----------- return are for 16 similar funds
for the period October 1, 1995
XXXX Next 25% through September 30, 1998.
------------ -----------
Next 25%
------------ -----------
Lowest Highest
Return Worst 25% Risk
------------ -----------
</TABLE>
* Lipper Analytical Services, Inc. is the source for the peer group information
of similar funds.
- --------------------------------------------------------------------------------
+ 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.
24
<PAGE>
THE FUND'S INVESTMENT STRATEGY
In keeping with the Fund's investment objective of producing a high
level of tax-free income with less price risk, we continued to focus on
securities with maturities that provided the best expected returns relative to
their price risk. As a result, 72% of the portfolio was invested in bonds with
maturities between 5 and 15 years. In addition, 87% of the Portfolio's bonds are
non-callable. Callable bonds permit the issuer to redeem the bonds prior to
their stated maturity date so that they may be refinanced at a lower interest
rate. Therefore, our strategy is to purchase non-callable bonds in order to
provide a more reliable stream of income.
The Fund continues to have a duration slightly shorter than the
long-term municipal market in order to limit price volatility. At present, the
portfolio consists of 97% AAA-insured bonds with an average effective duration
of 7.62 years, which is slightly shorter than the Index.
OUTLOOK
We continue to seek to provide you with high current income, free from
federal income taxes, but with less risk of loss than a long-term municipal bond
fund. Despite current market conditions, we also remain committed to maintaining
a portfolio comprised predominantly of securities with moderate duration.
Essentially, the shorter a portfolio's duration, the less its net asset value
will likely be adversely affected by an increase in interest rates. At the same
time, a short duration may restrict a portfolio's participation in market
rallies.
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors in higher tax brackets who want high income
that is free from federal income taxes. Investors should be seeking to invest
for the longer term (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, 1998
Less than 1 year 3%
1 to less than 5 years 11%
5 to less than 10 years 35%
10 to less than 15 years 37%
Greater than 15 years 14%
----
100%
====
- --------------------------------
PORTFOLIO STATISTICS
Number of Issues 370
30-Day SEC Yield 3.82%
Average Coupon 4.67%
Average Maturity 10.2 Years
Effective Duration 7.62 Years
Average Quality AAA
- --------------------------------
25
<PAGE>
AARP BOND FUND FOR INCOME
-------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP Bond Fund for Income seeks to produce a high level of current income
but with less risk of loss to its portfolio than other long-term bond mutual
funds. The Fund pursues current income by investing primarily in short-,
medium-, and long-term investment-grade debt securities.
PORTFOLIO
MANAGEMENT TEAM
Stephen A. Wohler
Lead Portfolio Manager
Kelly D. Babson
Robert S. Cessine
Portfolio Managers
------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 8.47% 11.50%
Life of
Fund* 15.05% 18.42%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. 8.47% 11.50%
Life of
Fund* 8.81% 10.70%
------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP Bond Fund for Income's total return for the one-year period
ending September 30, 1998 was 8.47% (representing 6.95% in distributions of
income and 1.52% in capital change).
The Fund's performance improved versus its competitors in June and
July. However, August's "flight" to high quality assets (when investors seek the
perceived safety of less risky investments), during which prices of U.S.
Treasuries rose while those of lesser quality bonds fell in the high grade and
high yield corporate markets, made it a difficult month. Even our holdings of
26% in Treasuries and 9% in cash in the Fund were insufficient to bolster the
performance during the market downturn. However, we believe the portfolio is
well positioned to take full advantage of lower valuations in many market
sectors for the future.
The Fund's benchmark index, the unmanaged Lehman Brothers Aggregate
Bond Index, returned 11.50% for the same period. Owing to the Fund's investment
strategy of minimizing downside risk, its performance often lags similar funds
in the Index. It is important to also note that the index return does not
reflect investment in cash or the deduction of any servicing, investment
management, or administrative expenses, as a mutual fund must.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Quarterly Periods from February 1, 1997*
to September 30, 1998
CHART DATA:
AARP BOND FUND LEHMAN BROTHERS
FOR INCOME AGGREGATE BOND INDEX+
---------- ---------------------
2/1/97* 10000 10000
3/97 9921 9914
6/97 10266 10279
9/97 10606 10621
12/97 10875 10933
3/98 11035 11102
6/98 11261 11362
9/98 11505 11841
THE FUND'S INVESTMENT STRATEGY
We invested primarily in BB-rated securities -- the highest level of
low-grade securities -- as well as those of higher quality. Our focus has been
on finding non-cyclical corporate issues with attractive yield levels, resulting
in purchases of such issuers as Simon Property Group, Time Warner, Niagara
Mohawk, Westpoint Stevens, Inc., TCI-Communications, Inc., and Worldcom. Because
of what we perceive as weakening technical factors in the corporate market, the
percentage of assets invested in Treasuries has been kept constant.
- --------------------------------------------------------------------------------
+ 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.
26
<PAGE>
At present, the portfolio has a duration of 5.2 years, an average quality
of A1 and a 6% weighting in below investment grade bonds. This positioning
leaves the Fund slightly above its universe of peer funds in interest rate
exposure and credit quality.
OUTLOOK
We continue to manage the Fund with less potential for loss in the value of
the portfolio than comparable investment-grade debt mutual funds. Shareholders
should recognize, however, that the Fund may experience more volatility than the
AARP GNMA and U.S. Treasury Fund or the AARP High Quality Short Term Bond Fund.
Investors, therefore, should be in a position to exchange greater short-term
risk to the value of their investment for the potential of greater returns over
the long term.
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
Maturity Structure
As of September 30, 1998
PIE CHART DATA:
Under One Year 8%
1 to 5 Years 25%
5 to 8 Years 36%
Over 8 Years 31%
----
100%
====
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors who seek high current income, but are willing
to accept interest rate, credit, and other risks associated with a portfolio of
investment-grade and, to a lesser extent, below-investment-grade bonds (up to
35% of total assets). You should be prepared to invest for the longer term (at
least three years or more) and be comfortable with fluctuation in the value of
your principal. We believe that 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, price appreciation, and less share price fluctuation
than other long-term bond funds of similar quality.
- --------------------------------
PORTFOLIO ALLOCATION
As of September 30, 1998
Corporate Bonds 54%
U.S. Treasury Obligations 26%
Cash Equivalents 9%
Asset-Backed Securities 6%
Government National
Mortgage Association 2%
Foreign Bonds -- U.S. $
Denominated 2%
Collateralized Mortgage
Obligations 1%
----
100%
====
- --------------------------------
PORTFOLIO STATISTICS
Number of Issues 90
30-Day SEC Yield 6.32%
Average Coupon 7.95%
Yield to Maturity 5.80%
Average Maturity 8.53 Years
Average Duration 5.2 Years
Average Quality A1
- --------------------------------
27
<PAGE>
AARP BALANCED STOCK AND BOND FUND
---------------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP Balanced Stock and Bond Fund seeks to provide long-term capital growth
and income but with less risk of loss to its portfolio than other balanced
mutual funds. 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.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
Lori J. Ensinger
Stephen A. Wohler
Portfolio Managers
-------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 1.26% 10.21%
3 yr. 45.81% 53.68%
Life of
Fund* 68.98% 80.98%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. 1.26% 10.21%
3 yr. 13.40% 15.39%
Life of
Fund* 11.91% 13.56%
-------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP Balanced Stock and Bond Fund's total return for the one-year
period ending September 30, 1998 was 1.26% (representing 3.41% in distributions
of income and -2.15% in capital change). Its benchmark index is a blend of the
unmanaged Standard & Poor's 500 Index (50%), the unmanaged Lehman Brothers
Aggregate Bond Index (40%), and the three-month Treasury Bill Index (10%). The
blended index returned 10.21% for the same period. Because the Fund was
introduced on February 1, 1994, there is no five- or ten-year data available.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Annual Periods from February 1, 1994*
to September 30, 1998
CHART DATA:
<TABLE>
<CAPTION>
AARP BALANCED STOCK STANDARD & POOR'S 500 LEHMAN BROTHERS BLENDED
AND BOND FUND STOCK PRICE INDEX AGGREGATE BOND INDEX INDEX+
------------- ----------------- -------------------- ------
<S> <C> <C> <C> <C>
2/94* 10000 10000 10000 10000
9/94 9922 9800 9543 9747
9/95 11589 12715 10885 11776
9/96 13104 15299 11416 13247
9/97 16687 21489 12527 16421
9/98 16898 23432 13968 18098
</TABLE>
THE FUND'S INVESTMENT STRATEGY
Overall, the stock portion of the Fund (representing 56% of the
portfolio as of September 30, 1998) follows a similar investment approach as the
AARP Growth and Income Fund. For the period, we continued to invest primarily in
stocks of companies that pay above average dividends.
THE PRINTED DOCUMENT CONTAINS A MATRIX CHART HERE, SHOWING A
THREE-YEAR RISK/RETURN PERFORMANCE OF THE FUND
TITLE:
AARP Balanced Stock and Bond Fund
Three-Year Risk/Return Performance
CHART DATA: (AARP Fund noted by XXXX)
<TABLE>
<S> <C> <C> <C> <C> <C>
----------------------------------
Lipper
Return Balanced Risk
Peer Group*
----------------------------------
Highest Lowest Over three years, this Fund is in
Return Best 25% XXXX Risk the Best 25% of similar funds for
------------ ----------- Monthly Downside Risk, and in the
third quartile of similar funds
Next 25% for Total Return.
------------ -----------
The monthly averages for risk and
XXXX Next 25% return are for 119 similar funds
------------ ----------- for the period October 1, 1995
Lowest Highest through September 30, 1998.
Return Worst 25% Risk
------------ -----------
</TABLE>
* Lipper Analytical Services, Inc. is the source for the peer group information
of similar funds.
- --------------------------------------------------------------------------------
+ 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 10% the 3-Month Treasury Bill Index. 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 and American Stock
Exchange, and traded on the 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.
28
<PAGE>
Our research has shown that above-average yielding stocks, as a group, generally
tend to outperform lower yielding stocks, with lower volatility. This investment
discipline, however, does not outperform in every discrete time period. During
the second quarter and year-to-date, our value style was severely out of favor,
as it was low and non-dividend yielding stocks that outperformed the market.
Despite our recent underperformance, we are still completely committed to our
style of investing in companies that pay above-average dividends. We, like you,
are long-term investors and we believe that our disciplines will lead to
outperformance over the long term. For a more in-depth report on stock
selection, please refer to the AARP Growth and Income Fund review, as the same
strategy and stock selection process are followed for both Funds.
The portion of the Fund that invests in bonds (representing 39% of the
portfolio as of September 30, 1998) may include corporate issues, U.S.
government securities, mortgage-backed obligations, and other fixed income
securities. At least 75% of the securities must be rated within the three
highest quality ratings (AAA, AA, and A) by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, independent rating organizations. In the past six
months, the emphasis has been on finding short-term issues with call protection,
to provide added protection in the event of falling interest rates which may
trigger refinancing of debt. As of September 30, 1998, the bond portfolio was
invested in securities with an average duration of 5.1 years, an average quality
of AA3. Twenty-three percent of the maximum allowable 25% of securities were
rated Baa.
- ------------------------------
ASSET ALLOCATION
As of September 30, 1998
Stock Holdings 56%
Bond Holdings 39%
Cash Equivalents 5%
----
100%
====
- ------------------------------
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
This Fund is designed for investors who are seeking long-term growth of their
assets, but who want less risk than money invested solely in stocks. Investors
should be able to invest for the longer term (at least three to five years or
more) and be comfortable with the value of their principal moving up and down.
- ------------------------------
STOCK ALLOCATION
As of September 30, 1998
Financial 20%
Manufacturing 13%
Durables 11%
Utilities 10%
Communications 10%
Energy 10%
Health 7%
Consumer Staples 5%
Consumer Discretionary 3%
Other 11%
----
100%
====
- ------------------------------
BOND ALLOCATION
As of September 30, 1998
Corporate Bonds 56%
Asset-Backed Securities 13%
U.S. Government Agency-
Backed Mortgages 12%
U.S. Treasury Obligations 11%
Foreign Bonds - U.S. $
Denominated 6%
Collateralized Mortgages 2%
----
100%
====
- ------------------------------
29
<PAGE>
AARP GROWTH AND INCOME FUND
---------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP Growth and Income Fund seeks to provide long-term capital growth and
income but with less risk of loss to its portfolio than other growth and income
mutual funds. The Fund pursues long-term capital growth and income by investing
primarily in common stocks with above-average dividend yields and fixed income
securities which are convertible into common stocks.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
Lori J. Ensinger
Kathleen T. Millard
Benjamin W. Thorndike
Portfolio Managers
-------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. -4.22% 9.04%
5 yr. 110.66% 147.92%
10 yr. 318.34% 392.58%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. -4.22% 9.04%
5 yr. 16.07% 19.90%
10 yr. 15.39% 17.28%
- -------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP Growth and Income Fund's total return for the one-year period
ending September 30, 1998 was -4.22% (representing 2.01% in distributions of
income and -6.23% in capital change). Several reasons can be cited to explain
the Fund's recent underperformance; most notably the dramatic outperformance of
a relatively small group of the largest stocks in the U.S. market, the
significant underperformance of "value" stocks versus "growth" stocks, and the
impact of the financial crises in Asia, Russia, and Latin America, in cyclical
and financial companies in particular. Combined, the effects of these situations
on the Growth and Income portfolio for the second quarter and year-to-date have
not been favorable. The Fund's benchmark index, the unmanaged Standard & Poor's
500 Index, returned 9.04% for the same period. It is important to note that 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.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
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+
----------- ----------------------
88 10000 10000
89 13052 13297
90 11721 12070
91 14908 15830
92 16635 17583
93 19858 19869
94 21445 20601
95 25826 26728
96 31044 32160
97 43677 45173
98 41834 49258
As the chart above illustrates, investors who maintain a long-term
perspective and avoid overreaction to short-term market volatility may realize
growth potential in their investment over time.
THE PRINTED DOCUMENT CONTAINS A MATRIX CHART HERE, SHOWING A
THREE-YEAR RISK/RETURN PERFORMANCE OF THE FUND
TITLE:
AARP Growth and Income Fund
Three-Year Risk/Return Performance
CHART DATA: (AARP Fund noted by XXXX)
<TABLE>
<S> <C> <C> <C> <C> <C>
----------------------------------
Morningstar
Return Large Blend Risk
Peer Group*
----------------------------------
Highest Lowest Over three years, this Fund is in
Return Best 25% Risk the Best 50% of similar funds for
------------ ----------- Monthly Downside Risk, and in the
Best 50% of similar funds for
XXXX Next 25% XXXX Total Return.
------------ -----------
The monthy averages for risk and
Next 25% return are for 185 similar funds
------------ ----------- for the period October 1, 1995
Lowest Highest through September 30, 1998.
Return Worst 25% Risk
------------ -----------
</TABLE>
* Morningstar is the source for the peer group information of similar funds.
- --------------------------------------------------------------------------------
+ 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.
30
<PAGE>
THE FUND'S INVESTMENT STRATEGY
We remained committed to our strict discipline of investing in value
stocks, believing any sudden changes in our core investment disciplines would be
a direct contradiction of our long-term investment strategy. We continued to
invest primarily in stocks of companies that pay above average dividends -- a
common characteristic of a value-oriented style, not a growth style.
We added to the Fund's telecom and electrical utilities positions which
proved to be a primary source of performance for the portfolio, even as the
market continued its downward trend. We also added to our rail exposure, as
companies such as CSX, Canadian Pacific, and Norfolk Southern have strong
management teams with proven capabilities. This sector, as a whole, has
displayed recession-proof qualities during these volatile times. Many of the
companies are experiencing an ongoing process of restructuring. In addition,
rail companies are tremendous users of technology. This bodes well in today's
climate as technology is experiencing a period of deflation, which in turn
benefits its users. We also increased our oil sector holdings, which are selling
at historically low valuations, including British Petroleum and Mobil. We
believe this strategy is a good example of positioning the Fund for the future.
The two areas that were the primary contributors to our underperformance
were the financial and manufacturing sectors. Because we assumed an overweight
position in both sectors versus the S&P 500 Index weighting, the impact was even
greater. The financial sector, namely banks, has been hardest hit by the
financial crises affecting many global markets, because many banks extended
credit to emerging economies that are having, or will have, difficulty in paying
back the loans. Manufacturing companies worldwide have also been affected by the
global turmoil, as modernization in emerging economies is put on the back burner
until economic problems are addressed.
OUTLOOK
While it may be tempting to chase the growth stocks that investors have so
strongly favored this year, the portfolio team remains committed to its
discipline of seeking undervalued stocks which we believe offers the potential
for less downside risk. We believe, even more strongly, in adhering to our
proven investment discipline and that gives us the confidence to stay the
course, especially when the short term gets bumpy. We continue to focus on the
value-oriented discipline that has served the portfolio well since the Fund's
inception and we are confident our style will continue to provide superior
results over the long term.
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
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 of
the value of their principal that is associated with investing in stocks.
(Please note that portfolio changes should not be considered recommendations for
action by individual investors.)
-----------------------------
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
As of September 30, 1998
Financial 21%
Manufacturing 14%
Energy 11%
Communications 11%
Durables 10%
Utilities 8%
Health 7%
Consumer Staples 5%
Consumer Discretionary 4%
Other 9%
----
100%
====
-----------------------------
ASSET ALLOCATION
As of September 30, 1998
Stock Holdings 98%
Cash Equivalents 2%
----
100%
====
-----------------------------
31
<PAGE>
AARP U.S. STOCK INDEX FUND
--------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP U.S. Stock Index Fund seeks 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. The Fund favors securities of S&P 500
companies with above-average dividend yields, but otherwise seeks to
match the investment characteristics of the S&P 500.
PORTFOLIO
MANAGEMENT TEAM
Philip S. Fortuna
Lead Portfolio Manager
James M. Eysenbach
Portfolio Manager
-------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 9.39% 9.04%
Life of
Fund* 32.60% 33.06%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. 9.39% 9.04%
Life of
Fund* 18.52% 18.74%
-------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP U.S. Stock Index Fund's total return for the one-year period
ending September 30, 1998 was 9.39% (representing 1.59% in distributions of
income and 7.80% in capital change). The Fund outperformed its benchmark index,
the unmanaged Standard & Poor's 500 Index, which returned 9.04% for the period.
By design, the performance of the Fund closely paralleled the Index, where the
strongest returns came from the communications, health, and utilities industries
and our investment in the largest capitalization growth stocks. Industries that
proved to be weak performers, and therefore affected performance negatively,
included metals/minerals, service, and transportation.
Bankers Trust Company has been retained as Subadviser to the Fund. The
Subadviser handles the day-to-day investment and trading functions. The
Portfolio Managers are in regular contact with the Subadviser, receive records
of daily transactions, monitor returns and relative risk, and scrutinize
portfolio activity.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Quarterly Periods from February 1, 1997*
to September 30, 1998
CHART DATA:
AARP U.S. STOCK STANDARD & POOR'S 500
INDEX FUND STOCK PRICE INDEX+
---------- ------------------
2/21/97* 10000 10000
3/97 9659 9664
6/97 11293 11352
9/97 12122 12202
12/97 12465 12553
3/98 14223 14304
6/98 14654 14777
9/98 13260 13306
THE FUND'S INVESTMENT STRATEGY
The AARP U.S. Stock Index Fund is designed to track the performance of the
unmanaged S&P 500 Index (typically within 1% per year), while offering slightly
less downside risk. The Fund's investment characteristics, such as sector
weightings and average market capitalization, are kept roughly in line with the
Index. As a result, the Fund, like the S&P 500 Index, gives more weight to the
largest U.S. companies. This strategy was very beneficial for the Fund over the
past year, as the largest U.S. stocks have performed substantially better than
other U.S. stocks. In periods when the largest capitalization stocks are not
dominating performance, however, the Fund is likely to do less well relative to
funds that do not follow an index-based strategy.
- --------------------------------------------------------------------------------
+ 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 and 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.
32
<PAGE>
We also seek to reduce downside risk by adhering to a "yield tilt strategy"
- -- investing in a large majority of the S&P 500 companies, but giving slightly
more weight to those paying higher dividends. Dividend paying stocks
historically have been more stable, especially in periods of market decline. The
Fund's slight return advantage over the Index was attributable to the yield tilt
strategy, which resulted in the Fund outperforming during August and September
when the markets and the Index significantly declined in value.
The sector diversification, excluding cash equivalents, as of September 30,
1998:
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
Sector Diversification
As of September 30, 1998
PIE CHART DATA:
Financial 15%
Health 14%
Technology 13%
Manufacturing 10%
Consumer Staples 9%
Energy 8%
Communications 7%
Consumer Discretionary 6%
Utilities 5%
Durables 5%
Other 8%
----
100%
====
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
The Fund may be appropriate for more conservative stock fund investors who are
seeking higher dividend income and somewhat lower average volatility than an S&P
500 Index mutual fund. You should be prepared to invest for the longer term (at
least five years or more) and be comfortable with the value of your principal
moving up and down in value.
-----------------------------
ASSET ALLOCATION
As of September 30, 1998
Stock Holdings 95%
Cash Equivalents 5%
----
100%
====
-----------------------------
33
<PAGE>
AARP CAPITAL GROWTH FUND
------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP Capital Growth Fund is designed to provide long-term capital growth but
with less risk of loss to its portfolio than other growth funds. 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.
PORTFOLIO
MANAGEMENT TEAM
Bruce F. Beaty
William F. Gadsden
Co-Lead Portfolio Managers
- -------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. -3.39% 9.04%
5 yr. 93.43% 147.92%
10 yr. 275.04% 392.58%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. -3.39% 9.04%
5 yr. 14.11% 19.90%
10 yr. 14.13% 17.28%
- -------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP Capital Growth Fund's total return for the one-year period ending
September 30, 1998 was -3.39% (representing 0.54% in distributions of income and
- -3.93% in capital change). During the period, we found the markets to be less
than favorable to our "growth at a reasonable price" discipline. Global market
turmoil also impacted performance negatively. The Fund's benchmark index, the
unmanaged Standard & Poor's 500 Index, returned 9.04% for the same period.
Shareholders are reminded, however, that 12-month returns will vary from
year to year. Those who maintain a long-term perspective may have the
opportunity to watch their investment grow over time.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP CAPITAL STANDARD & POOR'S 500
GROWTH FUND STOCK PRICE INDEX+
----------- ------------------
88 10000 10000
89 14362 13297
90 10490 12070
91 14980 15830
92 15571 17583
93 19390 19869
94 18479 20601
95 22815 26728
96 26459 32160
97 38822 45173
98 37505 49258
THE FUND'S INVESTMENT STRATEGY
The turmoil in global markets that began with Asia at the beginning of the
period continued to negatively impact the United States, and thus the Fund. By
mid-summer, first the Russian debt crisis, then the Latin American
THE PRINTED DOCUMENT CONTAINS A MATRIX CHART HERE, SHOWING A THREE-YEAR
RISK/RETURN PERFORMANCE OF THE FUND
TITLE: AARP Capital Growth Fund
Three-Year Risk/Return Performance
CHART DATA: (AARP Fund noted by XXXX)
<TABLE>
<S> <C> <C> <C> <C> <C>
----------------------------------
Morningstar
Return Large Growth Risk
Peer Group*
----------------------------------
Highest Lowest Over three years, this Fund is in
Return Best 25% Risk the third quartile of similar
------------ ----------- funds for Monthly Downside Risk,
and in the Best 50% of similar
XXXX Next 25% funds for Total Return.
------------ -----------
The monthly averages for risk and
Next 25% XXXX return are for 112 similar funds
------------ ----------- for the period October 1, 1995
Lowest Highest through September 30, 1998.
Return Worst 25% Risk
------------ -----------
</TABLE>
* Morningstar is the source for the peer group information of similar funds.
- --------------------------------------------------------------------------------
+ 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 and 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.
34
<PAGE>
crisis, triggered a broad-based correction in the U.S. market which
affected all sectors and included the stocks of the largest U.S. companies.
Early in the period, our technology holdings suffered as a result of the Asian
situation, namely our holdings in Intel and Compaq Computer Corporation.
The Fund currently holds sizeable positions in the health care and
technology sectors, both of which continue to offer growth stocks which are
reasonably priced. We have begun to reposition our holdings in the financial
sector, in order to reduce exposure to financial firms with significant
international operations which contributed to the Fund's underperformance.
Stocks such as Travelers Corporation and BankAmerica suffered greatly from their
international exposure. However, we plan to keep financial firms such as
American Express, which derives most of its revenue from domestic operations.
Individual portfolio holdings that performed well in spite of the volatility
included Home Depot and Dayton Hudson -- two major U.S. retailers -- and Omnicon
Group, Inc., a large multinational advertising agency.
Despite the global turmoil, we remain committed to our "growth at a
reasonable price" discipline. We use a disciplined stock selection process,
seeking stocks that have strong fundamentals and sound valuations. The Fund's
model evaluates a variety of factors, including earnings growth,
price-to-earnings, price-to-book ratios, and debt. In this turbulent market,
however, we did invest with extra caution, placing high premium on valuations
and on seeking companies with strong, competitive positions. We also looked for
companies with extremely healthy balance sheets, believing that, over the long
term, these companies have the potential to weather economic and market stress
better than others may. Notwithstanding these efforts, for much of the period
superior performance was confined to a small group of large-cap growth companies
whose stock valuations pushed them beyond the reach of our valuation
disciplines.
OUTLOOK
We expect the volatility of the past twelve months to continue,
particularly in global markets. While the price to earnings ratio of many stocks
have been coming down in the past few months, we are still cautious in
predicting a rebound at this point. We do, however, maintain a high degree of
conviction in our stock selection process and believe our approach will continue
to direct us to emerging opportunities in the large-capitalization sector.
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors seeking long-term growth of their principal.
Investors should be able to invest for the longer term (at least five years or
more) and be comfortable with the short-term fluctuation of their principal that
is associated with investing in stocks.
(Please note that portfolio changes should not be considered recommendations for
action by individual investors.)
- ------------------------------
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
As of September 30, 1998
Technology 18%
Financial 17%
Consumer Discretionary 15%
Health 13%
Energy 8%
Manufacturing 7%
Durables 6%
Media 5%
Communications 4%
Other 7%
----
100%
====
- ------------------------------
ASSET ALLOCATION
As of September 30, 1998
Stock Holdings 93%
Cash Equivalents 7%
----
100%
====
- ------------------------------
35
<PAGE>
AARP SMALL COMPANY STOCK FUND
-----------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP Small Company Stock Fund seeks to provide long-term capital growth, but
with less risk of loss to its portfolio than other small company stock mutual
funds. The Fund pursues this objective by investing primarily in a broadly
diversified portfolio of common stocks of small U.S. companies.
PORTFOLIO
MANAGEMENT TEAM
James M. Eysenbach
Philip S. Fortuna
Co-Lead Portfolio Managers
Calvin S. Young
Portfolio Manager
- -------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. -14.91% -19.03%
Life of
Fund* 13.62% 0.50%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. -14.91% -19.03%
Life of
Fund* 8.00% 0.30%
- -------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP Small Company Stock Fund's one-year total return of -14.91%
outperformed the -19.03% return for the Russell 2000 Index of small stocks.
Consistent with its risk management strategy, the Fund exhibited more stable
returns than the unmanaged Russell 2000 Index and declined approximately
one-fifth less than the Index during the one-year period ending September 30,
1998. From inception (2/1/97), the Fund has earned a total return of 13.62%
which is well ahead of the Russell 2000 Index's return of 0.50%.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Quarterly Periods from February 1, 1997*
to September 30, 1998
CHART DATA:
AARP SMALL
COMPANY RUSSELL 2000
STOCK FUND INDEX+
---------- ------
2/1/97* 10000 10000
3/97 9940 9297
6/97 11660 10805
9/97 13353 12413
12/97 13368 11997
3/98 14387 13202
6/98 13723 12586
9/98 11362 10050
THE FUND'S INVESTMENT STRATEGY
During this period of increased market volatility and weak small stock
returns, we continued to pursue our disciplined approach to small stock
investing with a focus on identifying undervalued stocks and managing a
risk-controlled portfolio.
While small-cap stocks were down 19% overall, not all segments of the
market were hit equally hard. Among the strongest sectors, utilities were up
19%, media stocks were up 7%, and construction stocks declined a relatively
modest 6%. At the other extreme, the energy, metals and minerals and technology
sectors were all down 35% or more. The wide spread in performance within the
small-cap market provided a significant opportunity to add value relative to the
Index.
In general, lower-priced value stocks were hit less hard during the market
decline, favoring our value-oriented approach to small-cap investing. The Fund
benefited from above-market weightings in the higher yielding utilities and
construction sectors. By contrast, the Fund had below-market weights in the
weak-performing energy and technology sectors. In metals and minerals, we had an
above-market weight, but the Fund's holdings (down 6%) held up significantly
better than the overall sector (down 37%).
- --------------------------------------------------------------------------------
+ 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.
36
<PAGE>
Likewise in the Fund's largest two sectors -- manufacturing and finance --
the Fund's holdings outperformed the overall sector returns. On balance, our
focus on attractively priced securities -- those with low valuations and
relatively stable or improving fundamentals -- made a significant contribution
to the Fund's outperformance during the year.
Another important element of our strategy is a focus on risk control. While
we cannot eliminate the risk of small-cap investing, we attempt to moderate this
risk in a number of ways. One way is through our emphasis on stocks with
below-average price-to-earnings (P/E's) and above-average yields. This has the
potential to provide a degree of downside protection relative to other small-cap
stocks in a market decline. We also limit individual security risk by holding a
large number of securities (approximately 190) in the portfolio and investing no
more than 2% of assets in any one security. Taken together, we believe these
risk control measures may account for the Fund falling less than the small-cap
market index and other small-cap funds in this market.
OUTLOOK
Over the past year, we witnessed a widening gap between the returns for
large stocks (up 9%) and small stocks (down 19%). While small stocks have less
direct exposure to foreign economies, they were affected by a "flight to
quality" concentrated in U.S. Treasury securities and the largest cap U.S.
growth stocks, punctuated by a broad worldwide sell-off towards the end of the
period. Importantly, this divergence in stock prices has not been accompanied by
a corresponding divergence in company earnings. As a result, there now exist
compelling values among small-cap stocks. While these values may not be
recognized overnight -- as short-term market uncertainty continues -- we believe
the long-term outlook for small stocks is positive. SIDEBAR TEXT:
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS 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 moving up and down.
- ------------------------------
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
As of September 30, 1998
Manufacturing 20%
Financial 14%
Utilities 12%
Consumer Discretionary 11%
Technology 10%
Durables 8%
Service Industrie 7%
Construction 6%
Consumer Staples 4%
Other 8%
----
100%
====
- ------------------------------
ASSET ALLOCATION
As of September 30, 1998
Stock Holdings 99%
Cash Equivalents 1%
----
100%
====
- ------------------------------
37
<PAGE>
AARP GLOBAL GROWTH FUND
-----------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP Global Growth Fund seeks to offer long-term capital growth in a
globally diversified portfolio, but with less risk of loss to its portfolio than
other global growth mutual funds. The Fund pursues this investment objective by
investing primarily in common stocks of established corporations in a wide
variety of developed countries, including the United States.
PORTFOLIO
MANAGEMENT TEAM
William E. Holzer
Lead Portfolio Manager
Nicholas Bratt
Diego Espinosa
Portfolio Managers
- -------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. -2.19% 0.13%
Life of
Fund* 25.92% 32.48%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. -2.19% 0.13%
Life of
Fund* 9.04% 11.13%
- -------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP Global Growth Fund's one-year total return for the one-year period
ending September 30, 1998 was -2.19%, slightly less than its benchmark index,
the unmanaged MSCI World Index, which returned 0.13% for the same period.
Performance suffered early in the period because we avoided excessively valued
large-cap U.S. growth stocks which led the U.S. market in performance for most
of the period. The Fund's positions in both financial stocks and in German
stocks were also negatively affected as they also suffered as a result of global
turmoil.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Semiannual Periods from February 1, 1996*
to September 30, 1998
CHART DATA:
AARP GLOBAL MSCI WORLD
GROWTH FUND INDEX+
----------- ------
2/1/96* 10000 10000
3/96 10180 10224
9/96 10327 10661
3/97 11141 11181
9/97 12874 13231
3/98 14010 14754
9/98 12592 13248
THE FUND'S INVESTMENT STRATEGY
Our approach to investing in the global equity markets has remained the
same. We continued to focus on identifying long-term themes or concepts around
areas of shortage or change in the world economy and capital markets. We then
identified companies with appropriate stock values to take advantage of such
themes. This strategy results in a well diversified portfolio of approximately
125 issues across many countries. As of September 30, 1998, the portfolio was
49% invested in Europe, 39% in the U.S. and Canada, 4% in the Pacific Basin
(excluding Japan), 5% in Japan, and 3% in Latin America and other countries.
Over the last year, the Fund has pursued a relatively defensive portfolio
strategy. Deteriorating economic conditions in many corners of the world, high
valuations in the U.S. stock market, downward pricing pressure, and pockets of
deflation have combined to limit the identification of new growth-oriented
themes. The major changes in the portfolio over the last six months reflected
this strategic view. We have added investments in gold and oil. USEC, a
U.S.-based uranium services firm, and PECO Energy, a U.S. electric utility, are
examples of recent purchases, both of which provided high yields and income for
investors. While the Fund does not seek to provide regular income, it may
provide some income infrequently.
- --------------------------------------------------------------------------------
+ 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.
38
<PAGE>
In the gold mining sector we added in Barrick Gold Corporation and Normandy
Mining. We believe current economic conditions may compel central banks to
provide easy credit. Should deflationary tendencies prevail, gold would be an
attractive asset if the consequence is the imposition of capital controls in the
world's weaker economies.
In the oil industry we purchased Atlantic Richfield and Phillips Petroleum.
We may add others since we believe that there will be concentration in this
industry, given the perceived benefits of global diversification. The companies
in this sector also have very attractive valuations.
In the non-ferrous mining sector we bought Noranda and WMC Ltd. These are
examples of companies that are well aware that they have not offered investors
competitive returns in the past. Going forward, we believe that their
managements will correct this, although it may take some time given the
deteriorating demand prospects.
Although our recent purchases of oil and metal stocks are not part of any
formal theme, they give us stakes in certain economic outcomes -- outcomes which
may play a key role in determining the future thematic composition of the
portfolio.
OUTLOOK
As the world works through the current period of weakness, our analysts
will be focusing on identifying new ways in which companies will profit from a
changing global environment. We believe that the world may be moving from an
inflationary to a deflationary growth mode. Over time, the new themes
represented in the Fund's portfolio will attempt to capitalize on the companies
which are the winners and on new modes of economic behavior.
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
GEOGRAPHICAL DIVERSIFICATION -- EXCLUDES 4% CASH EQUIVALENTS
As of September 30, 1998
PIE CHART DATA:
Europe 49%
U.S. & Canada 39%
Japan 5%
Pacific Basin 4%
Latin America 2%
Africa 1%
----
100%
====
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
FUND IS DESIGNED
The AARP Global Growth Fund is suitable for investors who want to add both U.S.
and foreign equity opportunities to their portfolio. Investors should invest for
the longer term (at least five years or more) and be comfortable with the value
of their principal moving up and down.
(Please note that portfolio changes should not be considered recommendations for
action by individual investors.)
- ------------------------------
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
As of September 30, 1998
Financial 22%
Manufacturing 15%
U.S. and Foreign
Treasury Bonds 10%
Energy 9%
Technology 6%
Metals and Minerals 6%
Utilities 6%
Consumer Staples 5%
Health 5%
Other 16%
----
100%
====
- ------------------------------
ASSET ALLOCATION
As of September 30, 1998
Stock Holdings 87%
Bond Holdings 9%
Cash Equivalents 4%
----
100%
====
- ------------------------------
39
<PAGE>
AARP INTERNATIONAL GROWTH AND INCOME FUND
-----------------------------------------
SIDEBAR TEXT:
FUND OVERVIEW
The AARP International Growth and Income Fund seeks to offer long-term capital
growth and income but with less risk of loss to its portfolio than other
international mutual funds. 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 changed its name from the AARP International Stock
Fund on February 1, 1998.
PORTFOLIO
MANAGEMENT TEAM
Sheridan Reilly
Lead Portfolio Manager
Deborah A. Chaplin
Irene T. Cheng
Portfolio Managers
- ------------------------------
TOTAL RETURN
CUMULATIVE
FUND INDEX+
------------------------
1 yr. -3.16% -8.35%
Life of
Fund* 12.08% 4.87%
AVERAGE ANNUAL
FUND INDEX+
------------------------
1 yr. -3.16% -8.35%
Life of
Fund* 7.11% 2.90%
- -------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The AARP International Growth and Income Fund returned -3.16% (representing
0.64% in distributions of income and -3.80% in capital change). While the return
is markedly lower than last year's double-digit, year-end return, it is
reflective of the current market environment. On a more positive note, the Fund
managed to outperform its benchmark index, the unmanaged MSCI Eafe Index, which
returned -8.35% for the period. This is largely attributed to our investment
strategy, stock selection process, and geographic allocation. In light of the
ongoing crisis in Japan, we maintained an underweight position. In addition, we
had virtually no exposure to emerging markets; rather we concentrated on the
European economies, specifically France, Germany, and the U.K. This
overweighting in Europe served the Fund well, as many European markets enjoyed
significant appreciation for the first six months of 1998. While the remainder
of the period was volatile, the gains made in European markets in the first half
helped to lessen the impact of the losses in the second half.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD:
Quarterly Periods from February 1, 1997*
to September 30, 1998
CHART DATA:
AARP INTERNATIONAL MSCI EAFE
GROWTH AND INCOME FUND INDEX+
---------------------- ------
2/1/97* 10000 10000
3/97 10140 10201
6/97 10960 11524
9/97 11573 11443
12/97 11147 10546
3/98 12941 12097
6/98 13524 12225
9/98 11208 10487
THE FUND'S INVESTMENT STRATEGY
We remained committed to seeking stocks of undervalued companies --
focusing on companies with solid returns and predictable cash flows, two
important sources of downside risk protection. We focused our sector allocation
on the financial and telecommunications sectors. In our country selection
process, we steered clear of those markets that have experienced the most
volatility. We believe this strategy served us well, as it helped to limit
downside risk. In late summer, we sold all European bank holdings that had
exposure to both Russia and Latin America, two areas that began to experience a
high degree of financial instability.
It is important to note that the fourth quarter of 1997 and the second
quarter of 1998 were extremely volatile, namely in Asian and emerging
- --------------------------------------------------------------------------------
+ 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.
40
<PAGE>
markets. In August, the EAFE Index declined more than 12%. Financial stocks,
particularly in Europe, led the decline. Because the Fund was weighted
heavily in the financial sector, it suffered along with the market.
In spite of the volatility, there were success stories. Allied Irish Bank
is a shining example and is typical of many European financial institutions.
Generally speaking, European financial institutions are well established and
well regulated. Allied Irish Bank also has limited exposure to global markets,
focusing mainly on its domestic market. This strategy sheltered its stock price
from the extreme volatility occurring in places such as Asia, Russia, and Latin
America.
We were disappointed by the performance of some of our holdings. One such
company was Albright & Wilson, a U.K. specialty chemical company which we sold
as a result. While the company was attractively valued, paid a high dividend,
and had undertaken significant restructuring and cost-cutting measures, it was
unable to escape the downturn in the world chemical markets. This is a good
example of how external pressures can foil the efforts of even a well run
company.
OUTLOOK
We do not expect market volatility to subside until the financial crises
affecting world markets are resolved. Japan needs to implement significant
reforms to its economy, especially in the banking sector, before we feel it is a
safe place to increase our investments. Russia faces even greater obstacles on
its road to recovery. Europe, on the other hand, remains one of the safer places
to explore investment opportunities as it is not suffering as badly as other
global markets. Many European markets can boast of sound banking systems, no
excessive debt, and modest, but positive economic growth.
Overall, we remain confident in our investment approach during these
volatile times. We believe the Fund will continue to be an appropriate vehicle
for investors seeking global exposure, with less risk than comparable
international mutual funds.
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
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 moving up
and down.
(Please note that portfolio changes should not be considered recommendations for
action by individual investors.)
- ------------------------------
SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
As of September 30, 1998
Financial 25%
Manufacturing 14%
Communications 13%
Consumer Discretionary 11%
Transportation 10%
Service Industries 6%
Energy 5%
Durables 5%
Construction 4%
Other 7%
----
100%
====
- ------------------------------
ASSET ALLOCATION
As of September 30, 1998
Stock Holdings 92%
Cash Equivalents 8%
----
100%
====
- ------------------------------
41
<PAGE>
AARP MANAGED INVESTMENT PORTFOLIOS:
-----------------------------------
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
SIDEBAR TEXT:
PORTFOLIO OVERVIEWS
The AARP Managed Investment Portfolios are conservatively managed "funds of
funds," portfolios that invest exclusively in other AARP Mutual Funds. The two
portfolios are:
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
the AARP Stock Mutual Funds. The Fund changed its name from the AARP Diversified
Income Portfolio on February 1, 1998.
o The AARP Diversified Growth Portfolio seeks long-term growth of capital. This
investment objective is pursued by diversifying among a mix of AARP Stock Mutual
Funds, and a lesser mix of AARP Bond Mutual Funds.
The investment mix in both portfolios may change when assets appreciate
significantly or as economic conditions change.
PORTFOLIO
MANAGEMENT TEAM
Philip S. Fortuna
Lead Portfolio Manager
Salvatore J. Bruno
Karla D. Grant
Shahram Tajbakhsh
Portfolio Managers
- -----------------------------
TOTAL RETURN
DIVERSIFIED INCOME WITH
GROWTH PORTFOLIO
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 5.38% 11.26%
Life of
Fund* 15.22% 23.36%
- -----------------------------
TOTAL RETURN
DIVERSIFIED GROWTH
PORTFOLIO
CUMULATIVE
FUND INDEX+
------------------------
1 yr. 1.22% 10.29%
Life of
Fund* 17.42% 29.26%
- -----------------------------
- --------------------------------------------------------------------------------
PORTFOLIO PERFORMANCE
The Diversified Income with Growth Portfolio provided shareholders with a
one-year total return of 5.38% (representing 4.81% in distributions of income
and 0.57% in capital change). The Diversified Income with Growth Portfolio's
benchmark index is a blended index (comprised of the unmanaged S&P 500 Index,
30%, and the Lehman Brothers Aggregate Bond Index, 70%), which returned 11.26%
for the same period.
The Diversified Growth Portfolio provided shareholders with a one-year
total return of 1.22% for the period (representing 1.85% in distributions of
income and -0.63% in capital change). The Diversified Growth Portfolio's
benchmark index is a blended index (comprised of the unmanaged S&P 500 Index,
70%, and the Lehman Brothers Aggregate Bond Index, 30%), which returned 10.29%
for the same period.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
CHART PERIOD:
Quarterly Periods from February 1, 1997*
to September 30, 1998
CHART DATA:
AARP
DIVERSIFIED STANDARD & LEHMAN
INCOME WITH POOR'S 500 BROTHERS
GROWTH STOCK AGGREGATE BLENDED
PORTFOLIO PRICE INDEX BOND INDEX INDEX+
--------- ----------- ---------- ------
2/97* 10000 10000 10000 10000
3/97 9897 9664 9914 9839
6/97 10548 11352 10279 10597
9/97 10935 12202 10621 11087
12/97 11100 12553 10933 11416
3/98 11574 14304 11102 12009
6/98 11722 14777 11362 12237
9/98 11522 13306 11842 12336
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
AARP DIVERSIFIED GROWTH PORTFOLIO
CHART PERIOD:
Quarterly Periods from February 1, 1997*
to September 30, 1998
CHART DATA:
AARP STANDARD & LEHMAN
DIVERSIFIED POOR'S 500 BROTHERS
GROWTH STOCK AGGREGATE BLENDED
PORTFOLIO PRICE INDEX BOND INDEX INDEX+
--------- ----------- ---------- ------
2/97* 10000 10000 10000 10000
3/97 9973 9664 9914 9739
6/97 10927 11352 10279 11026
9/97 11600 12202 10621 11720
12/97 11673 12553 10933 12065
3/98 12691 14304 11102 13290
6/98 12766 14777 11362 13693
9/98 11742 13306 11842 12926
+ 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. The 30/70 measure of the Diversified Income with Growth
Portfolio and 70/30 measure of the Diversified Growth Portfolio is meant to
reflect the anticipated long-range asset mix of each Fund, which may change
over time. The unmanaged S&P 500 Index is a market-value-weighted measure of
500 widely held common stocks listed on the New York Stock Exchange and
American Stock Exchange, and traded on the 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.
42
<PAGE>
THE PORTFOLIOS INVESTMENT STRATEGIES
The past 12 months were difficult for conservatively managed asset
allocation funds. With the U.S. Equity market racing ahead to record levels, the
expectation was for an eventual slowdown in the market with high growth
companies being the hardest hit. Accordingly, both Funds were underweighted in
large U.S. stocks. As a result, we placed our emphasis on income. We sought to
underweight our equity position in the Diversified Growth Portfolio through
smaller positions in global, international, and small-cap (all of which
underperformed the S&P 500 Index for the period). Our underweight positions in
equities required us to be overweight in bonds, which also proved to be a drag
on portfolio performance. For the Diversified Income with Growth Portfolio, we
took an overweight position in cash, while slightly underweighting bonds. Since
the market continued to do well, our exposure to income and value oriented
stocks hampered performance. We also diversified into small-cap, which also
underperformed the S&P 500 Index. Combined, these strategies resulted in the
Fund's underperformance for the period.
THE PRINTED DOCUMENT CONTAINS TWO SIDE-BY-SIDE TABLES HERE
<TABLE>
<CAPTION>
- ---------------------------------------- ----------------------------------------
DIVERSIFIED INCOME WITH GROWTH DIVERSIFIED GROWTH
PORTFOLIO ALLOCATION PORTFOLIO ALLOCATION
As of September 30, 1998 As of September 30, 1998
<S> <C> <C> <C>
AARP GNMA and U.S. Treasury Fund 31% AARP Growth and Income Fund 24%
AARP Bond Fund for Income 30% AARP Bond Fund for Income 19%
AARP High Quality Money Fund 16% AARP GNMA and U.S. Treasury Fund 16%
AARP Growth and Income Fund 10% AARP U.S. Stock Index Fund 13%
AARP Global Growth Fund 6% AARP Small Company Stock Fund 9%
AARP U.S. Stock Index Fund 4% AARP Global Growth Fund 6%
AARP Small Company Stock Fund 3% AARP International Growth and
---- Income Fund 6%
100% AARP Capital Growth Fund 4%
==== AARP High Quality Money Fund 3%
----
100%
====
- ---------------------------------------- ----------------------------------------
</TABLE>
OUTLOOK
The conservative natures of the Funds necessitate that we invest to help
protect against downside risk. In an environment characterized by high
volatility and still lofty stock price levels, underweighting equities and
overweighting bonds and cash remains a prudent strategy. In addition, investing
in value/yield-oriented equity funds and bonds is another way to protect against
downside risk. The Diversified Growth Portfolio will likely maintain some
exposure to the international/global markets, since the relative valuations are
more attractive in many areas.
- --------------------------------------------------------------------------------
SIDEBAR TEXT:
FOR WHOM THE
PORTFOLIOS ARE DESIGNED
The AARP Managed Investment Portfolios are for individuals comfortable with bond
and stock investing who don't have time or are less confident in making the
all-important asset allocation decisions. They 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 with Growth Portfolio may be appropriate for
investors in retirement with an investment horizon of three to five years. The
AARP Diversified Growth Portfolio is designed for investors in pre-retirement
with an investment time horizon of more than five years.
- ------------------------------
ASSET ALLOCATION
AARP DIVERSIFIED
INCOME WITH GROWTH
PORTFOLIO
As of September 30, 1998
Stock Holdings 23%
Bond Holdings 61%
Cash Equivalents 16%
----
100%
====
- ------------------------------
ASSET ALLOCATION
AARP DIVERSIFIED
GROWTH PORTFOLIO
As of September 30, 1998
Stock Holdings 62%
Bond Holdings 35%
Cash Equivalents 3%
----
100%
====
- ------------------------------
43
<PAGE>
This page
intentionally
left blank.
44
<PAGE>
/4/
-------------------------------------------------------------------
AARP FUNDS'
INVESTMENT PORTFOLIOS
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 reporting period.
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 (unaudited) 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 show 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.
45
<PAGE>
This page
intentionally
left blank.
46
<PAGE>
AARP HIGH QUALITY MONEY FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.4%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with State Street Bank and Trust Company dated 9/30/1998
at 5.45% to be repurchased at $2,479,375 on 10/1/1998, collateralized by a
$2,505,000 U.S. Treasury Note, 3.625%, 7/15/2002 (Cost $2,479,000) ................... 2,479,000 2,479,000
------------
COMMERCIAL PAPER 62.5%
- -----------------------------------------------------------------------------------------------------------------------------
Apex Funding Corp., 5.65%, 10/26/1998 ................................................... 23,000,000 22,908,805
AES Shady Point Inc., 5.72%, 10/14/1998 ................................................. 10,000,000 9,978,650
Banner Receivables, 5.7%, 10/14/1998 .................................................... 20,000,000 19,958,833
Broadway Capital Corp., 5.7%, 10/30/1998 ................................................ 24,000,000 23,890,798
Centric Capital Corp., 5.1%, 3/22/1999 .................................................. 15,000,000 14,639,583
Coca-Cola Enterprises, 5.51%, 11/12/1998 ................................................ 25,000,000 24,839,643
Countrywide Home Loans, Inc., 5.48%, 11/19/1998 ......................................... 28,000,000 27,791,151
Deutsche Bank Financial Corp., 5.51%, 10/23/1998 ........................................ 25,000,000 24,912,313
Ford Motor Credit Corp., 5.53%, 10/2/1998 ............................................... 24,000,000 23,996,313
GTE Corp., 5.6%, 10/8/1998 .............................................................. 23,000,000 22,974,956
Gotham Funding Corp., 5.67%, 10/13/1998 ................................................. 24,000,000 23,954,640
JP Morgan, 5.28%, 10/15/1998 ............................................................ 15,000,000 14,965,688
Lehman Brothers Holding Corp., 5.53%, 11/16/1998 ........................................ 20,000,000 19,860,305
PACCAR Financial Corp., 5.54%, 10/20/1998 ............................................... 27,000,000 26,921,055
Private Export Funding Corp., 5.45%, 11/9/1998 .......................................... 22,000,000 21,870,108
Prudential Funding Corp., 5.15%, 1/15/1999 .............................................. 25,000,000 24,628,472
Societe Generale N.A., 5.13%, 1/7/1999 .................................................. 15,000,000 14,793,750
------------
Total Commercial Paper (Cost $362,874,874) .............................................. 362,885,063
------------
CERTIFICATES OF DEPOSIT 11.2%
- -----------------------------------------------------------------------------------------------------------------------------
Bankers Trust Co., 5.6%, 4/30/1999* ..................................................... 20,000,000 19,925,800
Royal Bank of Canada, 5.55%, 7/6/1999* .................................................. 20,000,000 19,989,641
Toronto-Dominion Bank, 5.495%, 8/13/1999* ............................................... 25,000,000 24,982,880
------------
Total Certificates of Deposit (Cost $64,967,830) ........................................ 64,898,321
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 9.0%
- -----------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association, 4.62%, 7/14/1999* ................................ 17,000,000 16,993,030
Federal National Mortgage Association, 4.62%, 7/26/1999* ................................ 20,000,000 19,984,600
Student Loan Marketing Association, 4.543%, 7/12/1999* .................................. 15,500,000 15,414,750
------------
Total U.S. Government Agency Obligations (Cost $52,445,557) ............................. 52,392,380
------------
SHORT-TERM AND MEDIUM-TERM NOTES 16.4%
- -----------------------------------------------------------------------------------------------------------------------------
General Electric Capital Corp., 5.544%, 9/9/1999* ....................................... 10,000,000 9,999,000
Goldman Sachs & Co., 5.438%, 3/26/1999* ................................................. 20,000,000 20,008,200
Northern Trust Corp., 5.515%, 9/8/1999* ................................................. 25,000,000 24,985,000
</TABLE>
The accompanying notes are an integral part of the financial statements
47
<PAGE>
AARP HIGH QUALITY MONEY FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch & Co., 5.574%, 10/21/1999* ................................................ 20,500,000 20,483,600
Sigma Finance Corp., 5.63%, 4/27/1999* .................................................. 20,000,000 20,000,000
------------
Total Short-Term and Medium-Term Notes (Cost $95,485,946) ............................... 95,475,800
------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $578,253,207) (a) ...................................... 99.5 578,130,564
Other Assets and Liabilities, Net ....................................................... 0.5 2,609,682
------ ------------
Net Assets .............................................................................. 100.0 580,740,246
====== ============
</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, 1998.
(a) At September 30, 1998, the net unrealized depreciation on investments
based on cost for federal income tax purposes of $578,253,207 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost .......................................... $ 66,096
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................. (188,739)
------------
Net unrealized depreciation .............................. $ (122,643)
============
- --------------------------------------------------------------------------------
At September 30, 1998, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $129,347, of which $71,958
expires September 30, 2004, and $57,389 expires September 30, 2005.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
48
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INVESTMENTS 98.9%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alaska
Alaska Housing Finance Corp., General Mortgage Revenue,
Series 1991-A, Weekly Demand Note, 3.6%, 6/1/2026* .......................... 3,000,000 A1+ 3,000,000
Valdez, AK, Marine Terminal, ARCO Transportation, Series 1994A, Tax
Exempt Commercial Paper, 3.6%, 10/15/1998 ................................... 2,500,000 MIG1 2,500,000
Arizona
Apache County, AZ, Industrial Development Authority, Tucson Electric
Power Co., 1983 Series C, Weekly Demand Note, 3.6%, 12/15/2018* ............. 1,000,000 A1+ 1,000,000
Pima County, AZ, Industrial Development Authority, Tucson Electric
Power Co., Series 1982, Weekly Demand Note, 3.6%, 10/1/2022* ................ 3,900,000 A1+ 3,900,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper, Weekly
Demand Note, 3.55%, 12/1/2011* .............................................. 1,900,000 A1 1,900,000
Salt River, AZ, Agricultural Improvement & Power District, Tax Exempt
Commercial Paper, 3.55%, 11/13/1998 ......................................... 2,000,000 A1+ 2,000,000
Colorado
Smith Creek, CO, Metropolitan District, Eagle County, Weekly Demand
Note, 3.95%, 10/1/2035* ..................................................... 1,500,000 A1+ 1,500,000
District of Columbia
District of Columbia, General Obligation, Refunding Bonds, Series A-2,
Daily Demand Note, 4.2%, 10/1/2007* ......................................... 2,200,000 A1+ 2,200,000
Florida
Dade County, FL, Industrial Development Authority Revenue, Dolphins
Stadium Project:
Series C, Weekly Demand Note, 3.5%, 1/1/2016* ............................ 1,000,000 A1+ 1,000,000
Series D, Weekly Demand Note, 3.5%, 1/1/2016* ............................ 1,300,000 A1+ 1,300,000
Jacksonville, FL, Electric System, Tax Exempt Commercial Paper, 3.5%,
11/12/1998 .................................................................. 2,000,000 A1+ 2,000,000
Orange County, FL, Health Facilities Authority Revenue, Presbyterian
Retirement Communities, Weekly Demand Note, 4.05%, 11/1/2028* ............... 1,000,000 F1+ 1,000,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric
Cooperative Finance Corp., 1984 Series H-1, Weekly Demand Note,
3.65%, 3/15/2014* ........................................................... 4,050,000 A1+ 4,050,000
Sunshine State Governmental Financing Commission, FL, Tax Exempt
Commercial Paper:
3.5%, 11/12/1998 ......................................................... 2,500,000 MIG1 2,500,000
3.55%, 11/10/1998 ........................................................ 1,500,000 MIG1 1,500,000
Georgia
Burke County, GA, Development Authority, Pollution Control, Georgia
Power, Series 1995-2, Daily Demand Note, 4.15%, 4/1/2025* ................... 400,000 A1 400,000
Gainsville, GA, Redevelopment Authority, Riverside Military Academy,
4.0%, 1/1/2023* ............................................................. 1,000,000 A1+ 1,000,000
Illinois
Chicago-O'Hare International Airport, Daily Demand Bond, 4.2%,
12/1/2017* .................................................................. 2,700,000 P1 2,700,000
</TABLE>
The accompanying notes are an integral part of the financial statements
49
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Illinois Health Facilities Authority, Rush Presbyterian Hospital, Tax
Exempt Commercial Paper, 3.6%, 10/15/1998 ................................... 2,500,000 A1+ 2,500,000
Illinois Health Facilities Authority, Victory Memorial Hospital, Tax
Exempt Commercial Paper, Series B, 3.5%, 1/11/1999 .......................... 1,000,000 A1+ 1,000,000
Iowa
West Des Moines, IA, Commercial Development Revenue, Greyhound
Lines, Weekly Demand Note, 3.65%, 12/1/2014* ................................ 3,400,000 A1+ 3,400,000
Kentucky
Danville, KY, Multi-City Lease Revenue, Tax Exempt Commercial Paper,
3.7%, 10/14/1998 ............................................................ 1,000,000 A1 1,000,000
Kentucky Economic Development Finance Authority, Hospital Facilities
Revenue, Health Alliance, Series C, Weekly Demand Bond, 3.55%,
1/1/2022* (c) ............................................................... 2,000,000 MIG1 2,000,000
Pendleton County, KY, Multi-County Lease Revenue, Tax Exempt
Commercial Paper, 3.65%, 11/10/1998 ......................................... 1,015,000 A1+ 1,015,000
Louisiana
Louisiana Offshore Terminal Authority, Deepwater Port Revenue,
Series 1992, Daily Demand Note, 3.9%, 9/1/2008* ............................. 1,300,000 MIG1 1,300,000
Louisiana Public Finance Authority, SCH Health Care System,
Series 1997D, Tax Exempt Commercial Paper, 3.55%, 11/12/1998 ................ 2,100,000 A1+ 2,100,000
Maryland
Anne Arundel County, MD, Baltimore Gas & Electric, Tax Exempt
Commercial Paper, 3.6%, 11/9/1998 ........................................... 1,300,000 MIG1 1,300,000
Maryland Health & Educational Facilities Authority, Weekly Demand
Note, 3.5%, 4/1/2035* ....................................................... 3,000,000 MIG1 3,000,000
Michigan
University of Michigan, Hospital Revenue, Series 1995A, Daily Demand
Bond, 4.0%, 12/1/2027* ...................................................... 2,300,000 MIG1 2,300,000
Minnesota
Cottage Grove, MN, Environmental Control Revenue, Minnesota Mining
and Manufacturing, Series 1982, Weekly Demand Note, 4.212%,
8/1/2012* ................................................................... 300,000 A1+ 300,000
Missouri
Independence, MO, Water Utility Revenue, Tax Exempt
Commercial Paper:
3.55%, 11/9/1998 ......................................................... 1,000,000 MIG1 1,000,000
3.55%, 11/13/1998 ........................................................ 1,500,000 MIG1 1,500,000
Nevada
Clark County, NV, Airport System, McCarran International Airport,
Series A, Weekly Demand Note, 3.5%, 7/1/2012* (c) ........................... 3,000,000 A1+ 3,000,000
New Hampshire
New Hampshire Business Finance Authority, Pollution Control Revenue,
Connecticut Light & Power, Weekly Demand Note, 3.55%,
12/1/2022* .................................................................. 1,700,000 A1+ 1,700,000
New Mexico
Albuquerque, NM, Gross Receipts/Lodgers Tax, Series 1991, Weekly
Demand Note, 3.55%, 7/1/2022* ............................................... 2,000,000 A1+ 2,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements
50
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York
New York City, NY, General Obligation, Daily Demand Note, 4.25%,
8/1/2017* ................................................................... 400,000 A1+ 400,000
New York City, NY, Municipal Water Finance Authority, Series A, Daily
Demand Note, 4.15%, 6/15/2025* (c) .......................................... 500,000 MIG1 500,000
Pennsylvania
Lehigh County, PA, General Purpose Authority, Hospital Revenue,
Lehigh Valley Hospital, Series A, Daily Demand Note, 3.95%,
7/1/2028* ................................................................... 1,500,000 MIG1 1,500,000
Pennsylvania Higher Education Facilities Authority, University of
Pennsylvania Health Services, Series B, Weekly Demand Note,
3.65%, 1/1/2026* ............................................................ 2,000,000 A1+ 2,000,000
Schuylkill County, PA, Industrial Development Authority, Gilberton
Power Project, Weekly Demand Note, 3.55%, 12/1/2002* ........................ 1,800,000 A1+ 1,800,000
South Carolina
South Carolina Public Service Authority, Tax Exempt Commercial Paper,
3.6%, 10/15/1998 ............................................................ 1,000,000 A1+ 1,000,000
Tennessee
Clarksville, TN, Public Building Authority, Pooled Financing, Weekly
Demand Note, 4.0%, 6/1/2024* ................................................ 2,000,000 A1+ 2,000,000
Franklin, TN, Industrial Development Revenue, Franklin Oaks
Apartments, Weekly Demand Note, Series 1985, 4.0%, 12/15/2021* .............. 3,000,000 A1+ 3,000,000
Texas
Harris County, TX, Health Facilities Authority, St. Lukes Hospital, Daily
Demand Note, 4.1%, 2/15/2027* ............................................... 2,300,000 A1+ 2,300,000
Harris County, TX, Toll Road, Series 1994G, Weekly Demand Note,
3.6%, 8/1/2020* ............................................................. 1,000,000 A1+ 1,000,000
San Antonio, TX, Water Revenue, Tax Exempt Commercial Paper, 3.6%,
11/10/1998 .................................................................. 1,100,000 A1 1,100,000
State of Texas, General Obligation, Veterans Housing Assistance
Refunding Bonds, Series 1995, Weekly Demand Note, 3.5%,
12/1/2016* .................................................................. 1,500,000 A1+ 1,500,000
Texas A&M University, Higher Education, Series B, Tax Exempt
Commercial Paper, 3.6%, 11/9/1998 ........................................... 2,000,000 A1+ 2,000,000
Texas Municipal Power Agency, Tax Exempt Commercial Paper, 3.6%,
10/22/1998 .................................................................. 1,900,000 A1 1,900,000
Vermont
Vermont Educational & Health Buildings Financing Agency, Capital
Asset Financing, Series 2005-A, Weekly Demand Note, 3.95%,
8/1/2005* ................................................................... 2,800,000 MIG1 2,800,000
Washington
Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand
Note, 3.5%, 11/1/2018* ...................................................... 1,900,000 A1+ 1,900,000
Wisconsin
Wisconsin State Health Care Facilities Authority Revenue, Franciscan
Memorial Hospital, Series-1, Weekly Demand Note, 3.5%,
1/1/2016* ................................................................... 2,000,000 A1+ 2,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements
51
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wyoming
Sweetwater County, WY, Pollution Control Revenue Refunding,
Pacificorp Project, 1990 Series A, Weekly Demand Note, 3.65%,
7/1/2015* ................................................................... 2,000,000 MIG1 2,000,000
------------
Total Municipal Investments (Cost $96,565,000) ................................. 96,565,000
============
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $96,565,000) (a) .............................. 98.9 96,565,000
Other Assets and Liabilities, Net .............................................. 1.1 1,031,234
------ ------------
Net Assets ..................................................................... 100.0 97,596,234
====== ============
</TABLE>
* Floating rate and monthly, weekly, or daily 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, 1998, the cost for federal income tax purposes was
$96,565,000.
(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 Kemper 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, 1998, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $758,220, 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, $217,594 expires September 30, 2005, and
$102,679 expires September 30, 2006. In addition, from November 1, 1997
through September 30, 1998, the Fund incurred approximately $222 of net
realized capital losses. As permitted by tax regulations, the Fund intends
to elect to defer these losses and treat them as arising in the fiscal
year ended September 30, 1999.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
52
<PAGE>
AARP HIGH QUALITY SHORT TERM BOND FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 3.9%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/1998
at 5.4% to be repurchased at $17,479,622 on 10/1/1998, collateralized by a
$16,781,000 U.S. Treasury Note, 6.375%, 5/15/2000 (Cost $17,477,000) ................. 17,477,000 17,477,000
-------------
SHORT-TERM INVESTMENT 5.6%
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., Zero Coupon, 10/1/1998
(Cost $25,000,000) ................................................................... 25,000,000 25,000,000
-------------
U.S. TREASURY OBLIGATIONS 5.5%
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 6.375%, 5/15/2000 ................................................... 20,000,000 20,584,400
U.S. Treasury Note, 5.5%, 5/31/2003 ..................................................... 4,000,000 4,196,240
-------------
Total U.S. Treasury Obligations (Cost $24,592,500) ...................................... 24,780,640
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 1.3%
- -----------------------------------------------------------------------------------------------------------------------------
8.0% with various maturities to 8/15/2012 (Cost $5,911,008) ............................. 5,697,357 5,894,087
-------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 8.1%
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank, 5.53%, 2/3/2000 ................................................. 20,000,000 20,200,000
Federal Home Loan Mortgage Corp., 5.75%, 7/15/2003 ...................................... 10,000,000 10,437,500
Federal Home Loan Mortgage Corp., 8.0%, 4/1/2008 ........................................ 5,611,669 5,741,803
-------------
Total U.S. Government Agency Pass-Thrus (Cost $35,958,745) .............................. 36,379,303
-------------
U.S. GOVERNMENT BACKED MORTGAGES* 4.7%
- -----------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association, 6.0%, REMIC, 11/25/2008 .......................... 6,602,831 6,701,873
Federal National Mortgage Association, 8.5%, 11/1/2009 .................................. 4,924,662 5,110,962
Federal National Mortgage Association, 8.0% with various maturities to
12/1/2009 ............................................................................ 8,797,557 9,034,915
-------------
Total U.S. Government Backed Mortgages (Cost $20,758,340) ............................... 20,847,750
-------------
ASSET BACKED 20.6%
- -----------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 1.9%
Ford Credit Automobile Trust, Series 1996-B A3, 6.1%, 3/15/2000 ......................... 8,384,205 8,397,285
-------------
Credit Card Receivables 3.7%
Advanta Corp., Series 1997-1 A4, 7.65%, 5/25/2027 ....................................... 5,000,000 5,237,500
MBNA Master Credit Card Trust, 5.8%, 12/15/2005 ......................................... 6,000,000 6,198,750
Proffitt's, Inc., Credit Card Master Trust, 6.0%, 9/15/2004 ............................. 5,000,000 5,103,125
-------------
16,539,375
-------------
Equipment Lease Receivables 2.1%
PBG Equipment Trust, 6.27%, 1/20/2012 ................................................... 9,006,752 9,205,886
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
53
<PAGE>
AARP HIGH QUALITY SHORT TERM BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home Equity Loans 5.7%
Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/2028 .............. 10,000,000 10,362,500
First Plus, Series 1998-1 A4, 6.2%, 3/10/2015 ........................................... 10,000,000 10,146,875
The Money Store Inc., Home Equity, Series 1997-A A6, 7.21%, 10/15/2021 .................. 5,000,000 5,056,250
-------------
25,565,625
-------------
Manufactured Housing Receivables 7.2%
Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/2028 ................ 3,750,000 3,616,406
Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/2026 ........................... 4,500,000 4,498,560
Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/2027 ......................... 3,730,000 3,732,186
Green Tree Financial Corp., Series 1997-1 B1, 7.23%, 3/15/2028 .......................... 4,000,000 4,027,031
Green Tree Financial Corp., Series 1997-1 B2, 7.76%, 3/15/2028 .......................... 2,600,000 2,627,930
Green Tree Financial Corp., Series 1997-2 B2, 8.05%, 6/15/2028 .......................... 1,500,000 1,552,441
Green Tree Financial Corp., Series 1996-10 B2, 7.74%, 11/15/2028 ........................ 8,000,000 7,524,960
Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/2011 ............. 4,500,000 4,588,560
-------------
32,168,074
-------------
Total Asset Backed (Cost $91,032,128) ................................................... 91,876,245
-------------
CORPORATE BONDS 54.2%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 1.8%
Wal-Mart Stores Inc., 5.85%, 6/1/2000 ................................................... 8,000,000 8,104,000
-------------
Consumer Staples 4.7%
Bass America Inc., 6.625%, 3/1/2003 ..................................................... 10,000,000 10,422,300
Sony Corp., 6.125%, 3/4/2003 ............................................................ 10,500,000 10,800,090
-------------
21,222,390
-------------
Health 0.9%
Columbia/HCA Healthcare Corp., 6.41%, 6/15/2000 ......................................... 4,000,000 3,967,720
-------------
Communications 1.4%
WorldCom, Inc., 6.125%, 8/15/2001 ....................................................... 6,000,000 6,138,420
-------------
Financial 28.1%
American Express Credit Corp., Senior Note, 6.125%, 11/15/2001 .......................... 5,000,000 5,135,000
Associates Corp. of North America, 5.85%, 1/15/2001 ..................................... 5,000,000 5,072,800
Associates Corp. of North America, 6.625%, 5/15/2001 .................................... 15,000,000 15,520,650
Bank One Milwaukee N.A., 6.625%, 4/15/2003 .............................................. 5,000,000 5,235,100
CIT Group Holdings Inc., 6.375%, 8/1/2002 ............................................... 5,940,000 6,158,354
Citicorp, 8.03%, 2/15/2000 .............................................................. 10,000,000 10,368,400
Comdisco, Inc. 6.13%, 8/1/2001 .......................................................... 9,000,000 9,182,430
Continental Bank N.A., 7.875%, 2/1/2003 ................................................. 12,000,000 13,052,040
EOP Operating L.P., 6.375%, 2/15/2003 ................................................... 6,000,000 5,996,280
First USA Bank, 5.85%, 2/22/2001 ........................................................ 10,000,000 10,164,900
General Electric Capital Corp., 6.02%, 5/4/2001 ......................................... 6,000,000 6,006,000
Home Savings of America, 6.0%, 11/1/2000 ................................................ 4,000,000 4,047,040
Norwest Financial Inc., 6.375%, 9/15/2002 ............................................... 10,000,000 10,426,500
Pitney Bowes Credit Corp., 5.65%, 1/15/2003 ............................................. 9,000,000 9,205,560
Simon Property Group, Inc., 6.625%, 6/15/2003 ........................................... 10,000,000 10,079,100
-------------
125,650,154
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
54
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Media 3.5%
Cox Communications, Inc., 6.375%, 6/15/2000 ............................................. 5,000,000 5,088,400
Tele-Communications Inc., 6.375%, 9/15/1999 ............................................. 10,500,000 10,585,050
-------------
15,673,450
-------------
Service Industries 1.1%
USA Waste Services, Inc., 6.125%, 7/15/2001 ............................................. 5,000,000 5,081,250
-------------
Durables 1.2%
Ford Motor Credit Co., 6.125%, 4/28/2003 ................................................ 5,000,000 5,177,750
-------------
Manufacturing 1.2%
Champion International Corp., 9.875%, 6/1/2000 .......................................... 5,000,000 5,333,600
-------------
Technology 2.0%
Raytheon Co., 6.45%, 8/15/2002 .......................................................... 9,000,000 9,361,620
-------------
Energy 4.1%
Amoco Canada Petroleum Co., 7.25%, 12/1/2002 ............................................ 6,000,000 6,485,220
Anadarko Petroleum Corp., 6.75%, 3/15/2003 .............................................. 1,500,000 1,564,665
Enron Corp., 6.45%, 11/15/2001 .......................................................... 10,000,000 10,231,200
-------------
18,281,085
-------------
Construction 3.3%
Housing Securities International, 6.625%, 1/25/2009 ..................................... 14,256,000 14,861,880
-------------
Utilities 0.9%
Detroit Edison Co., 5.93%, 2/1/2001 ..................................................... 4,000,000 4,070,880
-------------
Total Corporate Bonds (Cost $238,343,068) ............................................... 242,924,199
-------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $459,072,789) (a) ...................................... 103.9 465,179,224
Other Assets and Liabilities, Net ....................................................... (3.9) (17,504,590)
------ -------------
Net Assets .............................................................................. 100.0 447,674,634
====== =============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1998, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $459,072,789 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ......................................... $ 7,041,279
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ (934,844)
------------
Net unrealized appreciation ............................. $ 6,106,435
============
The accompanying notes are an integral part of the financial statements
55
<PAGE>
AARP High Quality Short Term Bond Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1998 was $1,547,986,089.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and direct obligations of the U.S. Government) for the year
ended September 30, 1998 aggregated $372,420,868 and $311,464,842,
respectively. Purchases and sales of direct obligations of the U.S.
Government aggregated $206,697,345 and $276,354,082, respectively.
- --------------------------------------------------------------------------------
At September 30, 1998, and to the extent provided in regulations, the Fund
had a capital loss carryforward of approximately $1,181,657, all of which
expires September 30, 2005.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
56
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 2.7%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/1998 at
5.4% to be repurchased at $126,303,943 on 10/1/1998, collateralized by a
$20,500,000 U.S. Treasury Note, 6.375%, 5/15/1999, a $50,000,000 U.S.
Treasury Note, 6.375%, 5/15/2000, and a $49,892,000 U.S. Treasury Note,
6.25%, 10/31/2000 (Cost $126,285,000) ................................................ 126,285,000 126,285,000
-------------
U.S. TREASURY OBLIGATIONS 7.1%
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 5.875%, 11/15/2005 .................................................. 75,000,000 81,738,000
U.S. Treasury Note, 6.125%, 8/15/2007 ................................................... 25,000,000 27,984,250
U.S. Treasury Bond, 6.125%, 11/15/2027 .................................................. 24,500,000 28,243,845
U.S. Treasury Bond, 6.25%, 8/15/2023 .................................................... 164,200,000 187,931,826
-------------
Total U.S. Treasury Obligations (Cost $318,154,248) ..................................... 325,897,921
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 91.9%
- -----------------------------------------------------------------------------------------------------------------------------
6.0%, 9/15/2027 (b) ..................................................................... 56,000,000 56,244,720
6.5% with various maturities to 9/15/2028 (b) (c) ....................................... 787,402,552 805,518,850
7.0% with various maturities to 9/15/2028 (b) (c) ....................................... 1,331,264,760 1,374,088,498
7.5% with various maturities to 9/15/2028 (b) (c) ....................................... 885,176,043 918,109,895
8.0% with various maturities to 10/15/2027 (c) .......................................... 631,945,878 660,157,408
8.5% with various maturities to 9/15/2022 ............................................... 115,113,307 121,960,148
9.0% with various maturities to 4/20/2025 ............................................... 211,603,866 227,348,866
9.5% with various maturities to 12/15/2021 .............................................. 9,074,580 9,800,455
10.0% with various maturities to 3/15/2025 .............................................. 19,875,937 21,616,466
10.25%, 12/15/1998 ...................................................................... 1,334 1,360
10.5% with various maturities to 1/20/2021 .............................................. 10,062,558 11,000,467
11.5% with various maturities to 2/15/2016 .............................................. 2,285,297 2,573,319
12.0% with various maturities to 7/15/2015 .............................................. 4,894,139 5,586,383
12.5% with various maturities to 8/15/2015 .............................................. 3,679,519 4,245,153
13.0% with various maturities to 7/15/2015 .............................................. 484,001 563,430
13.5% with various maturities to 10/15/2014 ............................................. 506,122 598,105
14.0% with various maturities to 12/15/2014 ............................................. 227,921 268,563
14.5%, 10/15/2014 ....................................................................... 93,203 110,998
15.0% with various maturities to 10/15/2012 ............................................. 179,368 215,618
16.0%, 2/15/2012 ........................................................................ 107,406 127,586
-------------
Total Government National Mortgage Association (Cost $4,142,341,720) .................... 4,220,136,288
-------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $4,586,780,968) (a) .................................... 101.7 4,672,319,209
Other Assets and Liabilities, Net ....................................................... (1.7) (79,262,239)
------ -------------
Net Assets .............................................................................. 100.0 4,593,056,970
====== =============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
57
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1998, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $4,586,920,915 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ........................................ $ 85,783,726
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (385,432)
------------
Net unrealized appreciation ............................ $ 85,398,294
============
(b) When issued or forward delivery pools included.
(c) At September 30, 1998, these pools, in part or in whole, have been
segregated to cover when issued or forward delivery pools.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and direct obligations of the U.S. Government) for the year
ended September 30, 1998 aggregated $4,940,829,628 and $4,399,582,060,
respectively. Purchases and sales of direct obligations of the U.S.
Government aggregated $2,214,826,896 and $2,845,384,933, respectively.
- --------------------------------------------------------------------------------
At September 30, 1998, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $246,961,294, all of which
expire September 30, 2003.
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1998 was $2,300,931,687.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
58
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term Municipal Investments 0.4%
- -----------------------------------------------------------------------------------------------------------------------------
New York
Long Island, NY, Power Authority, Series 6, Daily Demand Note,
4.1%, 5/1/2033* ............................................................. 3,000,000 AA2 3,000,000
New York, NY, General Obligation, Daily Demand Note, 4.25%,
8/15/2020* .................................................................. 2,000,000 AA2 2,000,000
Texas
North Central Texas Health Facilities Development Corp., Presbyterian
Medical Center, 1995 Series D, Daily Demand Note, 4.1%, 12/1/2015* .......... 1,700,000 AAA 1,700,000
--------------
Total Short-Term Municipal Investments (Cost $6,700,000) ....................... 6,700,000
--------------
Long-term Municipal Investments 98.8%
- -----------------------------------------------------------------------------------------------------------------------------
Alaska
Alaska Housing Finance Corp., Veteran's Mortgage Project, 8.1%,
9/1/2020 .................................................................... 800,000 AAA 803,080
Anchorage, AK, Electric Utility Revenue, 6.5%, 12/1/2007 (c) ................... 2,620,000 AAA 3,096,395
North Slope Borough, AK, General Obligation:
Series 1997A, Zero Coupon, 6/30/2008 (c) .................................... 7,000,000 AAA 4,614,470
Series B, Zero Coupon, 1/1/2003 (c) ......................................... 16,000,000 AAA 13,514,240
North Slope Borough, AK, General Obligation, Capital Appreciation:
Series A, Zero Coupon, 6/30/2006 (c) ........................................ 4,000,000 AAA 2,905,040
Series B, Zero Coupon, 6/30/2005 (c) ........................................ 25,600,000 AAA 19,452,672
Series B, Zero Coupon, 6/30/2004 (c) ........................................ 15,500,000 AAA 12,301,575
Arizona
Arizona Municipal Finance Program, Certificate of Participation,
Series 25, 7.875%, 8/1/2014 (c) ............................................. 3,500,000 AAA 4,788,945
Maricopa County, AZ, School District #28, Kyrene Elementary, Series B,
Zero Coupon, 1/1/2004 (c) ................................................... 4,000,000 AAA 3,252,040
Maricopa County, AZ, School District #6, Washington Elementary,
Series B, 4.1%, 7/1/2013 (c) ................................................ 2,950,000 AAA 2,793,090
Maricopa County, AZ, Unified School District #41, Gilbert School, Zero
Coupon, 1/1/2005 (c) ........................................................ 5,280,000 AAA 4,106,626
California
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/1/2009 (c) (d) .................................................... 8,995,000 AAA 9,912,130
Banning, CA, Wastewater, Certificate of Participation, 8.0%,
1/1/2019 (c) ................................................................ 2,040,000 AAA 2,750,508
Big Bear Lake, CA, Series 1996, 6.0%, 4/1/2011 (c) ............................. 3,800,000 AAA 4,447,900
California Housing Finance Agency:
5.3%, 8/1/2014 (c) .......................................................... 2,735,000 AAA 2,836,469
5.7%, 8/1/2016 (c) .......................................................... 2,995,000 AAA 3,175,209
California State Public Works Board, Lease Revenue, Series A, 6.3%,
12/1/2006 (c) (d) ........................................................... 8,095,000 AAA 9,516,806
Los Angeles County, CA, Capital Asset Leasing, 6.0%, 12/1/2006 (c) ............. 9,000,000 AAA 10,317,600
</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>
Los Angeles County, CA, Public Works Authority, Series 1996B, 5.25%,
9/1/2011 (c) ................................................................ 3,000,000 AAA 3,255,540
Los Angeles County, CA, Public Works Finance Authority, Lease
Revenue, Multiple Projects IV, 4.75%, 12/1/2010 (c) ......................... 11,140,000 AAA 11,515,307
Madera County, CA, Certificates of Participation, Valley Childrens
Hospital, 6.5%, 3/15/2010 (c) ............................................... 2,840,000 AAA 3,440,745
Oakland, CA, Redevelopment Agency, Tax Allocation, 6.0%, 2/1/2007 (c) .......... 2,000,000 AAA 2,308,640
San Diego County, CA, Water Authority Revenue, Certificate of
Participation, 5.632%, 4/25/2007 (c) ........................................ 6,300,000 AAA 7,037,667
San Diego, CA, Water Utility Funding Network System Revenue, 5.375%,
8/1/2014 (c) ................................................................ 3,000,000 AAA 3,235,890
San Diego, CA, Water Authority, Certificate of Participation, 5.681%,
4/22/2009 (c) ............................................................... 4,500,000 AAA 5,063,085
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue
Refunding, 6.75%, 7/1/2010 (c) .............................................. 2,000,000 AAA 2,477,520
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road
Revenue, Capital Appreciation, Refunding, Series 1997A, Zero
Coupon, 1/15/2012 (c) ....................................................... 3,000,000 AAA 1,630,560
San Joaquin, CA, Certificate of Participation, County Public Facilities
Project, 5.5%, 11/15/2013 (c) ............................................... 2,000,000 AAA 2,236,320
Sweetwater Authority, CA, Water Revenue, 5.25%, 4/1/2010 (c) ................... 10,000,000 AAA 10,988,400
Three Valleys, CA, Municipal Water District, Certificates of Participation,
5.0%, 11/1/2014 (c) ......................................................... 3,000,000 AAA 3,088,200
Whittier, CA, Presbyterian Intercommunity Hospital, Health Facilities
Revenue, 6.25%, 6/1/2008 (c) ................................................ 1,780,000 AAA 2,084,398
Colorado
Castle Rock Ranch, CO, Public Facilities Revenue:
6.3%, 12/1/2007 ............................................................. 3,115,000 AA 3,584,804
6.4%, 12/1/2008 ............................................................. 3,310,000 AA 3,853,734
6.375%, 12/1/2011 ........................................................... 2,000,000 AA 2,362,840
Mesa County, CO, Residual Revenue, Single Family Housing,
Series 1992, Zero Coupon, ETM, 12/1/2011 (c)** .............................. 6,435,000 AAA 3,572,004
Connecticut
Connecticut Resource Recovery Authority:
Series 1996, 6.25%, 11/15/2005 (c) .......................................... 2,000,000 AAA 2,288,480
Series 1996A, 6.25%, 11/15/2006 (c) ......................................... 4,525,000 AAA 5,235,289
Connecticut State Health Facility Authority, Series 1992B, 6.15%,
11/15/2004 .................................................................. 5,000,000 AA2 5,317,650
District of Columbia
District of Columbia, General Obligation:
Prerefunded 8/1/1999 at 100, 6.5%, 6/1/2010 (c)*** .......................... 110,000 AAA 132,128
Series B, 5.4%, 6/1/2006 (c) (d) ............................................ 18,905,000 AAA 20,378,267
Series B, 5.5%, 6/1/2007 (c) (d) ............................................ 25,000,000 AAA 27,226,000
Series B, 5.5%, 6/1/2008 (c) (d) ............................................ 21,300,000 AAA 23,250,441
Series B, 5.5%, 6/1/2009 (c) (d) ............................................ 16,150,000 AAA 17,619,973
Series B, 5.5%, 6/1/2009 (c) ................................................ 2,840,000 AAA 3,098,497
Series B, 5.5%, 6/1/2012 (c) ................................................ 1,050,000 AAA 1,149,509
Series B, Zero Coupon, 6/1/2000 (c) ......................................... 3,500,000 AAA 3,287,900
Series B3, 5.4%, 6/1/2006 (c) ............................................... 10,000,000 AAA 10,779,300
</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>
District of Columbia, General Obligation, Prerefunded 6/1/2002 at 102,
Series B, 6.125%, 6/1/2003 (c)*** ........................................... 95,000 AAA 104,182
District of Columbia, General Obligation, Series A, 5.875%, ETM
6/1/2005 (c)** .............................................................. 350,000 AAA 388,710
District of Columbia, General Obligation, Unrefunded Balance:
Series A, 5.875%, 6/1/2005 (c) .............................................. 4,400,000 AAA 4,848,712
Series B, 6.125%, 6/1/2003 (c) .............................................. 3,905,000 AAA 4,255,669
District of Columbia, Unrefunded Balance, 6.25%, 6/1/2010 (c) .................. 2,160,000 AAA 2,557,332
Washington D.C. Convention Center Authority, Dedicated Tax Revenue,
5.25%, 10/1/2012 (c) ........................................................ 4,000,000 AAA 4,218,760
Florida
Florida Municipal Power Agency, Stanton II Project, 4.5%,
10/1/2016 (c) ............................................................... 4,400,000 AAA 4,288,680
State of Florida Board of Education Capital Outlay:
5.25%, 1/1/2012 ............................................................. 5,000,000 AA2 5,343,100
5.25%, 6/1/2012 ............................................................. 4,500,000 AA2 4,818,690
Georgia
Cobb County, GA, Kennestone Hospital Authority, Series A, 5.625%,
4/1/2011 (c) ................................................................ 2,305,000 AAA 2,583,744
Fulton County, GA, School District, General Obligation, 5.25%,
1/1/2015 .................................................................... 2,000,000 AA2 2,149,880
Georgia Municipal Electric Authority, Power Revenue, Series Y, 6.4%,
1/1/2013 (c) ................................................................ 3,500,000 AAA 4,173,295
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central
Georgia, Series C, 5.25%, 8/1/2011 (c) ...................................... 3,000,000 AAA 3,263,250
Hawaii
Maui County, HA, 6.0%, 12/15/2005 (c) .......................................... 2,000,000 AAA 2,248,200
State of Hawaii, General Obligation, Series 1992 BZ, 6.0%,
10/1/2009 (c) ............................................................... 2,000,000 AAA 2,301,260
Illinois
Central Lake County, IL, Joint Action Water Agency, Refunding Revenue,
Zero Coupon, 5/1/2002 (c) ................................................... 2,245,000 AAA 1,953,240
Chicago, IL, Board of Education, 6.125%, 1/1/2006 (c) .......................... 4,000,000 AAA 4,522,200
Chicago, IL, General Obligation:
6.25%, 1/1/2011 (c) ......................................................... 3,000,000 AAA 3,521,100
Series A, 5.375%, 1/1/2013 (c) (d) .......................................... 15,410,000 AAA 16,782,260
Series B, 5.0%, 1/1/2010 (c) (d) ............................................ 5,200,000 AAA 5,512,156
Series B, 5.0%, 1/1/2011 (c) (d) ............................................ 1,620,000 AAA 1,711,190
Series B, 5.125%, 1/1/2015 (c) (d) .......................................... 9,550,000 AAA 10,062,644
Chicago, IL, General Obligation Lease, Board of Education:
Series 1996, 6.25%, 12/1/2011 (c) ........................................... 1,600,000 AAA 1,893,360
Series A, 6.25%, 1/1/2010 (c) (d) ........................................... 11,550,000 AAA 13,519,159
Series A, 6.25%, 1/1/2015 (c) (d) ........................................... 26,000,000 AAA 30,705,740
Series A, 6.0%, 1/1/2016 (c) (d) ............................................ 11,025,000 AAA 12,733,765
Series A, 6.0%, 1/1/2020 (c) ................................................ 36,625,000 AAA 42,544,333
Chicago, IL, O'Hare International Airport, Refunding Revenue:
Series 1996A, 6.0%, 1/1/2006 (c) ............................................ 2,000,000 AAA 2,234,860
Series C, 5.0%, 1/1/2011 (c) ................................................ 6,500,000 AAA 6,840,730
</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>
Chicago, IL, Public Building Commission:
Board of Education, Series A, Zero Coupon, 1/1/2006 (c) ..................... 2,430,000 AAA 1,801,383
Building Revenue:
Series A, 5.25%, 12/1/2007 (c) ........................................... 3,500,000 AAA 3,807,650
Series A, 5.25%, 12/1/2009 (c) (d) ....................................... 10,420,000 AAA 11,338,315
Series A, 5.25%, 12/1/2011 (c) ........................................... 9,705,000 AAA 10,522,258
Chicago, IL, Wastewater Transmission Revenue:
5.5%, 1/1/2009 (c) (d) ...................................................... 11,990,000 AAA 13,224,251
5.5%, 1/1/2010 (c) .......................................................... 7,220,000 AAA 7,972,396
Cook & Dupage Counties, IL, Housing Development Authority:
Zero Coupon, 12/1/2007 (c) .................................................. 2,550,000 AAA 1,737,187
Zero Coupon, 12/1/2008 (c) .................................................. 2,625,000 AAA 1,697,981
Zero Coupon, 12/1/2009 (c) .................................................. 2,860,000 AAA 1,753,151
Cook County, IL, Community High School District #233, Capital
Appreciation, Series 1993 B:
Zero Coupon, 12/1/2008 (c) ............................................... 1,700,000 AAA 1,099,645
Zero Coupon, 12/1/2009 (c) ............................................... 1,700,000 AAA 1,042,083
Zero Coupon, 12/1/2010 (c) ............................................... 1,665,000 AAA 965,317
Cook County, IL, General Obligation:
Zero Coupon, ETM, 11/1/2004 (c)** ........................................... 3,205,000 AAA 2,508,009
Series C, 6.0%, 11/15/2007 (c) .............................................. 5,000,000 AAA 5,720,950
Decatur, IL, General Obligation:
Series 1991, Zero Coupon, 10/1/2003 (c) ..................................... 1,455,000 AAA 1,192,300
Series 1991, Zero Coupon, 10/1/2004 (c) ..................................... 1,415,000 AAA 1,111,016
Decatur, IL, Public Building Commission, General Obligation, Certificate
of Participation:
6.5%, 1/1/2003 (c) ....................................................... 1,725,000 AAA 1,900,484
6.5%, 1/1/2006 (c) ....................................................... 1,500,000 AAA 1,730,895
Hoffman Estates, IL, Tax Increment Revenue, Capital Appreciation,
Junior Lien, Series 1991, Zero Coupon, 5/15/2007 ............................ 17,460,000 A2 12,076,733
Illinois Dedicated Tax Revenue, Civic Center Project:
6.25%, 12/15/2011 (c) ....................................................... 3,000,000 AAA 3,551,250
6.25%, 12/15/2020 (c) ....................................................... 6,975,000 AAA 8,271,932
Series A, 6.5%, 12/15/2007 (c) .............................................. 4,765,000 AAA 5,654,530
Series A, 6.5%, 12/15/2008 (c) .............................................. 5,255,000 AAA 6,254,448
Illinois Educational Facilities Authority, Loyola University:
1991 Series A, Zero Coupon, 7/1/2004 (c) .................................... 2,860,000 AAA 2,268,295
Zero Coupon, 7/1/2005 (c) ................................................... 4,000,000 AAA 3,037,120
Illinois Health Facilities Authority:
Brokaw-Mennonite Healthcare:
6.0%, 8/15/2006 (c) ...................................................... 1,380,000 AAA 1,548,953
6.0%, 8/15/2007 (c) ...................................................... 1,460,000 AAA 1,650,632
6.0%, 8/15/2008 (c) ...................................................... 1,550,000 AAA 1,761,451
6.0%, 8/15/2009 (c) ...................................................... 1,640,000 AAA 1,870,863
Children's Memorial Hospital, 6.25%, 8/15/2013 (c) .......................... 3,400,000 AAA 4,015,502
Felician Healthcare Inc., Series A, 6.25%, 12/1/2015 (c) .................... 17,000,000 AAA 19,991,150
Memorial Medical Center, 6.75%, 10/1/2011 (c) ............................... 2,135,000 AAA 2,302,939
Sherman Hospital, 6.75%, 8/1/2011 (c) ....................................... 2,700,000 AAA 2,971,134
SSM Healthcare System, 6.4%, 6/1/2008 (c) ................................... 1,350,000 AAA 1,572,251
</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>
Joliet, IL, Junior College Assistance Corp., Lease Revenue, North Campus
Extension Center, 6.7%, 9/1/2012 (c) ........................................ 2,500,000 AAA 3,026,225
Kane County, IL, Series 1996A, 6.5%, 2/1/2010 (c) .............................. 1,775,000 AAA 2,118,817
Kane, Cook and Dupage Counties, IL, School District #46 Elgin:
Series 1996B, Zero Coupon, 1/1/2011 (c) ..................................... 1,040,000 AAA 593,559
Series 1996B, Zero Coupon, 1/1/2012 (c) ..................................... 1,300,000 AAA 704,184
Series 1996B, Zero Coupon, 1/1/2013 (c) ..................................... 2,095,000 AAA 1,072,996
Kendall, Kane and Will Counties, IL, Community Unit School District
#308, Oswego:
Zero Coupon, 3/1/2002 (c) ................................................ 1,055,000 AAA 923,853
Zero Coupon, 3/1/2005 (c) ................................................ 1,540,000 AAA 1,185,292
Zero Coupon, 3/1/2006 (c) ................................................ 1,595,000 AAA 1,173,441
Metropolitan Pier & Exposition Authority, IL, McCormick Place
Expansion Project:
Zero Coupon, 12/15/2003 (c) .............................................. 3,200,000 AAA 2,600,896
Zero Coupon, 6/15/2004 (c) ............................................... 10,300,000 AAA 8,183,762
Series 1994, Zero Coupon, 6/15/2013 (c) .................................. 5,625,000 AAA 2,820,038
Northwest Suburban Municipal Joint Action Water Agency, IL, Supply
System Revenue, 6.45%, 5/1/2007 (c) ......................................... 2,575,000 AAA 3,011,179
Rosemont, IL, Tax Increment:
Series C, Zero Coupon, 12/1/2005 (c) ........................................ 4,455,000 AAA 3,325,568
Series C, Zero Coupon, 12/1/2007 (c) ........................................ 2,655,000 AAA 1,808,719
Skokie, IL, Park District, Series 1994B, Zero Coupon, 12/1/2011 (c) ............ 3,000,000 AAA 1,641,840
State University Retirement System, IL, Special Revenue, Zero Coupon,
10/1/2003 (c) ............................................................... 2,750,000 AAA 2,253,488
University of Illinois, Board of Trustees, Series 1991:
Zero Coupon, 4/1/2003 (c) ................................................... 3,890,000 AAA 3,251,729
Zero Coupon, 4/1/2005 (c) ................................................... 3,830,000 AAA 2,937,840
Will County, IL, Community Unit School District #201-U, Crete-Monee,
Capital Appreciation:
Zero Coupon, 12/15/2000 (c) .............................................. 1,325,000 AAA 1,219,570
Zero Coupon, 12/15/2001 (c) .............................................. 1,730,000 AAA 1,531,258
Indiana
Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%,
11/15/2012 (c) .............................................................. 1,400,000 AAA 1,465,436
Indiana Health Facilities Finance Authority:
Series 1990A, 6.0%, 7/1/2003 (c) ............................................ 1,570,000 AAA 1,708,113
Series 1990A, 6.0%, 7/1/2004 (c) ............................................ 1,665,000 AAA 1,834,497
Series 1990A, 6.0%, 7/1/2005 (c) ............................................ 1,765,000 AAA 1,963,139
Series 1990A, 6.0%, 7/1/2006 (c) ............................................ 1,875,000 AAA 2,101,481
Series 1990A, 6.0%, 7/1/2007 (c) ............................................ 1,985,000 AAA 2,241,184
Series 1990A, 6.0%, 7/1/2008 (c) ............................................ 1,085,000 AAA 1,230,585
Series 1990A, 6.0%, 7/1/2009 (c) ............................................ 1,125,000 AAA 1,280,914
Series 1990A, 6.0%, 7/1/2010 (c) ............................................ 1,185,000 AAA 1,356,268
Series 1990A, 6.0%, 7/1/2011 (c) ............................................ 1,260,000 AAA 1,445,749
Series 1990A, 6.0%, 7/1/2012 (c) ............................................ 1,345,000 AAA 1,545,620
Series 1990A, 6.0%, 7/1/2013 (c) ............................................ 1,420,000 AAA 1,636,067
Series 1990A, 6.0%, 7/1/2014 (c) ............................................ 1,505,000 AAA 1,733,655
Series 1990A, 6.0%, 7/1/2015 (c) ............................................ 1,600,000 AAA 1,841,216
</TABLE>
The accompanying notes are an integral part of the financial statements
63
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1990A, 6.0%, 7/1/2016 (c) ............................................ 1,700,000 AAA 1,955,034
Series 1990A, 6.0%, 7/1/2017 (c) ............................................ 1,800,000 AAA 2,074,680
Series 1990A, 6.0%, 7/1/2018 (c) ............................................ 1,910,000 AAA 2,202,899
Indiana Health Facilities Finance Authority, Hospital Revenue:
Community Hospitals Project, 6.0%, 7/1/2001 (c) ............................. 1,395,000 AAA 1,473,650
Community Hospitals Project, 6.4%, 5/1/2012 (c) ............................. 5,000,000 AAA 5,438,650
Tax Exempt Custodian Receipts Refund, Series 1997A, 6.0%,
7/1/2002 (c) ............................................................. 1,480,000 AAA 1,587,966
Indiana University, Revenue Refunding:
Series H, Zero Coupon, 8/1/2006 (c) ......................................... 8,500,000 AAA 6,151,280
Student Fee Revenue, Series H, Zero Coupon, 8/1/2008 (c) .................... 10,000,000 AAA 6,567,900
Merrillville, IN, Multiple School Building Corp., First Mortgage,
Zero Coupon, 1/15/2011 (c) .................................................. 4,000,000 AAA 2,281,600
Iowa
Polk County, IA, Mercy Hospital, 6.75%, 11/1/2005 (c) .......................... 5,000,000 AAA 5,491,050
Kansas
Kansas City, KS, Utility System Revenue:
Capital Appreciation, Zero Coupon, ETM, 3/1/2001 (c)** ...................... 4,095,000 AAA 3,738,530
Zero Coupon, 9/1/2004 (c) ................................................... 2,640,000 AAA 2,099,222
Zero Coupon, 9/1/2005 (c) ................................................... 3,950,000 AAA 3,011,322
Zero Coupon, 9/1/2006 (c) ................................................... 1,375,000 AAA 1,003,255
Zero Coupon, ETM, 9/1/2004 (c)** ............................................ 3,575,000 AAA 2,819,674
Zero Coupon, ETM, 9/1/2005 (c)** ............................................ 5,300,000 AAA 4,002,348
Zero Coupon, ETM, 9/1/2006 (c)** ............................................ 1,875,000 AAA 1,354,350
Louisiana
Louisiana Public Facilities Authority, Prerefunded 2/15/2008 at 100,
4.75%, 5/1/2016*** .......................................................... 5,765,000 AAA 6,067,778
New Orleans, LA, General Obligation:
Zero Coupon, 7/15/2006 (c) .................................................. 4,850,000 AAA 3,209,390
Zero Coupon, 9/1/2007 (c) ................................................... 10,000,000 AAA 6,836,300
Orleans, LA, Levee District, Levee Improvement Bonds, Series 1986,
5.95%, 11/1/2014 (c) ........................................................ 1,830,000 AAA 2,036,589
Maryland
Baltimore, MD, Revenue Exchanged, Auto Parking Revenue,
Series 1996A, 5.9%, 7/1/2012 (c) ............................................ 3,100,000 AAA 3,579,229
Massachusetts
Commonwealth of Massachusetts, General Obligation, Series D, 7.0%,
10/1/2003 (c) ............................................................... 7,000,000 AAA 7,384,580
Massachusetts General Obligation, Series C, 5.25%, 8/1/2012 .................... 7,750,000 AA3 8,314,975
Massachusetts Health & Educational Facilities Authority, Boston Medical
Center, Series A, 5.25%, 7/1/2012 (c) ....................................... 2,920,000 AAA 3,093,419
Massachusetts State Water Pollution Abatement Trust, MWRA Loan
Program, Series A, 5.25%, 8/1/2012 .......................................... 2,500,000 AA1 2,673,975
Michigan
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess
Medical Center, Series A, 6.0%, 7/1/2009 (c) ................................ 8,250,000 AAA 8,412,525
Michigan Municipal Bond Authority Revenue, Clean Water Revolving
Funding, 5.25%, 10/1/2011 ................................................... 7,575,000 AA1 8,145,549
</TABLE>
The accompanying notes are an integral part of the financial statements
64
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michigan State Trunk Line, Series 1998A, 5.25%, 11/1/2013 ...................... 3,000,000 AA3 3,237,510
Wayne Charter County, MI, Airport Revenue, Detroit Metro Wayne
County Airport, Series B, 5.25%, 12/1/2011 .................................. 4,340,000 AAA 4,663,764
Minnesota
Northern Minnesota Municipal Power Agency, Series 1989A, 7.25%,
1/1/2016 .................................................................... 7,500,000 A2 7,720,725
Missouri
Missouri Health & Educational Facilities Authority, SSM Healthcare:
1992 Series AA, 6.35%, 6/1/2008 (c) ......................................... 8,125,000 AAA 9,529,162
1992 Series AA, 6.4%, 6/1/2009 (c) .......................................... 8,640,000 AAA 10,252,310
Nevada
Clark County, NV, School District:
General Obligation, Series B, Zero Coupon, 3/1/2005 (c) ..................... 8,070,000 AAA 6,234,721
Series 1991B, Zero Coupon, 3/1/2009 (c) ..................................... 4,350,000 AAA 2,772,516
New Jersey
New Jersey Highway Authority, 6.5%, ETM, 1/1/2011** ............................ 4,596,000 AAA 5,197,524
New Jersey Turnpike Authority, Series 1991A, 6.3%, 1/1/2001 (c) ................ 1,250,000 AAA 1,318,713
New York
New York City, NY, General Obligation:
5.9%, 2/1/2005 (c) .......................................................... 5,500,000 AAA 6,088,500
Prerefunded 8/1/1999 at 100, Series D, 1997, 6.0%, 8/1/2006 (c)*** .......... 85,000 A3 86,870
Prerefunded 8/1/1999 at 100, Series D, 1998, 6.0%, 8/1/2008 (c)*** .......... 265,000 AAA 270,851
Prerefunded 8/1/2002 at 101.50, 6.4%, 8/1/2004 (c)*** ....................... 275,000 AAA 304,978
Series 1991 A, 3.0%, 8/15/2002 (c) .......................................... 9,000,000 AAA 8,733,150
Series A, 5.2%, 8/1/2010 (c) ................................................ 10,000,000 AAA 10,712,600
Series A, 5.25%, 8/1/2011 (c) ............................................... 14,460,000 AAA 15,276,701
Series A, 5.375%, 8/1/2013 (c) .............................................. 9,295,000 AAA 9,827,789
Series A, 8.0%, ETM, 11/1/2001 (c)** ........................................ 740,000 AAA 748,221
Series C, 6.4%, 8/1/2004 (c) ................................................ 225,000 AAA 247,756
Series C, 6.4%, 8/1/2005 (c) ................................................ 195,000 AAA 214,137
Series C, Prerefunded 8/1/2002 at 101.50, 6.4%, 8/1/2005 (c)*** ............. 10,235,000 AAA 11,350,717
Series D, 8.0%, 8/1/2005 (c) ................................................ 5,000 AAA 5,148
Series E, 7.0%, ETM, 12/1/2007 (c)** ........................................ 1,385,000 AAA 1,403,711
Unrefunded Balance, Series D, 1997, 6.0%, 8/1/2006 (c) ...................... 55,000 A3 56,046
Unrefunded Balance, Series D, 1998, 6.0%, 8/1/2008 (c) ...................... 105,000 AAA 107,128
New York State Dormitory Authority:
College and University Pooled Capital Program, 7.8%, 12/1/2005 (c) .......... 7,690,000 AAA 7,889,863
State University of New York, 6.0%, 7/1/2009 (c) ............................ 2,000,000 AAA 2,310,640
New York State Dormitory Authority Revenue, City University:
Series C, 7.5%, 7/1/2010 (c) ................................................ 5,750,000 AAA 7,433,140
Series D, 7.0%, 7/1/2009 (c) ................................................ 4,000,000 AAA 4,952,920
New York State Energy Research and Development Authority, Pollution
Control Revenue, Electric and Gas, 5.9%, 12/1/2006 (c) ...................... 5,300,000 AAA 5,999,494
New York State Thruway Authority, Service Contract Revenue, Local
Highway and Bridge, Series A-2, 5.25%, 4/1/2012 (c) ......................... 3,270,000 AAA 3,487,193
New York State, Urban Development Authority, Correctional Facilities,
6.5%, 1/1/2011 (c) .......................................................... 4,500,000 AAA 5,401,530
Suffolk County, NY, Industrial Development Agency, Southwest Sewer
System, 6.0%, 2/1/2007 (c) .................................................. 8,000,000 AAA 9,069,600
</TABLE>
The accompanying notes are an integral part of the financial statements
65
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
North Carolina
North Carolina Eastern Municipal Power Agency:
5.5%, 1/1/2007 (c) .......................................................... 2,000,000 AAA 2,184,000
Power System Revenue, Series B, 6.0%, 1/1/2018 (c) .......................... 8,775,000 AAA 10,172,419
North Carolina Municipal Power Agency No. 1, Catawba Electric
Revenue:
5.25%, 1/1/2008 (c) ...................................................... 2,500,000 AAA 2,703,350
6.0%, 1/1/2011 (c) ....................................................... 8,235,000 AAA 9,488,943
Series 1992, 7.25%, 1/1/2007 ............................................. 5,000,000 AAA 6,040,300
Series 1997, 6.0%, 1/1/2008 (c) .......................................... 2,585,000 AAA 2,942,764
North Dakota
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center,
Series 1991, Zero Coupon, 5/1/2002 (c) ...................................... 2,850,000 AAA 2,467,302
Ohio
Cleveland, OH, Water Works Revenue, Series 1993G, 5.5%,
1/1/2013 (c) (d) ............................................................ 10,000,000 AAA 11,065,200
Hamilton County, OH, Electric System Mortgage Revenue, Series B,
Prerefunded 10/15/1998 at 102, 8.0%, 10/15/2022 (c)*** ...................... 3,720,000 AAA 3,801,505
Ohio Air Quality Development Authority, Ohio Power Company,
Series B, 7.4%, 8/1/2009 (c) ................................................ 5,000,000 AAA 5,247,450
Oklahoma
Tulsa, OK, Industrial Development Authority, Hospital Revenue,
St. John's Medical Center:
Zero Coupon, 12/1/2002 (c) ............................................... 3,930,000 AAA 3,364,630
Zero Coupon, 12/1/2004 (c) ............................................... 5,430,000 AAA 4,276,125
Zero Coupon, 12/1/2006 (c) ............................................... 6,430,000 AAA 4,645,161
Pennsylvania
Blair County, PA, Hospital Authority, Altoona Hospital, Project A,
5.5%, 7/1/2010 (c) .......................................................... 3,590,000 AAA 3,911,700
Commonwealth of Pennsylvania, Industrial Development Authority,
Economic Development Revenue:
5.8%, 1/1/2008 (c) ....................................................... 4,250,000 AAA 4,728,677
5.8%, 7/1/2008 (c) ....................................................... 4,875,000 AAA 5,448,056
Commonwealth of Philadelphia, PA, Water & Wastewater
Refunding Revenue:
5.625%, 6/15/2009 (c) .................................................... 20,000,000 AAA 22,235,400
5.5%, 6/15/2007 (c) ...................................................... 5,000,000 AAA 5,473,450
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health System, 5.375%, 7/1/2011 (c) ............................ 7,300,000 AAA 8,018,466
Rhode Island
Rhode Island Clean Water Protection Agency, Pollution Control
Revenue, Revolving Fund, Series A, 5.4%, 10/1/2015 (c) ...................... 2,000,000 AAA 2,165,120
Rhode Island Convention Center Authority, Refunding Revenue:
Series 1993 B, 5.0%, 5/15/2010 (c) .......................................... 5,000,000 AAA 5,312,600
Series 1993 B, 5.25%, 5/15/2015 (c) (d) ..................................... 22,000,000 AAA 23,462,780
Rhode Island Depositors Economic Protection Corp., Special Obligation:
Series B, 5.8%, 8/1/2010 (c) ................................................ 6,200,000 AAA 7,092,428
Series B, 5.8%, 8/1/2011 (c) ................................................ 4,525,000 AAA 5,169,677
</TABLE>
The accompanying notes are an integral part of the financial statements
66
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series B, 5.8%, 8/1/2012 (c) ................................................ 2,500,000 AAA 2,854,100
Series B, 5.8%, 8/1/2013 (c) ................................................ 7,340,000 AAA 8,372,811
South Carolina
Piedmont, SC, Municipal Power Agency, Electric Revenue:
Series 1991 A, 6.5%, 1/1/2016 (c) ........................................... 2,570,000 AAA 3,129,617
Series 1991 A, 6.5%, ETM, 1/1/2016 (c)** .................................... 430,000 AAA 524,209
Series 1993, 5.5%, 1/1/2008 (c) ............................................. 1,075,000 AAA 1,184,628
Series 1993, 5.5%, ETM, 1/1/2008 (c)** ...................................... 840,000 AAA 933,156
Series 1993, 5.5%, ETM, 1/1/2012 (c)** ...................................... 2,190,000 AAA 2,429,805
5.5%, 1/1/2012 (c) .......................................................... 2,810,000 AAA 3,111,738
Tennessee
Knox County, TN, Health & Educational Hospital Facilities Board, Fort
Sanders Alliance:
5.75%, 1/1/2011 (c) ...................................................... 15,405,000 AAA 17,295,193
5.75%, 1/1/2012 (c) ...................................................... 17,880,000 AAA 20,091,398
6.25%, 1/1/2013 (c) ...................................................... 4,000,000 AAA 4,707,080
Knox County, TN, Health, Education and Housing Facilities Board:
5.75%, 1/1/2014 (c) ......................................................... 2,000,000 AAA 2,252,320
Fort Sanders Alliance, 7.25%, 1/1/2009 (c) .................................. 3,750,000 AAA 4,653,825
Texas
Austin, TX, Utility Systems Revenue Refunding, Series A, Zero Coupon,
11/15/2008 (c) .............................................................. 3,460,000 AAA 2,255,747
Austin, TX, Combined Utility System Revenue, Zero Coupon,
11/15/2009 (c) .............................................................. 5,020,000 AAA 3,103,414
Bexar County, TX, Health Facilities Development Corp., Baptist
Health System:
Series 1997A, 6.0%, 11/15/2011 (c) ....................................... 2,000,000 AAA 2,299,080
Series 1997, 6.0%, 11/15/2012 (c) ........................................ 3,000,000 AAA 3,452,850
Brownsville, TX, Utility System Revenue, 6.25%, 9/1/2010 (c) ................... 4,085,000 AAA 4,809,107
Cedar Hill, TX, Zero Coupon, Series 1996, 8/15/2009 ............................ 1,500,000 AAA 937,395
Cedar Hill, TX, Zero Coupon, Series 1996, 8/15/2010 ............................ 3,130,000 AAA 1,828,077
Dallas, TX, Housing Finance Corp., Single Family Mortgage Revenue,
Zero Coupon, 10/1/2016 (c) .................................................. 6,535,000 AAA 1,049,717
Dallas-Fort Worth, TX, Airport Revenue:
7.75%, 11/1/2003 (c) ........................................................ 1,000,000 AAA 1,173,750
7.8%, 11/1/2005 (c) ......................................................... 2,000,000 AAA 2,410,400
7.8%, 11/1/2006 (c) ......................................................... 2,025,000 AAA 2,441,441
7.375%, 11/1/2008 (c) ....................................................... 4,500,000 AAA 5,318,010
7.375%, 11/1/2010 (c) ....................................................... 3,500,000 AAA 4,116,945
Harris County, TX, Health Facilities Development:
6.25%, 5/15/2009 (c) ........................................................ 2,965,000 AAA 3,431,839
Texas Medical Center Project, 6.25%, 5/15/2008 (c) .......................... 2,785,000 AAA 3,218,708
Harris County, TX, General Obligation:
Capital Appreciation Bond, Zero Coupon, 10/1/2006 (c) ....................... 9,035,000 AAA 6,519,114
Flood Control District, Zero Coupon, 10/1/2000 (c) .......................... 1,000,000 AAA 928,660
Toll Road Authority, Subordinate Lien:
Series A, Zero Coupon, 8/15/2005 (c) ..................................... 4,025,000 AAA 3,053,204
Toll Road Revenue, Series A, Zero Coupon, 8/15/2006 (c) .................. 4,010,000 AAA 2,908,493
Unlimited Tax, Series A, Zero Coupon, 8/15/2004 (c) ...................... 2,050,000 AAA 1,623,498
</TABLE>
The accompanying notes are an integral part of the financial statements
67
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston, TX, Water & Sewer System Authority:
Series C, Zero Coupon, 12/1/2006 (c) ........................................ 14,575,000 AAA 10,445,174
Series C, Zero Coupon, 12/1/2008 (c) ........................................ 19,000,000 AAA 12,363,870
Series C, Zero Coupon, 12/1/2009 (c) ........................................ 14,750,000 AAA 9,101,045
Zero Coupon, 12/1/2010 (c) .................................................. 5,000,000 AAA 2,919,600
Zero Coupon, Series 1991C, 12/1/2012 (c) .................................... 3,350,000 AAA 1,753,792
Hurst Euless Bedford, TX, Independent School District, Capital
Appreciation Refunding, Series 1994, Zero Coupon, 8/15/2009 ................. 4,925,000 AAA 3,077,780
Lubbock, TX, Health Facilities Development Corp., Methodist Hospital:
Series B, 5.5%, 12/1/2006 (c) ............................................... 3,945,000 AAA 4,265,137
Series B, 5.6%, 12/1/2007 (c) ............................................... 2,415,000 AAA 2,637,277
Series B, 5.625%, 12/1/2008 (c) ............................................. 4,400,000 AAA 4,815,140
Series B, 5.625%, 12/1/2009 (c) ............................................. 4,640,000 AAA 5,080,800
Montgomery County, TX, Capital Appreciation:
Zero Coupon, ETM, 9/1/2003 (c)** ............................................ 800,000 AAA 659,648
Zero Coupon, ETM, 9/1/2004 (c)** ............................................ 795,000 AAA 626,309
Zero Coupon, ETM, 9/1/2005 (c)** ............................................ 685,000 AAA 516,579
Montgomery County, TX, Unrefunded Balance, Capital Appreciation:
Zero Coupon, 9/1/2003 (c) ................................................... 2,675,000 AAA 2,205,698
Zero Coupon, 9/1/2004 (c) ................................................... 2,680,000 AAA 2,118,674
Zero Coupon, 9/1/2005 (c) ................................................... 2,790,000 AAA 2,112,616
Northeast, TX, Hospital Authority, Revenue Refunding, Northeast
Medical Center, Series 1997, 6.0%, 5/15/2010 (c) ............................ 2,180,000 AAA 2,490,367
Northwest Texas Independent School District, Capital Appreciation
Bonds, Series 1991, Zero Coupon, 8/15/2010 (c) .............................. 3,690,000 AAA 2,182,893
San Antonio, TX, Electric & Gas, Revenue Refunding:
Series A, Zero Coupon, 2/1/2005 (c) ......................................... 2,500,000 AAA 1,937,925
Series A, Zero Coupon, 2/1/2006 (c) ......................................... 17,900,000 AAA 13,271,597
Series B, Zero Coupon, 2/1/2005 (c) ......................................... 8,000,000 AAA 6,201,360
San Antonio, TX, Hotel Revenue, Series 1996, 6.0%, 8/15/2006 (c) ............... 2,000,000 AAA 2,260,620
San Antonio, TX, Series 1991B, Zero Coupon, 2/1/2009 (c) ....................... 4,400,000 AAA 2,814,504
State of Texas, General Obligation, Capital Appreciation Bond, Super
Collider, Series C, Zero Coupon, 4/1/2006 (c) ............................... 7,385,000 AAA 5,438,388
Tarrant County, TX, Health Facilities Development Corp., Hospital
Refunding Revenue, Fort Worth Osteopathic Hospital:
6.0%, 5/15/2011 (c) ...................................................... 4,615,000 AAA 5,300,004
6.0%, 5/15/2021 (c) ...................................................... 6,235,000 AAA 7,250,869
Texas General Obligation, Superconductor Revenue, Series C, Zero
Coupon, 4/1/2005 (c) ........................................................ 8,390,000 AAA 6,460,300
Texas Municipal Power Agency:
6.1%, 9/1/2007 (c) .......................................................... 9,250,000 AAA 10,635,003
6.1%, 9/1/2009 (c) .......................................................... 4,435,000 AAA 5,192,232
Texas Public Finance Authority, Building Authority:
Series B, 6.25%, 2/1/2008 (c) ............................................... 5,190,000 AAA 6,039,240
Zero Coupon, 2/1/2006 (c) ................................................... 13,915,000 AAA 10,316,998
</TABLE>
The accompanying notes are an integral part of the financial statements
68
<PAGE>
<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, 7/1/2000 (c) ................................................ 2,755,000 AAA 2,582,206
Zero Coupon, 7/1/2002 (c) ................................................ 5,200,000 AAA 4,504,968
Zero Coupon, 7/1/2004 (c) ................................................ 5,895,000 AAA 4,691,241
Zero Coupon, 7/1/2005 (c) ................................................ 5,900,000 AAA 4,497,570
Zero Coupon, 7/1/2006 (c) ................................................ 5,895,000 AAA 4,297,101
Zero Coupon, 7/1/2007 (c) ................................................ 3,750,000 AAA 2,613,038
Intermountain Power Agency, UT, Power Supply Revenue:
5.0%, 7/1/2012 (c) .......................................................... 1,000,000 AAA 1,000,290
Series 1993, 5.55%, 7/1/2011 ................................................ 7,000,000 AAA 7,429,590
Series A, 5.25%, 7/1/2012 (c) ............................................... 4,000,000 AAA 4,235,720
Series A, 6.5%, 7/1/2008 (c) ................................................ 4,000,000 AAA 4,736,720
Series A, Zero Coupon, 7/1/2002 (c) ......................................... 1,655,000 AAA 1,431,161
Series A, Zero Coupon, 7/1/2003 (c) ......................................... 1,000,000 AAA 828,030
Series A, Zero Coupon, 7/1/2004 (c) ......................................... 1,730,000 AAA 1,372,859
Series B, Zero Coupon, 7/1/2002 (c) ......................................... 8,230,000 AAA 7,116,893
Provo, UT, Electric System Revenue, 10.375%, ETM, 9/15/2015 (c)** .............. 1,800,000 AAA 2,704,212
Virginia
Roanoke, VA, Industrial Development Authority, Roanoke Memorial
Hospital, Series B, 6.125%, 7/1/2017 (c) .................................... 5,500,000 AAA 6,469,265
Southeastern Public Service Authority, VA, Refunding Revenue, Series A,
5.25%, 7/1/2010 (c) ......................................................... 7,380,000 AAA 7,985,603
Virginia Beach, VA, Development Authority, Virginia Beach General
Hospital Project:
6.0%, 2/15/2011 (c) ...................................................... 1,595,000 AAA 1,846,356
5.125%, 2/15/2018 (c) .................................................... 3,000,000 AAA 3,125,790
Winchester County, VA, Industrial Development Authority, Hospital
Revenue, 6.0%, 1/1/2015 (c) ................................................. 5,700,000 AAA 6,213,741
Washington
Clark County, WA, Public Utility District #1, 6.0%, 1/1/2006 (c) ............... 7,500,000 AAA 8,425,650
Clark County, WA, Public Utility District, Series 1995, 6.0%, 1/1/2008 (c) ..... 2,200,000 AAA 2,508,110
King & Snohomish Counties, WA, General Obligation, School
District #417, 5.6%, 12/1/2010 (c) .......................................... 1,650,000 AAA 1,856,498
King County, WA, Public Hospital District #1, Valley Medical Center,
Series 1992, 5.5%, 9/1/2017 (c) ............................................. 3,500,000 AAA 3,593,975
Snohomish County, WA, School District #6, 6.5%, 12/1/2007 (c) .................. 3,325,000 AAA 3,935,171
State of Washington, General Obligation Series AT-5, Zero Coupon,
8/1/2010 (c) ................................................................ 2,625,000 AAA 1,564,579
Washington Health Care Facilities Authority, Empire Health
Services - Spokane:
5.65%, 11/1/2005 (c) ..................................................... 2,155,000 AAA 2,361,298
5.7%, 11/1/2006 (c) ...................................................... 3,440,000 AAA 3,798,001
5.75%, 11/1/2007 (c) ..................................................... 7,350,000 AAA 8,185,254
5.8%, 11/1/2009 (c) ...................................................... 4,595,000 AAA 5,193,223
5.8%, 11/1/2010 (c) ...................................................... 2,100,000 AAA 2,381,673
</TABLE>
The accompanying notes are an integral part of the financial statements
69
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Public Power Supply System:
Nuclear Power Project #1, 6.0%, 7/1/2008 (c) ................................ 5,000,000 AAA 5,670,900
Nuclear Power Project #3, Series 1989A, Zero Coupon, 7/1/2010 (c) ........... 5,860,000 AAA 3,429,799
Nuclear Project #1, Prerefunded 7/1/1999 at 102, Series 1989A, 7.5%,
7/1/2015*** .............................................................. 1,500,000 AAA 1,575,045
Nuclear Project #2, Series 1992A, Zero Coupon, 7/1/2011 (c) ................. 4,200,000 AAA 2,331,168
Revenue Refunding:
Nuclear Project #1:
Series A, 7.0%, 7/1/2011 (c) .......................................... 3,830,000 AAA 4,117,518
Series A, Prerefunded 7/1/1999 at 102, 7.5%, 7/1/2015 (c)*** .......... 4,000,000 AAA 4,200,120
Series B, 7.25%, 7/1/2012 (c) ......................................... 10,895,000 AAA 11,758,756
Nuclear Project #2:
Series A, 5.7%, 7/1/2008 (c) .......................................... 5,000,000 AAA 5,552,450
Series A, 7.25%, 7/1/2003 (c) ......................................... 2,000,000 AAA 2,158,560
Series C, 7.0%, 7/1/2001 (c) .......................................... 10,000,000 AAA 10,814,500
Series C, 7.375%, 7/1/2011 (c) ........................................ 1,370,000 AAA 1,502,986
Nuclear Project #3:
7.5%, 7/1/2008 ........................................................ 2,000,000 AAA 2,503,460
Series A, Prerefunded 7/1/1999 at 102, 7.25%, 7/1/2016 (c)*** ......... 3,630,000 AAA 3,805,184
Series A, Zero Coupon, 7/1/2004 (c) ................................... 3,625,000 AAA 2,862,119
Series A, Zero Coupon, 7/1/2005 (c) ................................... 4,125,000 AAA 3,115,489
Washington State Housing Finance, Series A, 7.1%, 12/1/2017 .................... 1,885,000 AAA 1,918,779
West Virginia
West Virginia, School Building Authority Revenue, Series B, 6.75%,
7/1/2010 (c) ................................................................ 4,000,000 AAA 4,287,040
Wisconsin
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/1/2004 (c) ........... 3,475,000 AAA 2,774,579
Southeast Wisconsin Professional Baseball Park, District Sales Tax
Revenue, Series A, 5.5%, 12/15/2013 (c) ..................................... 5,795,000 AAA 6,414,312
Wisconsin Health & Educational Facilities Authority:
6.1%, 8/15/2009 (c) ......................................................... 2,000,000 AAA 2,293,100
Aurora Medical:
5.75%, 11/15/2006 (c) .................................................... 2,000,000 AAA 2,212,880
5.75%, 11/15/2007 (c) .................................................... 1,500,000 AAA 1,668,630
6.0%, 11/15/2008 (c) ..................................................... 4,085,000 AAA 4,664,416
6.0%, 11/15/2009 (c) ..................................................... 4,330,000 AAA 5,020,981
Felician Healthcare Inc., Series B, 6.25%, 1/1/2022 (c) ..................... 5,285,000 AAA 6,309,444
Hospital Sisters Services Inc. - Obligated Group, 5.375%, 6/1/2018 (c) ...... 4,800,000 AAA 4,936,272
SSM Healthcare:
Series 1992 AA, 6.4%, 6/1/2008 (c) ....................................... 2,335,000 AAA 2,727,490
Series 1992 AA, 6.45%, 6/1/2009 (c) ...................................... 2,485,000 AAA 2,964,033
Series 1992 AA, 6.45%, 6/1/2010 (c) ...................................... 2,650,000 AAA 3,176,396
Series 1992 AA, 6.5%, 6/1/2011 (c) ....................................... 2,820,000 AAA 3,362,935
Series 1992 AA, 6.5%, 6/1/2012 (c) ....................................... 3,000,000 AAA 3,634,890
St. Luke's Medical Center, 7.1%, 8/15/2011 (c) .............................. 2,000,000 AAA 2,220,960
Villa St. Francis Inc., Series C, 6.25%, 1/1/2022 (c) ....................... 9,230,000 AAA 11,019,143
Wheaton Franciscan Services, 6.1%, 8/15/2008 (c) ............................ 4,580,000 AAA 5,281,244
--------------
Total Long-Term Municipal Investments (Cost $1,513,566,054) .................... 1,710,869,698
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements
70
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $1,520,266,054) (a) ........................... 99.2 1,717,569,698
Other Assets and Liabilities, Net .............................................. 0.8 14,210,499
------ --------------
Net Assets ..................................................................... 100.0 1,731,780,197
====== ==============
- -----------------------------------------------------------------------------------------------------------------------------
</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, 1998, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $1,520,506,144 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ......................................... $197,075,042
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ (11,488)
------------
Net unrealized appreciation ............................. $197,063,554
============
(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. Unrated securities (NR) and
securities rated by Scudder Kemper have been determined to be of
comparable quality to rated eligible securities.
(c) (Unaudited) Bond is insured by one of these companies: AMBAC, BIG, MBIA,
FGIC, FSA, PSFG or Capital Guaranty.
(d) At September 30, 1998, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.
At September 30, 1998, open futures contracts sold short were as follows:
<TABLE>
<CAPTION>
Number of Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Bond December 1998 1,245 159,826,930 163,678,593
------------
Total net unrealized depreciation on open futures contracts sold short .......................... 3,851,663
============
</TABLE>
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1998 was $560,874,903 and $507,713,858,
respectively.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1998, aggregated
$104,173,838 and $149,352,977, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
71
<PAGE>
AARP BOND FUND FOR INCOME
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 3.8%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with State Street Bank and Trust Company dated 9/30/1998
at 5.45% to be repurchased at $6,947,052 on 10/1/1998, collateralized by a
$7,145,000 U.S. Treasury Note, 3.625%, 1/15/2007 (Cost $6,946,000) ................... 6,946,000 6,946,000
------------
SHORT-TERM INVESTMENTS 5.5%
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 5.4%, 10/1/1998 (Cost $10,000,000) .................... 10,000,000 10,000,000
------------
U.S. TREASURY OBLIGATIONS 26.0%
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond, 10.75%, 8/15/2005 ................................................... 23,250,000 31,754,385
U.S. Treasury Bond, 9.375%, 2/15/2006 ................................................... 2,500,000 3,258,975
U.S. Treasury Bond, 7.25%, 5/15/2016 .................................................... 2,000,000 2,482,500
U.S. Treasury Note, 5.625%, 12/31/2002 .................................................. 9,000,000 9,438,750
------------
Total U.S. Treasury Obligations (Cost $46,208,916) ...................................... 46,934,610
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 2.4%
- -----------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association, 9.5%, 11/15/2017 .............................. 1,391,646 1,503,910
Government National Mortgage Association, 7.5% with various maturities to
4/15/2027 ............................................................................ 2,620,874 2,716,693
------------
Total Government National Mortgage Association (Cost $4,171,553) ........................ 4,220,603
------------
FOREIGN BONDS -- U.S.$ DENOMINATED 1.6%
- -----------------------------------------------------------------------------------------------------------------------------
Hutchison Whampoa, Ltd., 7.5%, 8/1/2027 ................................................. 1,000,000 664,980
Petroleos Mexicanos SA, 8.85%, 9/15/2007 ................................................ 500,000 395,000
Saga Petroleum ASA, 7.25%, 9/23/2027 .................................................... 1,000,000 903,720
Seagram Co., Ltd., 6.875%, 9/1/2023 ..................................................... 1,000,000 960,440
------------
Total Foreign Bonds -- U.S.$ Denominated (Cost $3,473,455) .............................. 2,924,140
------------
COLLATERALIZED MORTGAGE OBLIGATIONS 0.6%
- -----------------------------------------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities Inc., 6.869%, 8/15/2007
(Cost $1,014,997) .................................................................... 1,000,000 1,063,750
------------
ASSET BACKED 6.2%
- -----------------------------------------------------------------------------------------------------------------------------
Credit Card Receivables 2.3%
Advanta Mortgage Loan Trust, Series 1997-1 A4, 7.65%, 5/25/2027 ......................... 500,000 523,750
Citibank Credit Card Trust 1, 6.0%, 4/10/2003 ........................................... 1,500,000 1,514,180
MBNA Master Credit Card Trust, 5.89%, 12/15/2005 ........................................ 2,000,000 2,066,250
------------
4,104,180
------------
Equipment Lease Receivables 1.0%
PBG Equipment Trust, 6.27%, 1/20/2012 ................................................... 1,801,350 1,841,177
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
72
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home Equity Loans 1.3%
Contimortgage Home Equity Loan Trust Series 1997-3 M1-F, 7.31%, 8/15/2028 ............... 500,000 518,125
First Plus Residential Trust Series 1998A, 8.5%, 5/15/2023 .............................. 1,518,285 1,534,891
The Money Store Inc. Home Equity Loan Trust, Series 1996-C A4, 7.4%,
6/15/2021 ............................................................................ 300,000 310,311
------------
2,363,327
------------
Manufactured Housing 1.6%
Associated Manufactured Housing Corp. Series 1997-1 B1, 7.6%, 6/15/2028 ................. 375,000 361,641
Green Tree Financial Corp. Series 1995-6 B1, 7.7%, 9/15/2026 ............................ 500,000 499,840
Green Tree Financial Corp. Series 1995-10 B1, 7.05%, 2/15/2027 .......................... 1,000,000 1,000,586
Green Tree Financial Corp. Series 1997-1 B2, 7.76%, 3/15/2028 ........................... 500,000 505,371
Green Tree Financial Corp. Series 1997-2 B2, 8.05%, 6/15/2028 ........................... 500,000 517,480
------------
2,884,918
------------
Total Asset Backed (Cost $10,971,762) ................................................... 11,193,602
------------
Corporate Bonds 54.0%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 1.7%
Tricon Global Restaurants Inc., 7.65%, 5/15/2008 ........................................ 1,500,000 1,526,250
Westpoint Stevens, Inc., 7.875%, 6/15/2005 .............................................. 1,500,000 1,522,500
------------
3,048,750
------------
Consumer Staples 1.4%
Aurora Foods, Inc., 8.75%, 7/1/2008 ..................................................... 1,000,000 1,030,000
Bass America Inc., 6.625%, 3/1/2003 ..................................................... 1,500,000 1,563,345
------------
2,593,345
------------
Health 1.1%
Columbia/HCA Healthcare Corp., 6.41%, 6/15/2000 ......................................... 1,000,000 991,930
NBTY Inc., 8.625%, 9/15/2007 ............................................................ 500,000 483,750
Tenet Healthcare Corp., 8.625%, 1/15/2007 ............................................... 500,000 518,750
------------
1,994,430
------------
Communications 4.4%
Call-Net Enterprises Inc., 8.0%, 8/15/2008 .............................................. 1,800,000 1,692,000
ComCast Cellular Holdings Corp., 9.5%, 5/1/2007 ......................................... 1,000,000 1,025,000
MCI Communications Corp., 6.125%, 4/15/2002 ............................................. 1,500,000 1,537,605
McLeodUSA Inc., 8.375%, 3/15/2008 ....................................................... 500,000 495,000
WorldCom, Inc., 6.4%, 8/15/2005 ......................................................... 3,000,000 3,165,660
------------
7,915,265
------------
Financial 11.0%
First USA Bank, 5.85%, 2/22/2001 ........................................................ 1,500,000 1,524,735
First Union Institutional Capital II, 7.85%, 1/1/2027 ................................... 1,000,000 1,069,270
GS Escrow Corp., 7.125%, 8/1/2005 ....................................................... 2,000,000 1,979,100
General Electric Capital Corp., Medium Term Note, 6.02%, 5/4/2001 ....................... 2,000,000 2,002,000
Home Savings of America, 6.0%, 11/1/2000 ................................................ 2,500,000 2,529,400
ICI Investments, 6.75%, 8/7/2002 ........................................................ 1,000,000 1,045,000
Lehman Brothers Holdings, Inc., 6.125%, 7/15/2003 ....................................... 2,000,000 1,942,820
McDonnell Douglas Finance Corp., Medium Term Note, 6.75%, 12/23/2003 .................... 1,500,000 1,602,900
</TABLE>
The accompanying notes are an integral part of the financial statements
73
<PAGE>
AARP BOND FUND FOR INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
People's Heritage Bank, 9.06%, 2/1/2027 ................................................. 1,000,000 1,042,500
Prudential Insurance Co., 6.375%, 7/23/2006 ............................................. 2,000,000 2,050,000
Simon Property Group, Inc., 6.625%, 6/15/2003 ........................................... 3,000,000 3,023,730
------------
19,811,455
------------
Media 9.2%
CSC Holdings Inc., 7.875%, 2/15/2018 .................................................... 1,500,000 1,493,475
Cox Communications, Inc., 6.85%, 1/15/2018 .............................................. 1,000,000 1,033,000
Harcourt General, Inc., 7.2%, 8/1/2027 .................................................. 1,000,000 898,190
News America Inc., 7.25%, 5/18/2018 ..................................................... 2,500,000 2,495,100
Outdoor Systems, Inc., 8.875%, 6/15/2007 ................................................ 1,000,000 1,045,000
Primedia, Inc., 7.625%, 4/1/2008 ........................................................ 1,500,000 1,455,000
TCA Cable TV, Inc., 6.53%, 2/1/2028 ..................................................... 1,500,000 1,535,535
TCI-Communications, Inc., 8.0%, 8/1/2005 ................................................ 2,500,000 2,857,050
Time Warner Inc., 9.125%, 1/15/2013 ..................................................... 1,000,000 1,255,690
Time Warner Inc., 6.875%, 6/15/2018 ..................................................... 2,500,000 2,583,300
------------
16,651,340
------------
Service Industries 0.5%
Prime Hospitality Corp., 9.25%, 1/15/2006 ............................................... 1,000,000 990,000
------------
Durables 2.0%
BE Aerospace, 8.0%, 3/1/2008 ............................................................ 2,000,000 1,960,000
Martin Marietta Corp., 6.5%, 4/15/2003 .................................................. 1,500,000 1,569,210
------------
3,529,210
------------
Manufacturing 2.6%
Argo-Tech Corp., 8.625%, 10/1/2007 ...................................................... 1,000,000 945,000
Columbus McKinnon Corp., 8.5%, 4/1/2008 ................................................. 1,000,000 937,500
Fort James Corp., 6.625%, 9/15/2004 ..................................................... 2,000,000 2,085,620
Graham Packaging Co., 8.75%, 1/15/2008 .................................................. 750,000 720,000
------------
4,688,120
------------
Technology 1.1%
Fairchild Semiconductor Corp., 10.125%, 3/15/2007 ....................................... 100,000 90,000
Loral Corp., 8.375%, 6/15/2024 .......................................................... 1,500,000 1,823,295
------------
1,913,295
------------
Energy 8.4%
Anadarko Petroleum Corp., 7.0%, 11/15/2027 .............................................. 3,000,000 3,049,349
Barrett Resources Corp., 7.55%, 2/1/2007 ................................................ 1,500,000 1,515,000
Chesapeake Energy Corp., 8.5%, 3/15/2012 ................................................ 500,000 385,000
Dawson Production Services, Inc., 9.375%, 2/1/2007 ...................................... 250,000 250,000
Lomak Petroleum, Inc., 8.75%, 1/15/2007 ................................................. 250,000 235,000
Louis Dreyfus Natural Gas Corp., 6.875%, 12/1/2007 ...................................... 2,500,000 2,467,300
Louisiana Land and Exploration Co., 7.65%, 12/1/2023 .................................... 2,500,000 2,732,025
Lyondell Chemical Co., 7.55%, 2/15/2026 ................................................. 1,000,000 888,170
Ocean Energy, Inc., 8.375%, 7/1/2008 .................................................... 2,000,000 1,910,000
Pioneer Natural Resources Co., 7.2%, 1/15/2028 .......................................... 2,000,000 1,756,140
------------
15,187,984
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
74
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Metals & Minerals 0.3%
AK Steel Corp., 9.125%, 12/15/2006 ...................................................... 500,000 500,000
------------
Construction 2.0%
American Standard Companies Inc., 7.625%, 2/15/2010 ..................................... 1,500,000 1,447,500
NVR Inc., 8.0%, 6/1/2005 ................................................................ 2,000,000 1,920,000
Nortek, Inc., 9.25%, 3/15/2007 .......................................................... 250,000 251,250
------------
3,618,750
------------
Transportation 2.1%
Allied Holdings Inc., 8.625%, 10/1/2007 ................................................. 500,000 492,500
Continental Airlines Inc. Series 1997-1B, 7.461%, 4/1/2013 .............................. 296,860 322,345
Newport News Shipbuilding Co., 8.625%, 12/1/2006 ........................................ 1,500,000 1,537,500
Northwest Airlines Corp., 7.875%, 3/15/2008 ............................................. 1,500,000 1,467,480
------------
3,819,825
------------
Utilities 6.2%
CalEnergy Co., Inc., 7.23%, 9/15/2005 ................................................... 2,500,000 2,559,375
Cleveland Electric Illumination Inc., 6.86%, 10/1/2008 .................................. 1,500,000 1,517,258
Niagara Mohawk Power Corp., Series E, 7.375%, 7/1/2003 .................................. 3,000,000 3,060,000
Niagara Mohawk Power Corp., Series F, 7.625%, 10/1/2005 ................................. 2,000,000 2,020,000
PacifiCorp Australia LLC, 6.15%, 1/15/2008 .............................................. 2,000,000 2,048,000
------------
11,204,633
------------
Total Corporate Bonds (Cost $97,301,542) ................................................ 97,466,402
------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $180,088,225) (a) ...................................... 100.1 180,749,107
Other Assets and Liabilities, Net ....................................................... (0.1) (308,480)
------ ------------
Net Assets .............................................................................. 100.0 180,440,627
====== ============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective maturities will be shorter due to prepayments.
(a) At September 30, 1998, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $180,099,244 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ......................................... $ 2,723,718
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ (2,073,855)
------------
Net unrealized appreciation ............................. $ 649,863
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and direct obligations of the U.S. Government) for the year
ended September 30, 1998 aggregated $121,181,777 and $43,783,014,
respectively. Purchases and sales of direct obligations of the U.S.
Government aggregated $120,936,829, and $76,891,341, respectively.
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1998 was $245,762,702.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
75
<PAGE>
AARP BALANCED STOCK AND BOND FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 4.8%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/1998 at
5.4% to be repurchased at $35,350,302 on 10/1/1998, collateralized by a
$34,781,000 U.S. Treasury Note, 5.625%, 12/31/1999 (Cost $35,345,000) ................ 35,345,000 35,345,000
------------
U.S. TREASURY OBLIGATIONS 4.2%
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 5.625%, 12/31/2002 .................................................. 7,000,000 7,341,250
U.S. Treasury Bond, 10.75%, 8/15/2005 ................................................... 12,250,000 16,730,805
U.S. Treasury Bond, 9.375%, 2/15/2006 ................................................... 2,000,000 2,607,180
U.S. Treasury Bond, 7.25%, 5/15/2016 .................................................... 3,500,000 4,344,375
------------
Total U.S. Treasury Obligations (Cost $30,263,415) ...................................... 31,023,610
------------
U.S. GOVERNMENT BACKED MORTGAGES** 4.6%
- -----------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association, 6.5% with various maturities to 3/1/2026 ......... 12,573,128 12,791,282
Federal National Mortgage Association, 7.0% with various maturities to 8/1/2026 ......... 20,909,945 21,497,933
------------
Total U.S. Government Backed Mortgages (Cost $32,211,640) ............................... 34,289,215
------------
COLLATERALIZED MORTGAGE OBLIGATIONS** 0.8%
- -----------------------------------------------------------------------------------------------------------------------------
Residential Funding Mortgage Securities Series 1993-A2, 6.85%, 9/25/2023 ................ 3,370,000 3,371,053
Ryland Mortgage Securities Corp., 8.0%, 8/25/2025 ....................................... 2,815,863 2,878,340
------------
Total Collateralized Mortgage Obligations (Cost $6,252,365) ............................. 6,249,393
------------
FOREIGN BONDS -- U. S. $ DENOMINATED 2.4%
- -----------------------------------------------------------------------------------------------------------------------------
Norsk Hydro AS, 7.75%, 6/15/2023 ........................................................ 5,000,000 5,518,500
Province of Ontario Global, 6.0%, 2/21/2006 ............................................. 3,000,000 3,141,090
Saga Petroleum A/S, 7.25%, 9/23/2027 .................................................... 5,000,000 4,518,600
Seagram Co., Ltd., 6.875%, 9/1/2023 ..................................................... 5,000,000 4,802,200
------------
Total Foreign Bonds -- U.S. $ Denominated (Cost $18,260,480) ............................ 17,980,390
------------
ASSET BACKED 5.1%
- -----------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 0.9%
Ford Credit Automobile Trust, Series 1996-A A4, 6.75%, 9/15/2000 ........................ 4,000,000 4,026,240
Premier Auto Trust Asset Backed Certificate, Series 1996-3 A4, 6.75%, 11/6/2000 ......... 3,000,000 3,028,110
------------
7,054,350
------------
Credit Card Receivables 2.2%
Chase Manhattan Credit Card Master Trust, Series 1996-4A, 6.73%, 2/15/2003 .............. 4,000,000 4,036,240
Citibank Credit Card Master Trust I, 6.0%, 4/10/2003 .................................... 3,500,000 3,533,086
MBNA Master Credit Card Trust, 5.8%, 12/15/2005 ......................................... 5,000,000 5,165,625
</TABLE>
The accompanying notes are an integral part of the financial statements
76
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proffitt's, Inc. Credit Card Master Trust, 6.0%, 9/15/2004 .............................. 2,500,000 2,551,563
Sears Credit Account Master Trust, Series 1995-A4, 6.25%, 1/15/2003 ..................... 833,334 834,892
------------
16,121,406
------------
Equipment Lease Receivables 0.9%
PBG Equipment Trust, 6.27%, 1/20/2012 ................................................... 6,304,727 6,444,120
------------
Home Equity Loans 0.7%
First Plus Home Loan Trust, Series 1998, 6.25%, 11/10/2016 .............................. 5,000,000 5,057,813
------------
Manufactured Housing Receivables 0.4%
Green Tree Financial Corp., Series 1997-2 B1, 7.56%, 6/15/2028 .......................... 3,000,000 3,060,938
------------
Total Asset Backed (Cost $37,149,467) 37,738,627
------------
CORPORATE BONDS 21.7%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.5%
ITT Corp., 7.375%, 11/15/2015 ........................................................... 4,000,000 3,640,680
------------
Consumer Staples 0.7%
Bass America Inc., 6.625%, 3/1/2003 ..................................................... 5,000,000 5,211,150
------------
Communications 0.7%
WorldCom, Inc., 6.4%, 8/15/2005 ......................................................... 5,000,000 5,276,100
------------
Financial 8.7%
Associates Corp. of North America, 6.625%, 5/15/2001 .................................... 5,850,000 6,053,054
BB&T Corp., 7.05%, 5/23/2003 ............................................................ 4,000,000 4,296,160
Capital One Bank, Medium Term Note, 5.95%, 2/15/2001 .................................... 4,000,000 3,999,960
First USA Bank, 5.85%, 2/22/2001 ........................................................ 3,000,000 3,049,470
First Union Corporation, 8.125%, 6/24/2002 .............................................. 2,500,000 2,735,600
Fleet Financial Group, 6.875%, 1/15/2028 ................................................ 4,000,000 4,083,560
Ford Motor Credit Co., 6.125%, 4/28/2003 ................................................ 5,000,000 5,177,750
General Electric Capital Corp., Medium Term Note, 6.02%, 5/4/2001 ....................... 4,000,000 4,004,000
Home Savings of America, 6.0%, 11/1/2000 ................................................ 3,000,000 3,035,280
ICI Investments, 6.75%, 8/7/2002 ........................................................ 4,000,000 4,180,000
Lehman Brothers Holding Corp., Medium Term Note, 6.33%, 8/1/2000 ........................ 3,500,000 3,491,250
McDonnell Douglas Finance Corp., Medium Term Note, 6.75%, 12/23/2003 .................... 3,000,000 3,205,800
Meditrust Corp., 7.0%, 8/15/2007 ........................................................ 5,000,000 4,395,150
Prudential Insurance Co., 6.375%, 7/23/2006 ............................................. 3,000,000 3,075,000
Simon Property Group, Inc., 6.625%, 6/15/2003 ........................................... 7,000,000 7,055,370
Wells Fargo & Co., 6.875%, 4/1/2006 ..................................................... 2,000,000 2,158,800
------------
63,996,204
------------
Media 3.7%
Cox Communications, Inc., 6.85%, 1/15/2018 .............................................. 5,000,000 5,165,000
News America Inc., 7.25%, 5/18/2018 ..................................................... 5,000,000 4,990,200
TCA Cable TV, Inc., 6.53%, 2/1/2028 ..................................................... 4,000,000 4,094,760
Tele-Communications Inc., 8.0%, 8/1/2005 ................................................ 4,000,000 4,571,280
Time Warner, Inc., 9.125%, 1/15/2013 .................................................... 4,500,000 5,650,604
Time Warner, Inc., 6.875%, 6/15/2018 .................................................... 3,000,000 3,099,960
------------
27,571,804
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
77
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Durables 0.6%
Martin Marietta Corp., 6.5%, 4/15/2003 .................................................. 3,000,000 3,138,420
McDonnell Douglas Corp., 9.75%, 4/1/2012 ................................................ 1,000,000 1,357,710
------------
4,496,130
------------
Manufacturing 0.7%
Fort James Corp., 6.625%, 9/15/2004 ..................................................... 5,000,000 5,214,050
------------
Technology 1.0%
Loral Corp., 8.375%, 6/15/2024 .......................................................... 6,000,000 7,293,180
------------
Energy 2.5%
Anadarko Petroleum Corp., 5.875%, 10/15/2003 ............................................ 5,000,000 5,049,850
Louisiana Land and Exploration Co., 7.65%, 12/1/2023 .................................... 5,000,000 5,464,050
PanEnergy Corp., 7.375%, 9/15/2003 ...................................................... 4,150,000 4,530,016
Pioneer Natural Resources Co., 7.2%, 1/15/2028 .......................................... 4,000,000 3,512,280
------------
18,556,196
------------
Transportation 1.3%
AMR Corp., 9.75%, 8/15/2021 ............................................................. 2,500,000 3,181,150
Continental Airlines Inc., Series 1997-1A, 7.461%, 4/1/2015 ............................. 5,450,575 6,113,365
------------
9,294,515
------------
Utilities 1.3%
PacifiCorp Australia LLC, 6.15%, 1/15/2008 .............................................. 6,000,000 6,144,000
Public Service Co. of Colorado, 6.0%, 4/15/2003 ......................................... 3,500,000 3,633,560
------------
9,777,560
------------
Total Corporate Bonds (Cost $155,752,817) 160,327,569
------------
CONVERTIBLE BONDS 0.8%
- -----------------------------------------------------------------------------------------------------------------------------
Media
Advertising
Interpublic Group of Companies Inc., 1.8%, 9/16/2004 (Cost $5,777,938) .................. 7,000,000 6,212,500
------------
CONVERTIBLE PREFERRED STOCKS 0.1%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial 0.0%
Consumer Finance
Advanta Corp., Depository Shares, 6.75% ................................................. 17,654 220,675
------------
Manufacturing 0.1%
Containers & Paper 0.0%
International Paper Co. 5.25% ........................................................... 2,100 101,850
------------
Industrial Specialty 0.1%
Cooper Industries, Inc. 6.0% ............................................................ 31,300 402,988
------------
Total Convertible Preferred Stocks (Cost $1,180,748) .................................... 725,513
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
78
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 0.1%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial
Real Estate
ProLogis Trust (REIT), 7.0% (Cost $480,685) ............................................. 18,900 543,375
------------
COMMON STOCKS 54.4%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 1.9%
Department & Chain Stores 1.9%
J.C. Penney Co., Inc. ................................................................... 118,100 5,307,119
May Department Stores ................................................................... 72,200 3,718,300
Sears, Roebuck & Co. .................................................................... 114,600 5,063,887
------------
14,089,306
------------
Hotels & Casinos 0.0%
Homestead Village, Inc.* ................................................................ 15,033 128,720
------------
Consumer Staples 2.5%
Food & Beverage 1.8%
H.J. Heinz Co. .......................................................................... 197,350 10,089,519
Unilever NV (New York shares) ........................................................... 52,300 3,203,375
------------
13,292,894
------------
Package Goods/Cosmetics 0.7%
Avon Products Inc. ...................................................................... 194,600 5,460,963
------------
Health 3.7%
Pharmaceuticals
American Home Products Corp. ............................................................ 214,000 11,208,250
Bristol-Myers Squibb Co. ................................................................ 73,200 7,603,650
SmithKline Beecham PLC (ADR) ............................................................ 78,400 4,292,400
Zeneca Group PLC ........................................................................ 122,100 4,316,189
------------
27,420,489
------------
Communications 5.8%
Telephone/Communications
Alltel Corp. ............................................................................ 111,500 5,282,313
Bell Atlantic Corp. ..................................................................... 189,864 9,196,538
BellSouth Corp. ......................................................................... 91,700 6,900,425
Frontier Corp. .......................................................................... 156,500 4,284,187
GTE Corp. ............................................................................... 160,200 8,811,000
Sprint Corp. ............................................................................ 113,500 8,172,000
------------
42,646,463
------------
Financial 11.0%
Banks 4.9%
Bank One Corp. .......................................................................... 106,950 4,558,744
Bankers Trust New York Corp. ............................................................ 33,800 1,994,200
Chase Manhattan Corp. ................................................................... 87,500 3,784,375
First Union Corp. ....................................................................... 179,166 9,171,060
</TABLE>
The accompanying notes are an integral part of the financial statements
79
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fleet Financial Group Inc. .............................................................. 42,900 3,150,469
KeyCorp ................................................................................. 117,000 3,378,375
NationsBank Corp. ....................................................................... 133,100 7,120,850
US Bancorp .............................................................................. 83,400 2,965,912
------------
36,123,985
------------
Insurance 1.7%
EXEL Ltd. "A" ........................................................................... 105,605 6,653,115
Lincoln National Corp. .................................................................. 34,700 2,854,075
Safeco Corp. ............................................................................ 69,000 2,876,437
------------
12,383,627
------------
Consumer Finance 0.1%
Associates First Capital Corp. .......................................................... 1 65
SLM Holding Corp. ....................................................................... 16,000 519,000
------------
519,065
------------
Other Financial Companies 0.8%
Federal National Mortgage Association ................................................... 97,500 6,264,375
------------
Real Estate 3.5%
Arden Realty Group, Inc. (REIT) ......................................................... 85,900 1,916,644
Boston Properties, Inc. (REIT) .......................................................... 63,800 1,818,300
Equity Office Properties Trust (REIT) ................................................... 172,900 4,236,050
Equity Residential Properties Trust (REIT) .............................................. 97,200 4,100,625
General Growth Properties, Inc. (REIT) .................................................. 116,100 4,136,062
Health Care Property Investment Inc. (REIT) ............................................. 66,600 2,197,800
Nationwide Health Properties Inc. (REIT) ................................................ 101,600 2,286,000
ProLogis Trust (REIT) ................................................................... 237,754 5,379,184
------------
26,070,665
------------
Miscellaneous 0.0%
Jardine Strategic Holdings Ltd.* ........................................................ 46,690 51,359
------------
Service Industries 0.6%
Environmental Services
Browning Ferris Industries .............................................................. 147,700 4,467,925
------------
Durables 6.0%
Aerospace 2.0%
Lockheed Martin Corp. ................................................................... 60,909 6,140,389
Northrop Grumman Corp. .................................................................. 65,400 4,774,200
Rockwell International Corp. (New) ...................................................... 115,900 4,186,886
------------
15,101,475
------------
Automobiles 2.6%
Dana Corp. .............................................................................. 142,328 5,310,614
Ford Motor Co. .......................................................................... 254,200 11,931,513
Meritor Automotive, Inc. ................................................................ 129,266 1,947,069
------------
19,189,196
------------
Construction/Agricultural Equipment 0.7%
Caterpillar Inc. ........................................................................ 42,900 1,911,731
PACCAR, Inc. ............................................................................ 74,700 3,076,706
------------
4,988,437
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
80
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tires 0.7%
Goodyear Tire & Rubber Co. .............................................................. 98,100 5,039,887
------------
Manufacturing 7.1%
Chemicals 2.5%
Akzo Nobel N.V. (ADR)* .................................................................. 93,200 3,273,650
E.I. du Pont de Nemours & Co. ........................................................... 26,300 1,476,088
Eastman Chemical Co. .................................................................... 63,600 3,207,825
Imperial Chemical Industries PLC (ADR) (New) ............................................ 208,700 6,626,230
Lyondell Petrochemical Co. .............................................................. 166,900 3,713,525
------------
18,297,318
------------
Containers & Paper 0.5%
Boise Cascade Corp. ..................................................................... 2,643 66,901
Temple-Inland, Inc. ..................................................................... 74,300 3,557,111
------------
3,624,012
------------
Diversified Manufacturing 0.6%
Canadian Pacific Ltd. (Ord.) ............................................................ 97,000 2,018,912
Olin Corp. .............................................................................. 80,500 2,309,344
------------
4,328,256
------------
Electrical Products 0.3%
Thomas & Betts Corp. .................................................................... 57,100 2,173,368
------------
Industrial Specialty 0.8%
Corning Inc. ............................................................................ 211,300 6,220,144
------------
Machinery/Components/Controls 0.2%
Parker-Hannifin Group ................................................................... 52,500 1,558,594
------------
Office Equipment/Supplies 1.4%
Xerox Corp. ............................................................................. 124,700 10,568,325
------------
Specialty Chemicals 0.8%
BetzDearborn Inc. ....................................................................... 55,300 3,822,613
Witco Corp. ............................................................................. 101,100 2,123,100
------------
5,945,713
------------
Energy 5.4%
Oil Companies 4.5%
British Petroleum PLC (ADR) ............................................................. 53,400 4,659,150
Mobil Corp. ............................................................................. 17,800 1,351,687
Pennzoil Co. ............................................................................ 8,500 298,031
Royal Dutch Petroleum Co. (New York shares) ............................................. 53,200 2,533,650
Societe Nationale Elf Aquitaine (ADR) ................................................... 108,781 6,764,818
Texaco Inc. ............................................................................. 124,000 7,773,249
Total SA (ADR) .......................................................................... 88,701 5,571,532
YPF S.A. "D" (ADR) ...................................................................... 158,500 4,121,000
------------
33,073,117
------------
Oil/Gas Transmission 0.9%
Williams Cos., Inc. ..................................................................... 243,100 6,989,125
------------
Metals & Minerals 1.0%
Steel & Metals
Allegheny Teledyne Inc. ................................................................. 202,435 3,605,873
Freeport McMoRan Copper & Gold, Inc. "A" ................................................ 99,000 1,157,062
</TABLE>
The accompanying notes are an integral part of the financial statements
81
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Oregon Steel Mills, Inc. ................................................................ 101,500 1,192,625
Phelps Dodge Corp. ...................................................................... 21,900 1,142,906
------------
7,098,466
------------
Construction 1.9%
Building Products 0.7%
Georgia Pacific Group ................................................................... 108,100 4,932,062
------------
Forest Products 1.2%
Georgia Pacific Timber Group ............................................................ 73,500 1,428,656
Westvaco Corp. .......................................................................... 77,300 1,855,200
Weyerhaeuser Co. ........................................................................ 126,400 5,332,500
------------
8,616,356
------------
Transportation 1.4%
Airlines 0.3%
Air New Zealand Ltd. "B" ................................................................ 3,200,000 2,530,275
------------
Marine Transportation 0.4%
Knightsbridge Tankers Ltd. .............................................................. 137,500 2,956,250
------------
Railroads 0.7%
CSX Corp. ............................................................................... 128,700 5,413,444
------------
Utilities 5.4%
Electric Utilities
CINergy Corp. ........................................................................... 160,400 6,135,300
Duke Energy Corp. ....................................................................... 100,189 6,631,259
PacifiCorp .............................................................................. 246,100 4,722,044
PowerGen PLC (ADR) ...................................................................... 13,600 812,600
Southern Co. ............................................................................ 181,000 5,328,187
TNP Enterprises, Inc. ................................................................... 216,500 7,563,969
Unicom Corp. ............................................................................ 166,300 6,215,462
Wisconsin Energy Corp. .................................................................. 83,400 2,632,312
------------
40,041,133
------------
Miscellaneous 0.7%
Miscellaneous
Archstone Communities Trust ............................................................. 243,962 4,970,726
------------
Total Common Stocks (Cost $356,650,350) ................................................. 402,575,515
------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $679,324,905) (a) ...................................... 99.0 733,010,707
Other Assets and Liabilities, Net ....................................................... 1.0 7,051,884
------ ------------
Net Assets .............................................................................. 100.0 740,062,591
====== ============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security
** Effective maturities will be shorter due to prepayments.
The accompanying notes are an integral part of the financial statements
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) At September 30, 1998, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $679,277,102 was as
follows:
Aggregate gross unrealized appreciation for
all investments in which there is an excess of value
over tax cost ......................................... $ 87,610,713
Aggregate gross unrealized depreciation for
all investments in which there is an excess of tax
cost over value ....................................... (33,877,108)
-------------
Net unrealized appreciation ............................. $ 53,733,605
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and direct obligations of the U.S. Government) for the year
ended September 30, 1998 aggregated $396,850,618 and $250,098,817,
respectively. Purchases and sales of direct obligations of the U.S.
Government aggregated $127,455,421 and $138,491,270, respectively.
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1998 was $656,847,635.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
83
<PAGE>
AARP GROWTH AND INCOME FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.7%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/1998 at
5.4% to be repurchased at $44,952,742 on 10/1/1998, collateralized by a
$44,323,000 U. S. Treasury Bond, 5.375%, 7/31/2000 (Cost $44,946,000) ................ 44,946,000 44,946,000
---------------
COMMERCIAL PAPER 1.6%
- -----------------------------------------------------------------------------------------------------------------------------
Financial 0.8%
Other Financial Companies
Madison Funding Corp., 5.54%, 10/22/1998 ................................................ 50,000,000 49,838,417
---------------
Miscellaneous 0.8%
Barclays U.S. Funding Corp., 5.55%, 10/1/1998 ........................................... 50,000,000 50,000,000
---------------
Total Commercial Paper (Cost $99,838,417) ............................................... 99,838,417
---------------
CONVERTIBLE BONDS 1.2%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.2%
Department & Chain Stores
Federated Department Stores, Inc., Debenture, 5.0%, 10/1/2003* .......................... 11,748,000 12,658,470
---------------
Consumer Staples 0.5%
Miscellaneous
Ralston Purina Group, 7.0%, 8/1/2000 .................................................... 490,000 29,890,000
---------------
Financial 0.2%
Real Estate
Security Capital Corp., 6.5%, 3/29/2016* (b) (c) ........................................ 18,250,000 13,528,725
---------------
Durables 0.1%
Automobiles
Magna International, Inc., 5.0%, 10/15/2002* ............................................ 6,800,000 7,318,500
---------------
Manufacturing 0.2%
Industrial Specialty
Omnicom Group Inc., 2.25%, 1/6/2013 ..................................................... 12,500,000 14,203,125
---------------
Total Convertible Bonds (Cost $81,548,135) .............................................. 77,598,820
---------------
CONVERTIBLE PREFERRED STOCKS 0.8%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Staples 0.6%
Food & Beverage
Suiza Foods Corp. 5.5%* ................................................................. 1,238,000 40,854,000
---------------
Financial 0.0%
Consumer Finance
Advanta Corp., Depository Shares, 6.75% ................................................. 68,801 860,013
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements
84
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Manufacturing 0.1%
Containers & Paper 0.0%
International Paper Co. 5.25% ........................................................... 50,200 2,434,700
---------------
Industrial Specialty 0.1%
Cooper Industries, Inc. 6.0% ............................................................ 652,400 8,399,650
---------------
Metals & Minerals 0.1%
Precious Metals 0.1%
Freeport McMoRan Copper & Gold, Inc., Cum. $1.25 ........................................ 500,000 8,062,500
---------------
Total Convertible Preferred Stocks (Cost $88,263,037) ................................... 60,610,863
---------------
PREFERRED STOCKS 0.1%
- -----------------------------------------------------------------------------------------------------------------------------
Financial
Real Estate
ProLogis Trust (REIT), 7.0% (Cost $8,080,381) ........................................... 321,500 9,243,125
---------------
COMMON STOCKS 94.6%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 3.6%
Department & Chain Stores
Federated Department Stores, Inc.* ...................................................... 242,900 8,835,488
J.C. Penney Co., Inc. ................................................................... 1,843,800 82,855,763
May Department Stores ................................................................... 1,127,300 58,055,950
Sears, Roebuck & Co. .................................................................... 1,888,300 83,439,256
---------------
233,186,457
---------------
Consumer Staples 4.1%
Food & Beverage 2.9%
H.J. Heinz Co. .......................................................................... 2,630,700 134,494,538
Suiza Foods Corp.* ...................................................................... 93,500 2,921,875
Unilever NV (New York shares) ........................................................... 839,200 51,401,000
---------------
188,817,413
---------------
Package Goods/Cosmetics 1.2%
Avon Products Inc. ...................................................................... 2,743,000 76,975,438
---------------
Health 6.6%
Pharmaceuticals
American Home Products Corp. ............................................................ 3,406,900 178,436,388
Bristol-Myers Squibb Co. ................................................................ 1,201,500 124,805,813
SmithKline Beecham PLC (ADR) ............................................................ 1,163,600 63,707,100
Zeneca Group PLC ........................................................................ 1,700,611 60,115,955
Zeneca Group PLC (Sponsored ADR) ........................................................ 13,009 455,315
---------------
427,520,571
---------------
Communications 10.8%
Telephone/Communications
Alltel Corp. ............................................................................ 1,896,300 89,837,213
Bell Atlantic Corp. ..................................................................... 3,404,480 164,904,500
BellSouth Corp. ......................................................................... 1,480,200 111,385,050
</TABLE>
The accompanying notes are an integral part of the financial statements
85
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Compania de Telefonos de Chile, S.A. (ADR) (New) ........................................ 52,190 998,134
Frontier Corp. .......................................................................... 2,579,900 70,624,763
GTE Corp. ............................................................................... 2,180,100 119,905,500
Sprint Corp. ............................................................................ 1,870,600 134,683,200
---------------
692,338,360
---------------
Financial 20.3%
Banks 9.6%
Banc One Corp. .......................................................................... 1,697,050 72,336,756
BankAmerica Corp. ....................................................................... 251,000 15,091,375
Bankers Trust New York Corp. ............................................................ 530,000 31,270,000
Chase Manhattan Corp. ................................................................... 1,402,400 60,653,800
First Chicago NBD Corp. ................................................................. 279,400 19,138,900
First Union Corp. ....................................................................... 2,849,474 145,857,450
Fleet Financial Group Inc. .............................................................. 695,300 51,061,094
KeyCorp ................................................................................. 1,728,000 49,896,000
NationsBank Corp. ....................................................................... 2,133,800 114,158,300
US Bancorp .............................................................................. 1,601,000 56,935,563
---------------
616,399,238
---------------
Insurance 3.1%
EXEL Ltd. "A" ........................................................................... 1,749,617 110,225,871
Lincoln National Corp. .................................................................. 556,400 45,763,900
Safeco Corp. ............................................................................ 1,087,000 45,314,313
---------------
201,304,084
---------------
Consumer Finance 0.1%
SLM Holding Corp. ....................................................................... 255,400 8,284,538
---------------
Other Financial Companies 1.5%
Federal National Mortgage Association ................................................... 1,493,400 95,950,950
---------------
Real Estate 6.0%
Acadia Realty Trust (REIT) .............................................................. 31,100 186,600
Arden Realty Group, Inc. ................................................................ 1,298,700 28,977,244
Avalon Bay Communities Inc. (REIT) ...................................................... 380,923 12,975,190
Boston Properties, Inc. (REIT) .......................................................... 988,900 28,183,650
Camden Property Trust (REIT) ............................................................ 386,200 10,789,463
Equity Office Properties Trust (REIT) ................................................... 1,679,200 41,140,400
General Growth Properties, Inc. (REIT) (d) .............................................. 2,004,900 71,424,563
Health Care Property Investment Inc. (REIT) ............................................. 409,800 13,523,400
Nationwide Health Properties Inc. (REIT) ................................................ 876,600 19,723,500
Prentiss Properties Trust (REIT) ........................................................ 1,279,100 30,538,513
ProLogis Trust (REIT) ................................................................... 2,816,172 63,715,892
Security Capital Group, Inc.* (b) (c) ................................................... 17,398 14,881,839
Security Capital US Realty (REIT) ....................................................... 2,688,521 28,767,175
Spieker Properties, Inc. ................................................................ 150,000 5,512,500
Vornado Realty Trust (REIT) ............................................................. 464,000 15,370,000
---------------
385,709,929
---------------
Miscellaneous 0.0%
Jardine Strategic Holdings Ltd. ......................................................... 1,263,327 1,389,660
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements
86
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service Industries 1.1%
Environmental Services
Browning Ferris Industries .............................................................. 2,396,800 72,503,200
---------------
Durables 9.7%
Aerospace 2.6%
Lockheed Martin Corp. ................................................................... 1,001,823 100,996,281
Rockwell International Corp. (New) ...................................................... 1,871,000 67,589,875
---------------
168,586,156
---------------
Automobiles 4.6%
Dana Corp. .............................................................................. 2,030,994 75,781,464
Ford Motor Co. .......................................................................... 4,037,200 189,496,075
Meritor Automotive, Inc. ................................................................ 2,078,466 31,306,894
---------------
296,584,433
---------------
Construction/Agricultural Equipment 1.2%
Caterpillar Inc. ........................................................................ 688,400 30,676,825
PACCAR, Inc. ............................................................................ 1,133,200 46,673,675
---------------
77,350,500
---------------
Tires 1.3%
Goodyear Tire & Rubber Co. .............................................................. 1,599,000 82,148,625
---------------
Manufacturing 13.2%
Chemicals 4.4%
Akzo Nobel N.V. ......................................................................... 1,431,100 50,918,008
E.I. du Pont de Nemours & Co. ........................................................... 414,200 23,246,975
Eastman Chemical Co. .................................................................... 945,000 47,663,438
Imperial Chemical Industries PLC ........................................................ 12,731,122 100,285,432
Lyondell Petrochemical Co. .............................................................. 2,707,100 60,232,975
---------------
282,346,828
---------------
Containers & Paper 1.4%
Boise Cascade Corp. ..................................................................... 1,235,281 31,268,050
Temple-Inland, Inc. ..................................................................... 1,191,800 57,057,425
---------------
88,325,475
---------------
Diversified Manufacturing 0.6%
Olin Corp. .............................................................................. 1,351,500 38,771,156
---------------
Electrical Products 0.6%
Thomas & Betts Corp. .................................................................... 1,014,600 38,618,213
---------------
Industrial Specialty 1.6%
Corning Inc. ............................................................................ 3,482,800 102,524,925
---------------
Machinery/Components/Controls 0.7%
Parker-Hannifin Group ................................................................... 841,200 24,973,125
S.K.F. AB "B" (Free) .................................................................... 1,401,200 17,339,593
---------------
42,312,718
---------------
Office Equipment/Supplies 2.6%
Xerox Corp. ............................................................................. 1,999,250 169,436,438
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements
87
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Specialty Chemicals 1.3%
BetzDearborn Inc. ....................................................................... 709,000 49,009,625
Witco Corp. ............................................................................. 1,649,900 34,647,900
---------------
83,657,525
---------------
Energy 11.1%
Oil Companies 9.6%
Amoco Corp. ............................................................................. 884,200 47,636,275
British Petroleum PLC ................................................................... 5,287,524 80,875,372
Chevron Corp. ........................................................................... 440,400 37,021,125
Mobil Corp. ............................................................................. 278,200 21,125,813
Pennzoil Co. ............................................................................ 213,500 7,485,844
Royal Dutch Petroleum Co. (New York shares) ............................................. 785,500 37,409,438
Societe Nationale Elf Aquitaine ......................................................... 759,800 93,768,963
Texaco Inc. ............................................................................. 1,875,400 117,564,126
Total S.A. "B" .......................................................................... 558,448 70,415,654
Total S.A. (ADR) ........................................................................ 569,496 35,771,468
YPF S.A. "D" (ADR) ...................................................................... 2,542,400 66,102,400
---------------
615,176,478
---------------
Oil/Gas Transmission 1.5%
Williams Cos., Inc. ..................................................................... 3,294,400 94,714,000
---------------
Metals & Minerals 1.1%
Steel & Metals
Allegheny Teledyne Inc. ................................................................. 3,293,210 58,660,303
Freeport McMoRan Copper & Gold, Inc. "A" ................................................ 579,010 6,767,179
J & L Specialty Steel, Inc. ............................................................. 1,596,700 8,282,881
---------------
73,710,363
---------------
Construction 3.3%
Building Products 1.3%
Georgia Pacific Group ................................................................... 1,778,300 81,134,938
---------------
Forest Products 2.0%
Georgia Pacific Timber Group ............................................................ 1,186,200 23,056,763
Westvaco Corp. .......................................................................... 889,200 21,340,800
Weyerhaeuser Co. ........................................................................ 2,041,500 86,125,781
---------------
130,523,344
---------------
Transportation 2.0%
Railroads
Canadian Pacific Ltd. ................................................................... 1,543,900 32,134,010
CSX Corp. ............................................................................... 2,051,700 86,299,631
Norfolk Southern Corp. .................................................................. 423,300 12,302,156
---------------
130,735,797
---------------
Utilities 7.7%
Electric Utilities
CINergy Corp. ........................................................................... 2,326,600 88,992,450
Duke Energy Corp. ....................................................................... 1,606,820 106,351,399
PacifiCorp .............................................................................. 3,722,000 71,415,875
PowerGen PLC ............................................................................ 232,159 3,452,352
PowerGen PLC (ADR) ...................................................................... 239,603 14,316,279
</TABLE>
The accompanying notes are an integral part of the financial statements
88
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Southern Co. ............................................................................ 2,937,100 86,460,881
Unicom Corp. ............................................................................ 2,316,000 86,560,500
Wisconsin Energy Corp. .................................................................. 1,183,600 37,357,375
---------------
494,907,111
---------------
Total Common Stocks (Cost $5,176,557,804) ............................................... 6,091,944,861
---------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $5,499,233,774) (a) .................................... 99.0 6,384,182,086
Other Assets and Liabilities, Net ....................................................... 1.0 67,685,226
------ ---------------
Net Assets .............................................................................. 100.0 6,451,867,312
====== ===============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security
(a) At September 30, 1998, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $5,496,933,579 was as
follows:
Aggregate gross unrealized appreciation for
all investments in which there is an excess of
value over tax cost ................................. $1,354,825,384
Aggregate gross unrealized depreciation for
all investments in which there is an excess of
tax cost over value ................................. (467,576,877)
--------------
Net unrealized appreciation ........................... $ 887,248,507
==============
(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $22,458,246 (0.35% 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, 1998 was $29,200,000. These securities may
also have certain restrictions as to resale.
(c) Restricted Securities are securities which have not been registered with
the Securities and Exchange Commission under the Securities Act of 1933.
The aggregate fair value of restricted securities at September 30, 1998,
amounted to $22,458,246 which represents 0.35% of net assets. Information
concerning such restricted securities at September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Security Acquisition Date Cost ($)
-------- ---------------- --------
<S> <C> <C>
Security Capital Group, Inc. 4/19/1996 10,950,000
Security Capital Group, Inc., 6.5%, 3/29/2016 4/19/1996 18,250,000
</TABLE>
(d) Affiliated Issuer (See Notes to Financial Statements)
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1998, aggregated
$3,084,973,865 and $2,777,870,646, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
89
<PAGE>
AARP U.S. STOCK INDEX FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 4.5%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with State Street Bank and Trust Company dated 9/30/1998
at 5.45% to be repurchased at $5,587,846 on 10/1/1998, collateralized by a
$4,845,000 U.S. Treasury Note, 6.875%, 5/15/2006 (Cost $5,587,000) ................... 5,587,000 5,587,000
------------
U.S. TREASURY OBLIGATIONS 0.2%
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bill, 4.38%, 11/5/1998 (b) (Cost $214,006) ................................ 215,000 214,142
------------
COMMON STOCKS 98.4%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Discretionary 5.6%
Apparel & Shoes 0.1%
Fruit of the Loom, Inc. "A" ............................................................. 300 4,519
Liz Claiborne Inc. ...................................................................... 400 10,475
Nike, Inc. "B" .......................................................................... 2,500 92,031
------------
107,025
------------
Department & Chain Stores 4.6%
CVS Corp. ............................................................................... 2,700 118,294
Consolidated Stores Corp. ............................................................... 300 5,888
Costco Companies, Inc. .................................................................. 2,100 99,488
Dayton Hudson Corp. ..................................................................... 6,500 232,375
Dillard's Inc. .......................................................................... 100 2,831
Dollar General Corp. .................................................................... 2,375 63,234
Gap Inc. ................................................................................ 6,200 327,050
Home Depot, Inc. ........................................................................ 19,600 774,200
J.C. Penney Co., Inc. ................................................................... 14,500 651,594
K-mart Corp. ............................................................................ 2,800 33,425
Kohl's Corp. ............................................................................ 700 27,300
Limited Inc. ............................................................................ 5,700 125,044
Longs Drug Stores, Inc. ................................................................. 600 24,113
Lowe's Companies, Inc. .................................................................. 5,400 171,788
May Department Stores ................................................................... 5,400 278,100
Nordstrom, Inc. ......................................................................... 1,800 44,550
Rite Aid Corp. .......................................................................... 3,700 131,350
Sears, Roebuck & Co. .................................................................... 7,200 318,150
TJX Companies, Inc. (New) ............................................................... 6,000 106,875
Wal-Mart Stores Inc. .................................................................... 34,400 1,879,100
Walgreen Co. ............................................................................ 6,500 286,406
------------
5,701,155
------------
Home Furnishings 0.3%
Newell Companies Inc. ................................................................... 1,300 59,881
Rubbermaid, Inc. ........................................................................ 3,500 83,781
Tupperware Corp. ........................................................................ 18,600 218,550
------------
362,212
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
90
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hotels & Casinos 0.0%
Hilton Hotels Corp. ..................................................................... 1,800 30,713
Marriott International, Inc. "A" ........................................................ 1,500 35,813
------------
66,526
------------
Recreational Products 0.2%
Brunswick Corp. ......................................................................... 7,300 94,444
Hasbro, Inc. ............................................................................ 1,050 30,975
Mattel Inc. ............................................................................. 3,000 84,000
------------
209,419
------------
Restaurants 0.3%
Darden Restaurants Inc. ................................................................. 100 1,600
McDonald's Corp. ........................................................................ 5,500 328,281
Tricon Global Restaurants ............................................................... 1,820 70,980
Wendy's International, Inc. ............................................................. 100 2,219
------------
403,080
------------
Specialty Retail 0.1%
AutoZone, Inc. .......................................................................... 100 2,463
Circuit City Stores Inc. ................................................................ 100 3,331
Pep Boys -- Manny, Moe & Jack ........................................................... 100 1,338
Tandy Corp. ............................................................................. 1,700 90,950
Toys "R" Us Inc. ........................................................................ 100 1,619
------------
99,701
------------
Miscellaneous 0.0%
Fortune Brands, Inc. .................................................................... 400 11,850
------------
Consumer Staples 8.6%
Alcohol & Tobacco 0.3%
Anheuser-Busch Companies, Inc. .......................................................... 5,100 275,400
Seagram Co., Ltd. ....................................................................... 2,000 57,375
------------
332,775
------------
Consumer Electronic & Photographic Products 0.5%
Eastman Kodak Co. ....................................................................... 6,600 510,263
Maytag Corp. ............................................................................ 1,400 66,850
Polaroid Corp. .......................................................................... 100 2,456
Whirlpool Corp. ......................................................................... 800 37,600
------------
617,169
------------
Consumer Specialties 0.4%
American Greeting Corp., "A" ............................................................ 300 11,869
Jostens, Inc. ........................................................................... 21,300 441,975
------------
453,844
------------
Farming 0.0%
Archer-Daniels-Midland Co. .............................................................. 110 1,843
Pioneer Hi-Bred International, Inc. ..................................................... 540 14,175
------------
16,018
------------
Food & Beverage 4.4%
Agribrands International, Inc. .......................................................... 20 473
Albertson's Inc. ........................................................................ 1,900 102,838
American Stores Co. ..................................................................... 500 16,094
</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 ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bestfoods ............................................................................... 1,800 87,188
Campbell Soup Co. ....................................................................... 3,900 195,731
Coca-Cola Co., Inc. ..................................................................... 36,100 2,080,263
ConAgra Inc. ............................................................................ 6,100 164,319
General Mills, Inc. ..................................................................... 5,400 378,000
Giant Food, Inc. "A" .................................................................... 100 4,319
H.J. Heinz Co. .......................................................................... 5,000 255,625
Hershey Foods Corp. ..................................................................... 100 6,844
Kellogg Co. ............................................................................. 10,200 335,963
PepsiCo Inc. ............................................................................ 24,300 715,331
Quaker Oats Co. ......................................................................... 4,300 253,700
Ralston Purina Group .................................................................... 1,000 29,250
SUPERVALU, Inc. ......................................................................... 2,000 46,625
Unilever NV (New York shares) ........................................................... 9,900 606,375
William Wrigley Jr. Co. ................................................................. 100 7,594
Winn-Dixie Stores, Inc. ................................................................. 3,900 145,031
------------
5,431,563
------------
Package Goods/Cosmetics 2.9%
Avon Products Inc. ...................................................................... 9,300 260,981
Clorox Co. .............................................................................. 1,400 115,500
Colgate-Palmolive Co. ................................................................... 4,500 308,250
Gillette Co. ............................................................................ 17,200 657,900
International Flavors & Fragrances, Inc. ................................................ 10,300 339,900
Kimberly-Clark Corp. .................................................................... 10,000 405,000
Procter & Gamble Co. .................................................................... 21,400 1,518,063
------------
3,605,594
------------
Textiles 0.1%
Springs Industries, Inc. "A" ............................................................ 300 10,425
VF Corp. ................................................................................ 2,300 85,388
------------
95,813
------------
Health 13.9%
Biotechnology 0.1%
Amgen Inc.* ............................................................................. 2,000 151,125
------------
Health Industry Services 0.5%
HBO & Company, Inc. ..................................................................... 7,200 207,900
HEALTHSOUTH Corp. ....................................................................... 2,700 28,519
Humana Inc. ............................................................................. 800 13,100
IMS Health Inc. ......................................................................... 3,700 229,169
Perkin-Elmer Corp. ...................................................................... 200 13,738
Shared Medical Systems Corp. ............................................................ 400 21,275
United Healthcare Corp. ................................................................. 1,500 52,500
------------
566,201
------------
Hospital Management 0.1%
Columbia/HCA Healthcare Corp. ........................................................... 4,900 98,306
Tenet Healthcare Corp. .................................................................. 500 14,375
------------
112,681
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
92
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Medical Supply & Specialty 1.0%
Bausch & Lomb, Inc. ..................................................................... 3,100 122,063
Becton, Dickinson & Co. ................................................................. 3,400 139,825
Biomet Inc. ............................................................................. 400 13,875
Boston Scientific Corp. ................................................................. 2,400 123,300
C.R. Bard, Inc. ......................................................................... 3,100 114,313
Guidant Corp. ........................................................................... 3,200 237,600
Mallinckrodt, Inc. ...................................................................... 900 18,281
Medtronic Inc. .......................................................................... 7,200 416,700
U.S. Surgical Corp. ..................................................................... 800 33,350
------------
1,219,307
------------
Pharmaceuticals 12.2%
Abbott Laboratories ..................................................................... 26,000 1,129,375
Allergan Specialty Therapeutics, Inc. ................................................... 5 49
Allergan, Inc. .......................................................................... 100 5,838
American Home Products Corp. ............................................................ 22,400 1,173,200
Baxter International Inc. ............................................................... 8,900 529,550
Bristol-Myers Squibb Co. ................................................................ 16,200 1,682,775
Cardinal Health, Inc. ................................................................... 500 51,625
Eli Lilly & Co. ......................................................................... 17,200 1,346,975
Johnson & Johnson ....................................................................... 22,300 1,744,975
Merck & Co., Inc. ....................................................................... 19,600 2,539,425
Pfizer, Inc. ............................................................................ 20,400 2,161,125
Pharmacia & Upjohn, Inc. ................................................................ 11,500 577,156
Schering-Plough Corp. ................................................................... 11,400 1,180,613
Warner-Lambert Co. ...................................................................... 13,400 1,011,700
------------
15,134,381
------------
Communications 7.0%
Cellular Telephone 0.2%
AirTouch Communications, Inc. ........................................................... 3,600 205,200
Nextel Communications, Inc. "A" ......................................................... 2,300 46,431
------------
251,631
------------
Telephone/Communications 6.8%
Alltel Corp. ............................................................................ 5,600 265,300
Ameritech Corp. ......................................................................... 16,600 786,425
AT&T .................................................................................... 29,300 1,712,169
Bell Atlantic Corp. ..................................................................... 30,606 1,482,478
BellSouth Corp. ......................................................................... 4,500 338,625
Frontier Corp. .......................................................................... 3,500 95,813
GTE Corp. ............................................................................... 19,500 1,072,500
MCI WorldCom, Inc. ...................................................................... 6,619 323,504
SBC Communications, Inc. ................................................................ 26,038 1,157,064
Sprint Corp. ............................................................................ 1,000 72,000
US West, Inc. ........................................................................... 20,854 1,093,532
------------
8,399,410
------------
</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 ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial 14.4%
Banks 8.2%
BB&T Corp. .............................................................................. 3,800 113,763
Banc One Corp. .......................................................................... 18,310 780,464
Bank of New York Co., Inc. .............................................................. 9,200 251,850
BankAmerica Corp. ....................................................................... 16,906 904,471
BankAmerica Corp. ....................................................................... 7,500 450,938
BankBoston Corp. ........................................................................ 6,500 214,500
Chase Manhattan Corp. ................................................................... 15,100 653,075
Citicorp ................................................................................ 7,300 678,444
Comerica Inc. ........................................................................... 1,350 73,997
Fifth Third Bancorp. .................................................................... 825 47,438
First Chicago NBD Corp. ................................................................. 3,500 239,750
First Union Corp. ....................................................................... 21,212 1,085,789
Fleet Financial Group Inc. .............................................................. 5,300 389,219
H.F. Ahmanson & Co. ..................................................................... 700 38,850
Huntington Bancshares Inc. .............................................................. 3,960 99,495
J.P. Morgan & Co., Inc. ................................................................. 6,400 541,600
KeyCorp ................................................................................. 10,900 314,738
MBNA Corp. .............................................................................. 8,850 253,331
Mellon Bank Corp. ....................................................................... 5,400 297,338
Mercantile Bancorporation Inc. .......................................................... 1,800 87,075
National City Corp. ..................................................................... 6,800 448,375
Norwest Corp. ........................................................................... 8,800 315,150
PNC Bank Corp. .......................................................................... 10,400 468,000
State Street Corp. ...................................................................... 300 16,369
Summit Bancorp. ......................................................................... 5,100 191,250
SunTrust Banks, Inc. .................................................................... 100 6,200
US Bancorp .............................................................................. 8,206 291,826
Union Planters Corp. .................................................................... 10,100 507,525
Wachovia Corp. .......................................................................... 2,600 221,650
Washington Mutual, Inc. ................................................................. 4,140 139,725
------------
10,122,195
------------
Insurance 3.0%
Aetna Inc. .............................................................................. 100 6,950
Allstate Corp. .......................................................................... 9,100 379,356
American General Corp. .................................................................. 4,900 312,988
American International Group, Inc. ...................................................... 12,900 993,300
Aon Corp. ............................................................................... 1,550 99,975
Chubb Corp. ............................................................................. 300 18,900
Cigna Corp. ............................................................................. 1,800 119,025
Cincinnati Financial Corp. .............................................................. 900 27,675
Conseco, Inc. ........................................................................... 1,983 60,608
General Re Corp. ........................................................................ 600 121,800
Hartford Financial Services Group Inc. .................................................. 400 18,975
Jefferson Pilot Corp. ................................................................... 1,100 66,550
Lincoln National Corp. .................................................................. 2,000 164,500
Marsh & McLennan Companies, Inc. ........................................................ 11,350 564,663
Progressive Corp. ....................................................................... 100 11,275
</TABLE>
The accompanying notes are an integral part of the financial statements
94
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Providian Financial Corp. ............................................................... 600 50,888
Safeco Corp. ............................................................................ 7,800 325,163
St. Paul Companies, Inc. ................................................................ 6,856 222,820
SunAmerica, Inc. ........................................................................ 3,050 186,050
Torchmark Corp. ......................................................................... 400 14,375
Transamerica Corp. ...................................................................... 100 10,600
UNUM Corp. .............................................................................. 200 9,938
------------
3,786,374
------------
Consumer Finance 0.9%
American Express Co. .................................................................... 6,900 535,613
Associates First Capital Corp. .......................................................... 3,573 233,138
Capital One Financial Corp. ............................................................. 1,700 175,950
SLM Holding Corp. ....................................................................... 4,400 142,725
------------
1,087,426
------------
Other Financial Companies 2.3%
Bear Stearns Companies, Inc. ............................................................ 1,400 43,313
Federal Home Loan Mortgage Corp. ........................................................ 7,500 370,781
Federal National Mortgage Association ................................................... 15,000 963,750
Household International, Inc. ........................................................... 8,059 302,213
Morgan Stanley, Dean Witter Discover Co. ................................................ 10,095 434,716
Travelers Group, Inc. ................................................................... 18,719 701,963
------------
2,816,736
------------
Media 2.5%
Advertising 0.1%
Interpublic Group of Companies Inc. ..................................................... 250 13,484
Omnicom Group, Inc. ..................................................................... 2,400 108,000
------------
121,484
------------
Broadcasting & Entertainment 1.7%
CBS Corp. ............................................................................... 10,800 261,900
Clear Channel Communications, Inc. ...................................................... 2,200 104,500
Time Warner Inc. ........................................................................ 8,400 735,525
Viacom Inc. "B" ......................................................................... 3,800 220,400
Walt Disney Co. ......................................................................... 28,500 721,406
------------
2,043,731
------------
Cable Television 0.6%
Comcast Corp. "A" ....................................................................... 3,400 159,588
Media One Group, Inc. ................................................................... 7,100 315,506
Tele-Communications Inc. "A"(New) ....................................................... 7,727 302,319
------------
777,413
------------
Print Media 0.1%
Gannett Co., Inc. ....................................................................... 2,300 123,194
Harcourt General, Inc. .................................................................. 100 4,838
Knight-Ridder, Inc. ..................................................................... 200 8,900
New York Times Co. "A" .................................................................. 200 5,500
Times Mirror Co. "A" .................................................................... 100 5,313
Tribune Co. ............................................................................. 500 25,156
------------
172,901
------------
</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 ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service Industries 2.6%
EDP Services 0.4%
Automatic Data Processing, Inc. ......................................................... 2,700 201,825
Electronic Data Systems Corp. ........................................................... 7,100 235,631
First Data Corp. ........................................................................ 1,700 39,950
------------
477,406
------------
Environmental Services 0.5%
Browning Ferris Industries .............................................................. 11,900 359,975
Safety-Kleen Corp. ...................................................................... 280 928
Waste Management, Inc. .................................................................. 5,600 269,150
------------
630,053
------------
Investment 0.4%
Charles Schwab Corp. .................................................................... 3,450 135,844
Franklin Resources, Inc. ................................................................ 2,200 66,000
Lehman Brothers Holdings, Inc. .......................................................... 1,000 28,250
Merrill Lynch & Co., Inc. ............................................................... 6,400 303,200
------------
533,294
------------
Miscellaneous Commercial Services 0.0%
Ecolab, Inc. ............................................................................ 200 5,688
Sodexho Marriott Services, Inc. ......................................................... 25 750
Sysco Corp. ............................................................................. 800 18,850
------------
25,288
------------
Miscellaneous Consumer Services 0.3%
Cendant Corp. ........................................................................... 10,280 119,505
H & R Block Inc. ........................................................................ 4,400 182,050
Service Corp. International ............................................................. 600 19,125
------------
320,680
------------
Printing/Publishing 1.0%
Deluxe Corp. ............................................................................ 18,100 514,719
Dow Jones & Co., Inc. ................................................................... 1,200 55,800
Dun & Bradstreet Corp. (New) ............................................................ 10,700 288,900
Equifax Inc. ............................................................................ 700 24,981
McGraw-Hill Inc. ........................................................................ 2,800 221,900
R.R. Donnelley & Sons Co. ............................................................... 3,400 119,638
------------
1,225,938
------------
Durables 5.2%
Aerospace 1.1%
AlliedSignal Inc. ....................................................................... 5,100 180,413
Boeing Co. .............................................................................. 13,750 471,797
Lockheed Martin Corp. ................................................................... 1,400 141,138
Northrop Grumman Corp. .................................................................. 1,800 131,400
Rockwell International Corp. (New) ...................................................... 5,000 180,625
United Technologies Corp. ............................................................... 3,500 267,531
------------
1,372,904
------------
Automobiles 2.1%
Chrysler Corp. .......................................................................... 12,400 593,650
Cummins Engine Co., Inc. ................................................................ 300 8,925
</TABLE>
The accompanying notes are an integral part of the financial statements
96
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dana Corp. .............................................................................. 2,592 96,714
Eaton Corp. ............................................................................. 1,100 68,956
Ford Motor Co. .......................................................................... 20,200 948,138
General Motors Corp. .................................................................... 10,900 596,094
Genuine Parts Co. ....................................................................... 7,200 216,450
Midas Inc. .............................................................................. 16 388
------------
2,529,315
------------
Construction/Agricultural Equipment 0.4%
Case Corp. .............................................................................. 100 2,175
Caterpillar Inc. ........................................................................ 6,900 307,481
Deere & Co. ............................................................................. 4,200 127,050
------------
436,706
------------
Leasing Companies 0.0%
IKON Office Solutions, Inc. ............................................................. 2,900 20,844
Ryder System, Inc. ...................................................................... 100 2,488
------------
23,332
------------
Telecommunications Equipment 1.5%
Andrew Corp. ............................................................................ 250 3,313
Ascend Communications, Inc. ............................................................. 3,500 159,250
General Instrument Corp. ................................................................ 500 10,813
Lucent Technologies Inc. ................................................................ 19,400 1,339,813
Northern Telecom Ltd. ................................................................... 8,440 270,080
Scientific-Atlanta, Inc. ................................................................ 500 10,563
Tellabs, Inc. ........................................................................... 2,600 103,513
------------
1,897,345
------------
Tires 0.1%
Cooper Tire & Rubber Co. ................................................................ 100 1,800
Goodyear Tire & Rubber Co. .............................................................. 2,600 133,575
------------
135,375
------------
Manufacturing 9.7%
Chemicals 2.2%
B.F. Goodrich Co., Inc. ................................................................. 5,400 176,513
Dow Chemical Co. ........................................................................ 8,400 717,675
E.I. du Pont de Nemours & Co. ........................................................... 17,900 1,004,638
Eastman Chemical Co. .................................................................... 2,800 141,225
Engelhard Corp. ......................................................................... 100 1,769
Great Lakes Chemicals Corp. ............................................................. 100 3,888
Hercules, Inc. .......................................................................... 6,300 189,394
Monsanto Co. ............................................................................ 3,700 208,588
Morton International, Inc. .............................................................. 400 8,750
Octel Corp. ............................................................................. 25 344
Praxair, Inc. ........................................................................... 100 3,269
Rohm & Haas Co. ......................................................................... 1,800 50,063
Sigma-Aldrich Corp. ..................................................................... 100 2,888
Union Carbide Corp. ..................................................................... 1,100 47,438
W.R. Grace & Co. ........................................................................ 8,500 105,719
------------
2,662,161
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
97
<PAGE>
AARP U.S. STOCK INDEX FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Containers & Paper 0.4%
Boise Cascade Corp. ..................................................................... 800 20,250
Crown Cork & Seal Co. Inc. .............................................................. 2,100 56,175
Fort James Corp. ........................................................................ 2,300 75,469
International Paper Co. ................................................................. 2,500 116,563
Sealed Air Corp. ........................................................................ 53 1,689
Stone Container Corp. ................................................................... 200 1,725
Temple-Inland, Inc. ..................................................................... 500 23,938
Union Camp Corp. ........................................................................ 5,900 232,313
------------
528,122
------------
Diversified Manufacturing 5.0%
Aeroquip-Vickers Inc. ................................................................... 400 11,500
Cooper Industries, Inc. ................................................................. 4,400 179,300
Dover Corp. ............................................................................. 1,000 30,875
General Electric Co. .................................................................... 51,100 4,065,644
Honeywell, Inc. ......................................................................... 1,900 121,719
ITT Industries Inc. ..................................................................... 700 23,713
Minnesota Mining & Manufacturing Co. .................................................... 10,000 736,875
National Service Industries, Inc. ....................................................... 4,300 137,063
TRW, Inc. ............................................................................... 300 13,313
Tenneco, Inc. ........................................................................... 8,500 279,438
Textron, Inc. ........................................................................... 1,600 97,000
Tyco International Ltd. (New) ........................................................... 7,400 408,850
------------
6,105,290
------------
Electrical Products 0.4%
Emerson Electric Co. .................................................................... 6,100 379,725
Raychem Corp. ........................................................................... 400 9,750
Thomas & Betts Corp. .................................................................... 3,900 148,444
------------
537,919
------------
Hand Tools 0.1%
Black & Decker Corp. .................................................................... 100 4,163
Briggs & Stratton Corp. ................................................................. 1,600 65,800
Snap-On, Inc. ........................................................................... 2,500 77,031
Stanley Works ........................................................................... 900 26,775
------------
173,769
------------
Industrial Specialty 0.4%
Avery Dennison Corp. .................................................................... 800 34,950
Corning Inc. ............................................................................ 2,600 76,538
Milacron Inc. ........................................................................... 1,200 18,525
PPG Industries, Inc. .................................................................... 2,900 158,231
Pall Corp. .............................................................................. 9,500 210,781
Sherwin-Williams Co. .................................................................... 200 4,325
------------
503,350
------------
Machinery/Components/Controls 0.3%
General Signal Corp. .................................................................... 4,600 156,113
Harnischfeger Industries, Inc. .......................................................... 100 1,125
Illinois Tool Works Inc. ................................................................ 1,700 92,650
Ingersoll-Rand Co. ...................................................................... 1,450 55,009
</TABLE>
The accompanying notes are an integral part of the financial statements
98
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parker-Hannifin Group ................................................................... 1,100 32,656
Timken Co. .............................................................................. 3,900 58,988
------------
396,541
------------
Office Equipment/Supplies 0.8%
Moore Corp., Ltd. ....................................................................... 27,800 299,787
Pitney Bowes, Inc. ...................................................................... 4,400 231,275
Xerox Corp. ............................................................................. 5,300 449,175
------------
980,237
------------
Specialty Chemicals 0.1%
Air Products & Chemicals, Inc. .......................................................... 1,000 29,750
Nalco Chemical Co. ...................................................................... 2,700 79,650
------------
109,400
------------
Technology 13.1%
Computer Software 4.0%
Adobe Systems Inc. ...................................................................... 500 17,344
Autodesk, Inc. .......................................................................... 500 13,125
BMC Software Inc. (b) ................................................................... 2,400 144,150
Computer Associates International, Inc. ................................................. 7,700 284,900
Microsoft Corp. ......................................................................... 37,200 4,094,325
Oracle Systems Corp. .................................................................... 11,800 343,675
Parametric Technology Corp. ............................................................. 4,200 42,263
PeopleSoft Inc. ......................................................................... 2,900 94,613
------------
5,034,395
------------
Diverse Electronic Products 0.5%
Applied Materials, Inc. ................................................................. 3,800 95,950
Harris Corp. ............................................................................ 4,500 144,000
KLA Tencor Corp. ........................................................................ 1,300 32,338
Motorola Inc. ........................................................................... 7,300 311,619
------------
583,907
------------
EDP Peripherals 0.4%
EMC Corp. ............................................................................... 7,200 411,750
Seagate Technology, Inc. ................................................................ 1,300 32,581
------------
444,331
------------
Electronic Components/Distributors 0.5%
AMP Inc. ................................................................................ 12,900 461,175
Gateway 2000, Inc. ...................................................................... 1,900 99,038
------------
560,213
------------
Electronic Data Processing 4.1%
Apple Computer, Inc. .................................................................... 2,700 102,938
Ceridian Corp. .......................................................................... 100 5,738
Compaq Computer Corp. ................................................................... 22,558 713,397
Data General Corp. ...................................................................... 200 2,175
Dell Computer Corp. ..................................................................... 20,600 1,354,450
Hewlett-Packard Co. ..................................................................... 15,600 825,825
International Business Machines Corp. ................................................... 13,700 1,753,600
Silicon Graphics Inc. ................................................................... 700 6,563
</TABLE>
The accompanying notes are an integral part of the financial statements
99
<PAGE>
AARP U.S. STOCK INDEX FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sun Microsystems, Inc. .................................................................. 3,600 179,325
Unisys Corp. ............................................................................ 7,900 179,725
------------
5,123,736
------------
Military Electronics 0.3%
Computer Sciences Corp. ................................................................. 3,400 185,300
EG&G, Inc. .............................................................................. 1,800 40,725
General Dynamics Corp. .................................................................. 200 10,038
Raytheon Co. "B" ........................................................................ 2,000 107,875
------------
343,938
------------
Office/Plant Automation 1.3%
3Com Corp. .............................................................................. 4,600 138,288
Cabletron Systems Inc. .................................................................. 500 5,625
Cisco Systems, Inc. ..................................................................... 23,425 1,447,958
Novell Inc. ............................................................................. 900 11,025
------------
1,602,896
------------
Semiconductors 2.0%
Advanced Micro Devices Inc. ............................................................. 1,700 31,556
Intel Corp. ............................................................................. 24,700 2,118,025
LSI Logic Corp. ......................................................................... 1,600 20,200
Micron Technology Inc. .................................................................. 2,000 60,875
National Semiconductor Corp. ............................................................ 900 8,719
Texas Instruments Inc. .................................................................. 5,800 305,950
------------
2,545,325
------------
Energy 8.2%
Engineering 0.2%
Fluor Corp. ............................................................................. 900 36,956
Foster Wheeler Corp. .................................................................... 18,700 257,125
McDermott International Inc. ............................................................ 400 10,775
------------
304,856
------------
Oil & Gas Production 0.5%
Burlington Resources, Inc. .............................................................. 100 3,738
Kerr-McGee Corp. ........................................................................ 2,500 113,750
Occidental Petroleum Corp. .............................................................. 22,400 481,600
------------
599,088
------------
Oil Companies 6.5%
Amerada Hess Corp. ...................................................................... 100 5,769
Amoco Corp. ............................................................................. 18,600 1,002,075
Ashland Inc. ............................................................................ 100 4,625
Atlantic Richfield Co. .................................................................. 9,900 702,281
Chevron Corp. ........................................................................... 9,900 832,219
Exxon Corp. ............................................................................. 34,900 2,449,544
Mobil Corp. ............................................................................. 12,300 934,031
Phillips Petroleum Co. .................................................................. 3,300 148,913
Royal Dutch Petroleum Co. (New York shares) ............................................. 32,700 1,557,338
Sun Co., Inc. ........................................................................... 400 12,800
Texaco Inc. ............................................................................. 6,200 388,663
</TABLE>
The accompanying notes are an integral part of the financial statements
100
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
USX Marathon Group ...................................................................... 900 31,894
Unocal Corp. ............................................................................ 100 3,625
------------
8,073,777
------------
Oil/Gas Transmission 0.2%
Enron Corp. ............................................................................. 200 10,563
Sonat, Inc. ............................................................................. 2,100 62,738
Williams Cos., Inc. ..................................................................... 5,200 149,500
------------
222,801
------------
Oilfield Services/Equipment 0.6%
Baker Hughes, Inc. ...................................................................... 5,300 110,969
Halliburton Co. ......................................................................... 9,100 259,919
Rowan Companies, Inc. ................................................................... 400 4,475
Schlumberger Ltd. ....................................................................... 7,100 357,219
------------
732,582
------------
Miscellaneous 0.2%
Sempra Energy ........................................................................... 8,571 223,382
------------
Metals & Minerals 0.8%
Precious Metals 0.1%
Barrick Gold Corp. ...................................................................... 100 2,000
Battle Mountain Gold Co. "A" ............................................................ 100 606
Freeport McMoRan Copper & Gold, Inc. "B" ................................................ 5,600 66,500
Homestake Mining Co. .................................................................... 100 1,213
Newmont Mining Corp. .................................................................... 143 3,468
Placer Dome Inc. ........................................................................ 100 1,383
------------
75,170
------------
Steel & Metals 0.7%
Alcan Aluminium Ltd. .................................................................... 300 7,031
Allegheny Teledyne Inc. ................................................................. 11,200 199,500
Aluminum Co. of America ................................................................. 400 28,400
Asarco, Inc. ............................................................................ 100 1,913
Bethlehem Steel Corp. ................................................................... 100 825
Cyprus Amax Minerals Co. ................................................................ 23,800 315,350
Inco Ltd. ............................................................................... 100 1,025
Nucor Corp. ............................................................................. 100 4,063
Phelps Dodge Corp. ...................................................................... 1,500 78,281
Reynolds Metals Co. ..................................................................... 800 40,650
USX-US Steel Group, Inc. ................................................................ 2,000 47,750
Worthington Industries, Inc. ............................................................ 13,500 168,750
------------
893,538
------------
Construction 0.8%
Building Products 0.2%
Armstrong World Industries, Inc. ........................................................ 2,800 149,800
Georgia Pacific Group ................................................................... 400 18,250
Masco Corp. ............................................................................. 3,000 73,875
Owens Corning ........................................................................... 200 6,513
------------
248,438
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
101
<PAGE>
AARP U.S. STOCK INDEX FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Forest Products 0.6%
Louisiana-Pacific Corp. ................................................................. 4,900 99,838
Potlatch Corp. .......................................................................... 6,200 211,188
Westvaco Corp. .......................................................................... 2,500 60,000
Weyerhaeuser Co. ........................................................................ 8,000 337,500
------------
708,526
------------
Homebuilding 0.0%
Kaufman & Broad Home Corp. .............................................................. 600 14,063
------------
Transportation 0.8%
Air Freight 0.0%
FDX Corp. ............................................................................... 160 7,220
------------
Airlines 0.1%
AMR Corp. ............................................................................... 400 22,175
Southwest Airlines Co. .................................................................. 1,350 27,000
US Airways Group, Inc. .................................................................. 2,400 121,500
------------
170,675
------------
Railroads 0.7%
Burlington Northern Santa Fe ............................................................ 3,000 96,000
CSX Corp. ............................................................................... 6,000 252,375
Norfolk Southern Corp. .................................................................. 11,700 340,031
Union Pacific Corp. ..................................................................... 2,700 115,088
------------
803,494
------------
Miscellaneous 0.0%
Laidlaw, Inc. ........................................................................... 4,700 44,675
------------
Utilities 5.2%
Electric Utilities 4.6%
Ameren Corp. ............................................................................ 5,400 226,463
American Electric Power Co. ............................................................. 1,200 58,575
Baltimore Gas & Electric Co. ............................................................ 3,800 126,825
CINergy Corp. ........................................................................... 2,900 110,925
Carolina Power & Light Co. .............................................................. 100 4,619
Central & South West Corp. .............................................................. 22,500 642,656
Consolidated Edison Inc. ................................................................ 4,500 234,563
DTE Energy Co. .......................................................................... 3,400 153,638
Dominion Resources Inc. ................................................................. 12,600 562,275
Duke Energy Corp. ....................................................................... 1,904 126,021
Edison International .................................................................... 100 2,569
Entergy Corp. ........................................................................... 14,800 455,100
FPL Group, Inc. ......................................................................... 100 6,969
FirstEnergy Corp. ....................................................................... 2,900 90,081
GPU, Inc. ............................................................................... 500 21,250
Houston Industries Inc. ................................................................. 12,111 376,955
Northern States Power Co. ............................................................... 400 11,225
P G & E Corp. ........................................................................... 100 3,194
PP&L Resources, Inc. .................................................................... 27,828 720,050
PacifiCorp .............................................................................. 100 1,919
Peco Energy Co. ......................................................................... 11,300 413,156
Public Service Enterprise Group ......................................................... 22,100 868,806
</TABLE>
The accompanying notes are an integral part of the financial statements
102
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Southern Co. ............................................................................ 8,800 259,050
Texas Utilities Co., Inc. ............................................................... 2,622 122,087
Unicom Corp. ............................................................................ 1,600 59,800
------------
5,658,771
------------
Natural Gas Distribution 0.6%
Consolidated Natural Gas Corp. .......................................................... 2,500 136,250
Eastern Enterprises ..................................................................... 3,200 134,800
NICOR, Inc. ............................................................................. 2,100 87,019
ONEOK, Inc. ............................................................................. 200 6,800
Peoples Energy Corp. .................................................................... 10,800 388,800
------------
753,669
------------
Total Common Stocks (Cost $120,750,446) ................................................. 121,654,631
------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $126,551,452) (a) ...................................... 103.1 127,455,773
Other Assets and Liabilities, Net ....................................................... (3.1) (3,773,492)
------ ------------
Net Assets .............................................................................. 100.0 123,682,281
====== ============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1998, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $126,571,795 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ......................................... $ 10,782,470
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ (9,898,492)
------------
Net unrealized appreciation ............................. $ 883,978
============
(b) At September 30, 1998, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.
At September 30, 1998, open futures contracts purchased were as follows:
<TABLE>
<CAPTION>
Number Aggregate Market
Futures Expiration of Contracts Face Value ($) Value ($)
------- ---------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C>
S&P 500 Index December, 1998 8 2,101,548 2,051,000
----------
Total net unrealized depreciation on open futures contracts purchased .............................. (50,548)
==========
</TABLE>
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1998 was $86,828,610 and $87,104,973,
respectively.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1998 aggregated $89,697,795
and $771,003, 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 reported in the Statement of Assets and
Liabilities.
- --------------------------------------------------------------------------------
From November 1, 1997 through September 30, 1998, the Fund incurred
approximately $24,000 of net realized capital losses on investments. As
permitted by tax regulations, the Fund intends to elect to defer these
losses and treat them as arising in the fiscal year ended September 30,
1999.
The accompanying notes are an integral part of the financial statements
103
<PAGE>
AARP CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS 5.0%
- -----------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/1998 at
5.4% to be repurchased at $62,111,315 on 10/1/1998, collateralized by a
$27,151,000 U.S. Treasury Note, 14.25%, 2/15/2002 and a $26,185,000
U.S. Treasury Note, 6.875%, 8/31/1999 (Cost $62,102,000) ................................. 62,102,000 62,102,000
------------
Commercial Paper 2.4%
- -----------------------------------------------------------------------------------------------------------------------------
Bank of Montreal CP, 5.58%, 10/9/1998 (Cost $29,962,800) .................................... 30,000,000 29,962,800
------------
Common Stocks 92.9%
- -----------------------------------------------------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 13.7%
Department & Chain Stores 7.3%
Dayton Hudson Corp. ......................................................................... 664,600 23,759,450
Home Depot, Inc. ............................................................................ 761,300 30,071,350
Wal-Mart Stores Inc. ........................................................................ 237,600 12,978,900
Walgreen Co. ................................................................................ 555,400 24,472,313
------------
91,282,013
------------
Home Furnishings 1.0%
Newell Companies Inc. ....................................................................... 259,800 11,967,038
------------
Hotels & Casinos 2.2%
Carnival Corp. .............................................................................. 560,700 17,837,269
Mirage Resorts, Inc.* ....................................................................... 583,100 9,766,925
------------
27,604,194
------------
Specialty Retail 3.2%
AutoZone, Inc.* ............................................................................. 455,000 11,204,375
Office Depot Inc.* .......................................................................... 799,700 17,943,269
Tiffany & Co. ............................................................................... 355,400 11,150,675
------------
40,298,319
------------
Consumer Staples 3.3%
Food & Beverage 0.8%
Suiza Foods Corp.* .......................................................................... 309,100 9,659,375
------------
Package Goods/Cosmetics 2.5%
Procter & Gamble Co. ........................................................................ 434,700 30,836,531
------------
Health 11.7%
Health Industry Services 1.0%
HEALTHSOUTH Corp.* .......................................................................... 1,153,100 12,179,619
------------
Medical Supply & Specialty 2.3%
Becton, Dickinson & Co. ..................................................................... 697,600 28,688,800
------------
Pharmaceuticals 8.4%
American Home Products Corp. ................................................................ 311,000 16,288,625
Bristol-Myers Squibb Co. .................................................................... 245,100 25,459,763
</TABLE>
The accompanying notes are an integral part of the financial statements
104
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pfizer, Inc. ................................................................................ 233,700 24,757,594
Schering-Plough Corp. ....................................................................... 372,800 38,608,093
------------
105,114,075
------------
Communications 4.1%
Telephone/Communications
Ameritech Corp. ............................................................................. 322,800 15,292,650
MCI WorldCom, Inc.* ......................................................................... 728,400 35,600,550
------------
50,893,200
------------
Financial 15.7%
Banks 1.4%
BankAmerica Corp. ........................................................................... 298,800 17,965,350
------------
Insurance 7.5%
Allstate Corp. .............................................................................. 333,300 13,894,444
American International Group, Inc. .......................................................... 369,750 28,470,750
EXEL Ltd. "A" ............................................................................... 577,500 36,382,500
MBIA, Inc. .................................................................................. 285,300 15,317,044
------------
94,064,738
------------
Consumer Finance 3.2%
American Express Co. ........................................................................ 230,300 17,877,038
Associates First Capital Corp. .............................................................. 335,100 21,865,275
------------
39,742,313
------------
Other Financial Companies 3.6%
Federal National Mortgage Association ....................................................... 455,400 29,259,450
Travelers Group, Inc. ....................................................................... 427,600 16,035,000
------------
45,294,450
------------
Media 5.1%
Advertising 2.1%
Omnicom Group, Inc. ......................................................................... 596,500 26,842,500
------------
Cable Television 2.1%
Tele-Comm Liberty Media Group "A"* .......................................................... 699,700 25,670,244
------------
Print Media 0.9%
Tribune Co. ................................................................................. 222,600 11,199,563
------------
Service Industries 3.0%
Investment 0.7%
Franklin Resources, Inc. .................................................................... 290,600 8,718,000
------------
Miscellaneous Commercial Services 1.1%
AccuStaff, Inc. ............................................................................. 899,600 13,100,425
------------
Miscellaneous Consumer Services 1.2%
Service Corp. International ................................................................. 472,100 15,048,188
------------
Durables 5.3%
Aerospace 3.1%
Lockheed Martin Corp. ....................................................................... 196,000 19,759,250
United Technologies Corp. ................................................................... 255,500 19,529,781
------------
39,289,031
------------
Automobiles 1.0%
Magna International, Inc. "A" ............................................................... 204,100 11,863,313
------------
</TABLE>
The accompanying notes are an integral part of the financial statements
105
<PAGE>
AARP CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications Equipment 1.2%
Nokia Corp. "A" (ADR) ....................................................................... 190,300 14,926,656
-------------
Manufacturing 6.4%
Chemicals 0.7%
Sigma-Aldrich Corp. ......................................................................... 314,200 9,072,525
-------------
Diversified Manufacturing 2.8%
General Electric Co. ........................................................................ 237,800 18,919,963
Textron, Inc. ............................................................................... 266,600 16,162,625
-------------
35,082,588
-------------
Electrical Products 0.9%
Emerson Electric Co. ........................................................................ 184,300 11,472,675
-------------
Machinery/Components/Controls 2.0%
Parker-Hannifin Group ....................................................................... 820,200 24,349,688
-------------
Technology 16.5%
Computer Software 2.7%
Computer Associates International, Inc. ..................................................... 587,100 21,722,700
Sterling Commerce, Inc.* .................................................................... 350,600 12,139,525
-------------
33,862,225
-------------
Diverse Electronic Products 1.2%
Applied Materials, Inc.* .................................................................... 574,000 14,493,500
-------------
Electronic Data Processing 8.6%
Compaq Computer Corp. ....................................................................... 1,066,300 33,721,738
Hewlett-Packard Co. ......................................................................... 504,600 26,712,263
International Business Machines Corp. ....................................................... 127,800 16,358,400
Sun Microsystems, Inc.* ..................................................................... 607,600 30,266,075
-------------
107,058,476
-------------
Semiconductors 4.0%
Intel Corp. ................................................................................. 449,900 38,578,925
Linear Technology Corp. ..................................................................... 227,600 11,380,000
-------------
49,958,925
-------------
Energy 7.6%
Oil Companies 5.1%
Exxon Corp. ................................................................................. 287,300 20,164,869
Mobil Corp. ................................................................................. 200,000 15,187,500
Royal Dutch Petroleum Co. (New York shares) ................................................. 577,500 27,503,438
-------------
62,855,807
-------------
Oil/Gas Transmission 1.2%
Williams Cos., Inc. ......................................................................... 527,300 15,159,875
-------------
Oilfield Services/Equipment 1.3%
Schlumberger Ltd. ........................................................................... 327,600 16,482,375
-------------
Transportation 0.5%
Railroads
Wisconsin Central Transportation Co.* ....................................................... 464,400 6,501,600
-------------
Total Common Stocks (Cost $923,090,674) 1,158,598,194
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
106
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $1,015,155,474) (a) ................................... 100.3 1,250,662,994
Other Assets and Liabilities, Net ...................................................... (0.3) (3,327,372)
------ -------------
Net Assets ............................................................................. 100.0 1,247,335,622
====== =============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.
(a) At September 30, 1998, the net unrealized
appreciation on investments based on cost for
federal income tax purposes of $1,015,210,988
was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost.............................................. $320,356,824
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (84,904,818)
------------
Net unrealized appreciation .......................... $235,452,006
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1998, aggregated
$717,549,004 and $670,435,780, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
107
<PAGE>
AARP SMALL COMPANY STOCK FUND
<TABLE>
<CAPTION>
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 1.0%
- -----------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Company dated 9/30/1998
at 5.45% to be repurchased at $918,139 on 10/1/1998, collateralized by a
$910,000 U.S. Treasury Note, 5.625%, 12/31/1999 (Cost $918,000) .......................... 918,000 918,000
-------------
COMMON STOCKS 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 10.6%
Apparel & Shoes 1.0%
Brown Group, Inc. ........................................................................... 20,000 307,500
Oxford Industries, Inc. ..................................................................... 17,400 535,050
-------------
842,550
-------------
Department & Chain Stores 0.5%
Ames Department Stores, Inc.* ............................................................... 36,500 463,094
-------------
Home Furnishings 3.1%
Bush Industries, Inc. "A" ................................................................... 9,400 135,125
Ethan Allen Interiors Inc. .................................................................. 7,200 261,000
Interface, Inc. ............................................................................. 38,000 456,000
La-Z-Boy Inc. ............................................................................... 35,400 694,725
Mikasa, Inc. ................................................................................ 21,400 239,413
Oneida Ltd. ................................................................................. 33,500 569,500
Thomas Industries, Inc. ..................................................................... 19,500 418,031
U.S. Industries, Inc. ....................................................................... 17,600 265,100
-------------
3,038,894
-------------
Hotels & Casinos 0.2%
Prime Hospitality Corp. ..................................................................... 24,700 172,900
-------------
Recreational Products 0.7%
CPI Corp. ................................................................................... 30,400 720,100
-------------
Restaurants 1.1%
IHOP Corp.* ................................................................................. 11,800 435,125
Ruby Tuesday, Inc. .......................................................................... 42,400 641,300
-------------
1,076,425
-------------
Specialty Retail 4.0%
Aaron Rents, Inc. ........................................................................... 42,800 642,000
Cellstar Corp.* ............................................................................. 24,000 103,500
Eagle Hardware & Garden, Inc.* .............................................................. 9,800 212,538
Friedman's, Inc., "A"* ...................................................................... 33,300 216,450
Hancock Fabrics, Inc. ....................................................................... 72,900 701,663
Inacom Corp.* ............................................................................... 28,900 545,488
The Finish Line, Inc. "A"* .................................................................. 65,100 606,244
Toro Co. .................................................................................... 14,200 293,763
Wet Seal, Inc. "A"* ......................................................................... 22,700 392,994
Zale Corp.* ................................................................................. 7,400 189,625
-------------
3,904,265
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
108
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Staples 3.6%
Consumer Electronic & Photographic Products 0.1%
Harman International Industries, Inc. ....................................................... 2,700 99,056
-------------
Food & Beverage 2.3%
Michael Foods, Inc. ......................................................................... 26,000 617,500
Nash-Finch Co. .............................................................................. 26,000 381,875
Riviana Foods, Inc. ......................................................................... 49,400 981,825
Ruddick Corp. ............................................................................... 18,000 306,000
-------------
2,287,200
-------------
Textiles 1.2%
Guilford Mills, Inc. ........................................................................ 42,650 634,419
Kellwood Company ............................................................................ 18,300 491,813
-------------
1,126,232
-------------
Health 2.6%
Health Industry Services 0.7%
PharMerica, Inc.* ........................................................................... 84,000 456,750
Prime Medical Services, Inc.* ............................................................... 30,200 245,375
-------------
702,125
-------------
Medical Supply & Specialty 1.9%
Bindley Western Industries, Inc. ............................................................ 40,266 1,328,778
West Co., Inc. .............................................................................. 18,200 523,250
-------------
1,852,028
-------------
Financial 14.0%
Banks 7.3%
ALBANK Financial Corp. ...................................................................... 15,200 847,400
Banknorth Group, Inc. ....................................................................... 25,800 754,650
Chittenden Corp. ............................................................................ 18,875 566,250
Commerce Bancorp, Inc. ...................................................................... 5,381 212,886
F.N.B. Corp. ................................................................................ 16,590 464,520
First Financial Holdings, Inc. .............................................................. 41,600 707,200
First Midwest Bancorp ....................................................................... 10,465 414,022
FirstBank Puerto Rico ....................................................................... 16,400 416,150
NBT Bancorp Inc. ............................................................................ 15,820 363,860
Riggs National Corp. ........................................................................ 13,500 330,750
Susquehanna Bancshares, Inc. ................................................................ 19,350 365,231
UST Corp. ................................................................................... 16,900 357,013
Usbancorp, Inc. ............................................................................. 26,100 495,900
Vermont Financial Services Corp. ............................................................ 15,000 322,500
Westcorp, Inc. .............................................................................. 48,800 420,900
-------------
7,039,232
-------------
Insurance 5.3%
Allied Group, Inc. .......................................................................... 1,200 57,675
American Annuity Group, Inc. ................................................................ 9,200 209,875
American Heritage Life Investment Corp. ..................................................... 48,300 1,101,844
First American Financial Co. ................................................................ 4,950 158,400
Harleysville Group, Inc. .................................................................... 33,800 697,125
Hilb, Rogal & Hamilton Co. .................................................................. 51,900 979,613
</TABLE>
The accompanying notes are an integral part of the financial statements
109
<PAGE>
AARP SMALL COMPANY STOCK FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kansas City Life Insurance Co. .............................................................. 3,000 244,875
Life Re Corp. ............................................................................... 3,100 285,006
Nymagic, Inc. ............................................................................... 13,900 352,713
RLI Corp. ................................................................................... 19,375 736,250
Selective Insurance Group, Inc. ............................................................. 18,800 359,550
-------------
5,182,926
-------------
Business Finance 0.6%
Advest Group, Inc. .......................................................................... 26,600 541,975
-------------
Consumer Finance 0.5%
Aames Financial Corp. ....................................................................... 74,200 449,838
-------------
Other Financial Companies 0.3%
Cash America International, Inc. ............................................................ 30,300 337,088
-------------
Media 0.6%
Advertising
Grey Advertising, Inc. ...................................................................... 1,910 626,480
-------------
Service Industries 7.2%
EDP Services 0.9%
Plexus Corp.* ............................................................................... 15,000 290,625
Pomeroy Computer Resources, Inc.* ........................................................... 31,700 527,013
-------------
817,638
-------------
Environmental Services 1.6%
Dames & Moore, Inc. ......................................................................... 58,800 617,400
Mine Safety Appliance Co. ................................................................... 12,000 966,000
-------------
1,583,400
-------------
Investment 0.8%
Dain Rauscher Corp. ......................................................................... 7,700 242,550
Jefferies Group, Inc. ....................................................................... 18,800 498,200
-------------
740,750
-------------
Miscellaneous Commercial Services 2.7%
ABM Industries, Inc. ........................................................................ 32,200 941,850
Copart, Inc.* ............................................................................... 12,900 287,025
Investment Technology Group, Inc.* .......................................................... 6,200 168,950
McGrath Rentcorp ............................................................................ 36,700 623,900
Veritas DGC Inc.* ........................................................................... 36,300 605,756
-------------
2,627,481
-------------
Printing/Publishing 1.2%
Bowne & Co., Inc. ........................................................................... 27,200 460,700
Merrill Corp. ............................................................................... 44,000 690,250
-------------
1,150,950
-------------
Durables 8.3%
Aerospace 2.0%
AAR Corp. ................................................................................... 11,100 217,838
Curtiss-Wright Corp. ........................................................................ 16,900 670,719
Kaman Corp. "A" ............................................................................. 60,200 1,030,925
-------------
1,919,482
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
110
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobiles 4.6%
Coachmen Industries, Inc. ................................................................... 24,900 494,888
Excel Industries Inc. ....................................................................... 41,800 522,500
Intermet Corp. .............................................................................. 38,800 492,275
Simpson Industries, Inc. .................................................................... 82,900 834,181
Standard Motor Products, Inc. ............................................................... 15,400 375,375
Thor Industries, Inc. ....................................................................... 29,250 621,563
Titan International, Inc. ................................................................... 46,300 515,088
Wynn's International, Inc. .................................................................. 31,500 588,656
-------------
4,444,526
-------------
Construction/Agricultural Equipment 0.5%
The Manitowoc Company, Inc. ................................................................. 15,300 460,913
-------------
Leasing Companies 0.9%
Leasing Solutions, Inc.* .................................................................... 33,600 919,800
-------------
Miscellaneous 0.3%
MotivePower Industries, Inc. ................................................................ 12,100 282,838
-------------
Manufacturing 19.7%
Chemicals 2.4%
LeaRonal Inc. ............................................................................... 28,900 491,300
Mississippi Chemical Corp. .................................................................. 11,500 139,438
NCH Corp. ................................................................................... 11,400 699,675
Stepan Co. .................................................................................. 35,800 968,838
-------------
2,299,251
-------------
Containers & Paper 0.5%
Chesapeake Corp. ............................................................................ 2,000 69,375
Clarcor, Inc. ............................................................................... 23,250 357,469
Wausau-Mosinee Paper Corp. .................................................................. 4,970 71,444
-------------
498,288
-------------
Diversified Manufacturing 1.3%
Cascade Corp. ............................................................................... 36,800 489,900
Robbins & Myers, Inc. ....................................................................... 11,300 239,419
Scotsman Industries, Inc. ................................................................... 11,600 262,450
Tredegar Industries, Inc. ................................................................... 13,200 241,725
Valmont Industries .......................................................................... 3,500 42,875
-------------
1,276,369
-------------
Electrical Products 1.9%
C&D Technologies, Inc. ...................................................................... 33,000 787,875
Kuhlman Corp. ............................................................................... 16,200 525,488
The Alpine Group, Inc.* ..................................................................... 28,000 486,500
-------------
1,799,863
-------------
Hand Tools 1.0%
L.S. Starrett Corp. ......................................................................... 27,100 934,950
-------------
Industrial Specialty 6.6%
Albany International Corp. "A" .............................................................. 32,386 589,020
Applied Power, Inc. "A" ..................................................................... 28,680 783,323
Barnes Group, Inc. .......................................................................... 37,400 1,075,250
Chart Industries, Inc. ...................................................................... 64,900 393,456
Commercial Intertech Corp. .................................................................. 46,700 861,031
</TABLE>
The accompanying notes are an integral part of the financial statements
111
<PAGE>
AARP SMALL COMPANY STOCK FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Huffy Corp. ................................................................................. 34,700 490,138
Lawson Products, Inc. ....................................................................... 41,800 919,600
Regal-Beloit Corp. .......................................................................... 36,500 812,125
Spartech Corp. .............................................................................. 25,300 434,844
-------------
6,358,787
-------------
Machinery/Components/Controls 4.3%
Amcast Industrial Corp. ..................................................................... 22,600 331,938
Asyst Technologies, Inc.* ................................................................... 24,700 172,900
Columbus McKinnon Corp. ..................................................................... 30,800 592,900
DT Industries, Inc. ......................................................................... 28,200 479,400
Gleason Corp. ............................................................................... 25,000 401,563
Graco, Inc. ................................................................................. 25,050 582,413
Reliance Steel & Aluminum Co. ............................................................... 15,300 502,031
Shaw Group, Inc.* ........................................................................... 16,400 141,450
Tennant Co. ................................................................................. 16,100 600,731
Woodhead Industries, Inc. ................................................................... 13,900 145,950
Woodward Governor Co. ....................................................................... 11,100 255,280
-------------
4,206,556
-------------
Wholesale Distributors 1.7%
A.M. Castle & Co. ........................................................................... 35,200 530,200
Applied Industrial Technology, Inc. ......................................................... 27,800 453,488
Hughes Supply, Inc. ......................................................................... 24,750 705,375
-------------
1,689,063
-------------
Technology 9.6%
Computer Software 1.8%
Activision, Inc.* ........................................................................... 45,800 515,250
MTS Systems Corp. ........................................................................... 49,000 722,750
Structural Dynamics Research Corp.* ......................................................... 43,600 490,500
-------------
1,728,500
-------------
Diverse Electronic Products 1.1%
Cohu, Inc. .................................................................................. 12,300 202,950
Cubic Corp. ................................................................................. 41,200 860,050
-------------
1,063,000
-------------
EDP Peripherals 1.6%
Black Box Corp.* ............................................................................ 5,900 143,075
Gerber Scientific, Inc. ..................................................................... 31,500 850,500
Telxon Corp. ................................................................................ 28,700 584,763
-------------
1,578,338
-------------
Electronic Components/Distributors 3.7%
CHS Electronics, Inc.* ...................................................................... 42,100 457,838
CTS Corp. ................................................................................... 26,600 784,700
Daisytek International Corp.* ............................................................... 21,700 488,250
HMT Technology Corp.* ....................................................................... 20,600 160,938
Insight Enterprises, Inc.* .................................................................. 25,350 716,138
Park Electrochemical Corp. .................................................................. 18,200 247,975
Pioneer Standard Electronics, Inc. .......................................................... 43,100 272,069
</TABLE>
The accompanying notes are an integral part of the financial statements
112
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Technitrol, Inc. ............................................................................ 25,500 510,000
-------------
3,637,908
-------------
Electronic Data Processing 0.9%
Veeco Instruments, Inc.* .................................................................... 26,000 819,000
-------------
Precision Instruments 0.5%
Innovex, Inc. ............................................................................... 41,900 508,038
-------------
Energy 2.5%
Oil & Gas Production 0.7%
Plains Resources, Inc.* ..................................................................... 24,600 415,125
Resource America, Inc. "A" .................................................................. 28,900 290,806
-------------
705,931
-------------
Oil Companies 0.2%
Holly Corp. ................................................................................. 12,000 186,000
-------------
Oilfield Services/Equipment 1.6%
Patterson Energy, Inc.* ..................................................................... 57,600 381,600
Pool Energy Services Co.* ................................................................... 53,400 487,275
RPC, Inc. ................................................................................... 68,700 609,713
-------------
1,478,588
-------------
Metals & Minerals 2.5%
Steel & Metals
Cleveland-Cliffs, Inc. ...................................................................... 21,000 819,000
Commercial Metals Co. ....................................................................... 13,000 299,000
Maverick Tube Corp.* ........................................................................ 43,700 300,438
Quanex Corp. ................................................................................ 28,600 566,638
RMI Titanium Co. ............................................................................ 19,200 386,400
-------------
2,371,476
-------------
Construction 6.1%
Building Materials 3.3%
Ameron International Corp. .................................................................. 20,300 715,575
Florida Rock Industries, Inc. ............................................................... 27,000 668,250
Lone Star Industries, Inc. .................................................................. 13,500 806,625
Puerto Rican Cement Co., Inc. ............................................................... 19,000 840,750
Southdown, Inc. ............................................................................. 3,300 148,500
-------------
3,179,700
-------------
Homebuilding 1.7%
Skyline Corp. ............................................................................... 38,300 1,110,700
Standard Pacific Corp. ...................................................................... 35,500 501,438
-------------
1,612,138
-------------
Miscellaneous 1.1%
Granite Construction, Inc. .................................................................. 38,100 1,121,569
-------------
Transportation 0.6%
Airlines 0.3%
Alaska Air Group Inc.* ...................................................................... 9,600 327,000
-------------
Marine Transportation 0.1%
Hvide Marine, Inc. "A"* ..................................................................... 17,900 128,656
-------------
Trucking 0.2%
USFreightways Corp. ......................................................................... 8,000 159,000
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
113
<PAGE>
AARP SMALL COMPANY STOCK FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities 12.1%
Electric Utilities 5.4%
Black Hills Corp. ........................................................................... 49,100 1,319,563
Northwestern Corp. .......................................................................... 45,400 1,180,400
Public Service Co. of New Mexico ............................................................ 19,700 437,094
SIGCORP, Inc. ............................................................................... 33,200 1,072,775
TNP Enterprises, Inc. ....................................................................... 34,200 1,194,863
-------------
5,204,695
-------------
Natural Gas Distribution 4.8%
CTG Resources Inc. .......................................................................... 14,000 338,625
Colonial Gas Co. ............................................................................ 34,600 1,001,238
Connecticut Energy Corp. .................................................................... 20,800 561,600
Eastern Enterprises ......................................................................... 7,700 324,363
Energen Corp. ............................................................................... 30,800 585,200
Laclede Gas Co. ............................................................................. 21,900 505,069
NUI Corp. ................................................................................... 44,800 1,030,400
Northwest Natural Gas Co. ................................................................... 7,400 204,656
ONEOK, Inc. ................................................................................. 2,400 81,600
-------------
4,632,751
-------------
Water Supply 1.9%
Aquarion Co. ................................................................................ 27,100 912,931
California Water Service Group .............................................................. 40,800 923,100
-------------
1,836,031
-------------
Total Common Stocks (Cost $108,573,005) ..................................................... 96,751,632
-------------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $109,491,005) (a) .......................................... 101.0% 97,669,632
Other Assets and Liabilities, Net ........................................................... (1.0)% (978,144)
------- -------------
Net Assets .................................................................................. 100.0% 96,691,488
======= =============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) At September 30, 1998, the net unrealized depreciation on
investments based on cost for federal income tax purposes of
$109,491,005 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of
value over tax cost .............................. $ 6,134,081
Aggregate gross unrealized depreciation for all
investments in which there is an excess of
tax cost over value .............................. (17,955,454)
-------------
Net unrealized depreciation ...................... $ (11,821,373)
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1998 aggregated $78,029,034
and $10,128,198, 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 reported in the Statement of Assets and
Liabilities.
- --------------------------------------------------------------------------------
As permitted by tax regulations, the Fund intends to elect to defer this
loss and treat it as arising in the fiscal year ended September 30, 1999.
At September 30, 1998, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $2,000, all of which
expire September 30, 2006. In addition, from November 1, 1997 through
September 30, 1998, the Fund incurred approximately $210,000 of net
realized capital losses on investments.
The accompanying notes are an integral part of the financial statements
114
<PAGE>
AARP GLOBAL GROWTH FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 3.6%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/1998 at
5.4% to be repurchased at $5,198,780 on 10/1/1998, collateralized by a
$5,092,000 U.S. Treasury Bond, 6.125%, 9/30/2000 (Cost $5,198,000)................ 5,198,000 5,198,000
-----------
BONDS 9.1%
- -----------------------------------------------------------------------------------------------------------------------------
Japan 0.6%
Sumitomo Bank, Variable Rate Bond, 9.4%, 12/29/2049 ................................. 1,000,000 830,000
-----------
United Kingdom 3.5%
United Kingdom Treasury Bond, 8.5%, 7/16/2007 ....................................... GBP 1,627,000 3,447,287
United Kingdom Treasury Bond, 3.5%, 12/29/2049 ...................................... GBP 1,287,200 1,583,274
5,030,561
-----------
United States 5.0%
U.S. Treasury Bond, 6.375%, 8/15/2027 ............................................... 6,150,000 7,262,781
-----------
Total Bonds (Cost $12,257,778) ...................................................... 13,123,342
-----------
CONVERTIBLE BONDS 0.0%
- -----------------------------------------------------------------------------------------------------------------------------
Ghana
Ashanti Capital Corp., 5.5%, 3/15/2003 (Cost $13,000) ............................... 13,000 9,360
-----------
COMMON STOCKS 85.8%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -----------------------------------------------------------------------------------------------------------------------------
Argentina 0.7%
YPF S.A. "D" (ADR) (Petroleum company) .............................................. 39,600 1,029,600
-----------
Australia 2.2%
Foster's Brewing Group, Ltd. (Leading brewery) ...................................... 445,458 971,359
Normandy Mining Ltd. (Mining and oil enterprises) ................................... 605,800 511,528
WMC Ltd. (Mineral exploration and production) ....................................... 122,100 367,323
Woodside Petroleum Ltd. (Major oil and gas producer) ................................ 259,800 1,357,791
-----------
3,208,001
-----------
Austria 0.4%
Flughafen Wien AG (Operator of terminals and facilities at Vienna International
Airport) ......................................................................... 14,100 575,424
-----------
Brazil 1.1%
Aracruz Celulose S.A. (ADR) (Producer of eucalyptus kraft pulp) ..................... 38,650 263,303
Companhia Cervejaria Brahma (pfd.) (Leading beer producer and distributor) .......... 1,250,000 490,320
Companhia Vale do Rio Doce (pfd.) "A" (Diverse mining and industrial
complex) ......................................................................... 55,200 791,598
</TABLE>
The accompanying notes are an integral part of the financial statements
115
<PAGE>
AARP GLOBAL GROWTH FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Usinas Siderurgicas de Minas Gerais S.A. (pfd.) (Steel manufacturer) ................ 42,140 124,417
-----------
1,669,638
-----------
Canada 3.1%
BCE, Inc. (Telecommunication services) .............................................. 21,600 604,622
Barrick Gold Corp. (Gold exploration and production in North and
South America) ................................................................... 38,900 778,000
Canadian National Railway (Railroad operator) ....................................... 24,000 1,081,648
Canadian Pacific Ltd. (Ord.) (Transportation and natural resource
conglomerate) .................................................................... 46,050 958,463
Molson Cos., Ltd. "A" (Brewery) ..................................................... 44,900 629,886
Noranda, Inc. (Operator in mining and metals) ....................................... 26,100 370,425
-----------
4,423,044
-----------
France 3.9%
AXA S.A. (Insurance group providing insurance, finance and real estate
services) ........................................................................ 14,990 1,373,412
Assurances Generales de France (Health, life, and liability insurance) .............. 14,510 800,770
Assurances Generales de France -- CVG Shares ........................................ 14,510 168,447
Canal Plus (Leading pay television network) ......................................... 5,320 1,293,158
Michelin "B" (Leading tire manufacturer) ............................................ 23,230 912,754
PSA Peugeot Citroen (Manufacturer of automobiles and light commercial
vehicles) ........................................................................ 6,150 1,050,062
-----------
5,598,603
-----------
Germany 15.6%
Allianz AG (Multi-line insurance company) ........................................... 7,742 2,401,483
BASF AG (Leading international chemical producer) ................................... 37,640 1,426,756
BHF-Bank AG (Universal banking services) ............................................ 18,770 606,952
Bayer AG (Leading chemical producer) ................................................ 51,505 1,946,145
Bayerische Vereinsbank AG (Commercial bank) ......................................... 26,352 1,940,954
Deutsche Telekom AG (Telecommunication services) .................................... 18,932 588,383
Deutsche Telekom AG (ADR) ........................................................... 16,566 487,662
Heidelberger Druckmaschinen AG (Manufacturer of commercial printing
presses) ......................................................................... 5,763 403,767
Hoechst AG (Chemical producer) ...................................................... 49,784 2,057,005
Muenchener Rueckversicherungs-Gesellschaft AG (Insurance company) ................... 4,862 1,353,831
Muenchener Rueckversicherungs-Gesellschaft AG (Registered) .......................... 2,900 1,279,859
Muenchener Rueckversicherungs-Gesellschaft AG (Warrants), expire 6/3/2002* .......... 310 12,252
RWE AG (pfd.) (Producer and marketer of petroleum and chemical products) ............ 52,357 2,431,381
SAP AG (pfd.) (Computer software manufacturer) ...................................... 3,812 1,810,184
Schering AG (Pharmaceutical and chemical producer) .................................. 8,860 916,533
VEBA AG (Electric utility, distributor of oil and chemicals) ........................ 29,356 1,529,370
VIAG AG (Provider of electrical power and natural gas services, aluminum
products, chemicals, ceramics and glass) ........................................ 1,892 1,300,647
-----------
22,493,164
-----------
Ghana 0.3%
Ashanti Goldfields Co., Ltd. (GDR) (Leading gold producer) .......................... 53,360 486,910
</TABLE>
The accompanying notes are an integral part of the financial statements
116
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hong Kong 1.9%
Cheung Kong Holdings Ltd. (Real estate company) ..................................... 114,000 529,630
Citic Pacific Ltd. (Diversified holding company) .................................... 484,000 849,473
Hutchison Whampoa, Ltd. (Container terminal and real estate company) ................ 164,000 865,631
Kerry Properties, Ltd. (Real estate company) ........................................ 377,447 129,083
New World Development Co., Ltd. (Property investment and development,
construction and engineering, hotels and restaurants, telecommunications) ........ 243,387 325,090
-----------
2,698,907
-----------
Italy 0.8%
Istituto Nazionale delle Assicurazione (Insurance company) .......................... 461,300 1,173,791
-----------
Japan 3.7%
Daiwa Securities Co., Ltd. (Brokerage and other financial services) ................. 103,000 241,377
Jafco Co. Ltd. (Venture capital company) ............................................ 6,000 98,865
Matsushita Electric Industrial Co., Ltd. (Leading manufacturer of consumer
electronic products) ............................................................. 68,000 923,764
Minebea Co., Ltd. (Manufacturer of bearings, electronic equipment, machinery
parts) ........................................................................... 88,000 715,987
Nomura Securities Co., Ltd. (Financial advisor, securities broker and
underwriter) ..................................................................... 146,000 1,047,821
Ono Pharmaceutical Co., Ltd. (Producer of medicines for human and veterinary
uses) ............................................................................ 13,000 312,267
Shohkoh Fund & Co., Ltd. (Finance company for small- and medium-sized
firms) ........................................................................... 2,400 614,280
Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and copper mining
company) ......................................................................... 102,000 321,948
The Nichido Fire & Marine Insurance Co., Ltd. (Property and casualty insurance
company) ......................................................................... 82,000 360,908
Yamanouchi Pharmaceutical Co., Ltd. (Leading manufacturer of ethical drugs) ......... 31,000 667,448
-----------
5,304,665
-----------
Korea 0.0%
Samsung Electronics Co., Ltd. (Major electronics manufacturer) ...................... 131 3,579
-----------
Netherlands 1.2%
AEGON Insurance Group NV (Insurance company) ........................................ 22,318 1,769,464
-----------
South Africa 0.5%
Anglo American Platinum Corp., Ltd. (ADR) (Leading platinum producer) ............... 27,765 402,593
Sasol Ltd. (Coal mining and processing, crude oil exploration and refining,
petrochemical production) ........................................................ 82,460 378,086
-----------
780,679
-----------
Sweden 2.2%
AGA AB "B" (Producer and distributor of industrial and medical gases) ............... 54,600 675,665
Astra AB "A" (Pharmaceutical company) ............................................... 67,426 1,152,655
Skandia Foersaekrings AB (Financial conglomerate) ................................... 106,460 1,385,331
-----------
3,213,651
-----------
Switzerland 7.4%
Ciba Specialty Chemical (Registered) (Manufacturer of chemical products for
plastics, coatings, fibers and fabrics) .......................................... 15,240 1,269,632
Clariant AG (Registered) (Manufacturer of color chemicals) .......................... 2,937 1,348,926
</TABLE>
The accompanying notes are an integral part of the financial statements
117
<PAGE>
AARP GLOBAL GROWTH FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Credit Suisse Group (Registered) (Provider of bank services, management
services and life insurance) ..................................................... 7,847 869,741
Holderbank Financiere Glaris AG (Bearer) (Cement producer) .......................... 1,357 1,395,929
Nestle SA (Registered) (Food manufacturer) .......................................... 1,197 2,388,103
Novartis AG (Bearer) (Pharmaceutical company) ....................................... 673 1,082,826
Novartis AG (Registered) (Pharmaceutical company) ................................... 648 1,041,663
Swiss Reinsurance (Registered) (Life, accident and health insurance company) ........ 705 1,401,931
-----------
10,798,751
-----------
United Kingdom 11.8%
BOC Group PLC (Producer of industrial gases) ........................................ 90,076 1,117,515
British Airways PLC (Provider of passenger and cargo airline services) .............. 115,828 708,659
Carlton Communications PLC (Television post production products and
services) ........................................................................ 195,872 1,304,908
Enterprise Oil PLC (Oil and gas exploration and production) ......................... 36,125 243,276
General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) ............................... 253,830 1,854,953
Lasmo PLC (Oil production and exploration) ......................................... 19,611 57,992
National Grid Group PLC (Owner and operator of electric transmission systems) ....... 240,210 1,788,079
Railtrack Group PLC (Operator of railway infrastructure) ............................ 70,650 2,036,383
Reuters Holdings PLC (International news agency) .................................... 216,730 1,819,564
Rio Tinto PLC (Mining and finance company) .......................................... 47,254 563,362
Shell Transport & Trading PLC (Part owner of Royal Dutch Shell Co.) ................. 272,650 1,650,752
SmithKline Beecham PLC (Manufacturer of ethical drugs and healthcare
products) ........................................................................ 89,120 979,943
Unilever PLC (Manufacturer of branded and packaged consumer goods, food,
detergents and personal care products) ........................................... 243,150 2,080,629
United Assurance Group PLC (Holding company for insurance businesses and
financial service providers) ..................................................... 87,729 872,209
-----------
17,078,224
-----------
United States 29.0%
American Greeting Corp., "A" (Designer of greeting cards) ........................... 24,600 973,238
Atlantic Richfield Co. (Petroleum company) .......................................... 17,200 1,220,125
Biogen Inc.* (Biotechnology research and development) ............................... 3,200 210,600
Boston Scientific Corp.* (Developer and producer of medical devices) ................ 15,100 775,763
CINergy Corp. (Holding company of electrical utilities in Ohio, Indiana and
Kentucky) ........................................................................ 52,800 2,019,600
Charles Schwab Corp. (Discount brokerage services) .................................. 14,650 576,844
Duke Energy Corp. (Electric utility in the Carolinas) ............................... 9,400 622,163
EXEL Limited "A" (Provider of liability insurance) .................................. 40,492 2,550,996
Electronic Data Systems Corp. (Provider of information technology services) ......... 44,500 1,476,844
Enron Corp. (Major natural gas pipeline system) ..................................... 33,410 1,764,466
Equity Residential Properties Trust (REIT) (Owner of apartment properties) .......... 34,000 1,434,375
Guidant Corp. (Developer and manufacturer of products used in minimally
invasive surgery) ................................................................ 10,300 764,775
Homestake Mining Co. (Major international gold producer) ............................ 66,100 801,463
International Business Machines Corp. (Principal manufacturer and servicer of
business and computing machines) ................................................ 24,000 3,072,000
Lockheed Martin Corp. (Manufacturer of aircraft, missiles and space equipment) ...... 14,900 1,502,106
</TABLE>
The accompanying notes are an integral part of the financial statements
118
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MBIA, Inc. (Insurer of municipal bonds) ............................................. 34,920 1,874,768
Newmont Mining Corp. (International gold exploration and mining company) ............ 35,900 870,575
Northrop Grumman Corp. (Manufacturer of aircraft, aircraft assemblies and
electronic systems for military and commercial use) .............................. 19,200 1,401,600
Parametric Technology Corp.* (Mechanical design software producer) .................. 40,400 406,525
PECO Energy Co. (Electric and gas utility) .......................................... 44,500 1,627,031
Phillips Petroleum Co. (Petroleum exploration, production and refining) ............. 15,200 685,900
Praxair, Inc. (Producer of industrial gases and specialized coatings) ............... 29,000 947,938
ProLogis Trust (REIT) (Owner and operator of bulk distribution and industrial
facilities) ...................................................................... 20,100 454,763
Sabre Group Holdings Inc. (Travel reservation system provider) ...................... 32,600 978,000
Sterling Commerce, Inc.* (Producer of electronic data interchange products and
services) ....................................................................... 31,700 1,097,613
Stillwater Mining Co.* (Exploration and development of mines in Montana
producing platinum, palladium and associated metals) ............................. 32,400 1,022,625
Sun Microsystems, Inc.* (Producer of high-performance workstations, servers and
networking software) ............................................................. 14,500 722,281
Tele-Communications Inc. "A" (New)* (Cable TV systems and microwave
services) ........................................................................ 39,400 1,541,525
Tele-Communications International, Inc. "A" (Telecommunication and broadband
cable television services) ....................................................... 28,600 593,450
UNUM Corp. (Provider of disability, health and life insurance and group pension
products) ........................................................................ 49,100 2,439,656
US Airways Group, Inc. (Major airline) .............................................. 25,800 1,306,125
USEC Inc.* (Provider of enriched uranium products and services) ..................... 189,600 2,926,950
Williams Cos., Inc. (Gas pipeline operator, petroleum producer) ..................... 44,000 1,265,000
-----------
41,927,683
-----------
Total Common Stocks (Cost $117,268,022) 124,233,778
-----------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $134,736,800) (a) .................................. 98.5 142,564,480
Other Assets and Liabilities, Net ................................................... 1.5 2,125,430
----- -----------
Net Assets .......................................................................... 100.0 144,689,910
===== ===========
</TABLE>
* Non income producing security.
(a) At September 30, 1998, the net unrealized appreciation on
investments based on cost for federal income tax purposes of
$134,834,120 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an excess
of value over tax cost ............................... $ 23,407,097
Aggregate gross unrealized depreciation
for all investments in which there is an excess
of tax cost over value ............................... (15,676,737)
------------
Net unrealized appreciation $ 7,730,360
============
(b) Principal amount is stated U.S. Dollars, unless otherwise specified.
The accompanying notes are an integral part of the financial statements
119
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1998 aggregated $94,138,095
and $86,148,899, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are reported in the Statement of Assets and
Liabilities.
Currency Abbreviations (These abbreviations have been used throughout this
report)
GBP British Pound
The accompanying notes are an integral part of the financial statements
120
<PAGE>
AARP INTERNATIONAL GROWTH AND INCOME FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY 7.7%
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 5.456%, 10/1/1998 (Cost $3,149,000) ................. 3,149,000 3,149,000
----------
CONVERTIBLE PREFERRED STOCKS 1.4%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -----------------------------------------------------------------------------------------------------------------------------
Belgium
Lernout & Hauspie Speech Products N.V. (Developer of advanced speech
technologies) (Cost $695,238) ...................................................... 13,300 570,238
----------
COMMON STOCKS 91.2%
- -----------------------------------------------------------------------------------------------------------------------------
Australia 2.5%
Commonwealth Bank of Australia (Bank) ................................................. 84,653 1,001,668
----------
Canada 3.8%
BCE, Inc. (Telecommunication services) ................................................ 32,700 915,330
Hudson's Bay Co. (Operator of retail department) ...................................... 45,900 636,393
----------
1,551,723
----------
Finland 3.5%
Merita Ltd. "B" (Financial services group) ............................................ 152,500 773,899
Metsa-Serla Oy "B" (Manufacturer of papers, corrugated and paper board, soft
and hardwood pulp) ................................................................. 90,690 642,179
----------
1,416,078
----------
France 12.1%
Accor S.A. (Catering, hotels, travel services) ........................................ 4,630 971,629
Dexia France (Municipal and local development financing) .............................. 7,660 967,230
Scor S.A. (Property, casualty and life reinsurance company) ........................... 19,900 1,183,530
Societe Nationale Elf Aquitaine (Petroleum company) ................................... 9,091 1,121,945
Sommer-Allibert (Manufacturer of plastic products for automotive industry) ............ 21,000 675,109
----------
4,919,443
----------
Germany 11.8%
Bayer AG (Leading chemical producer) .................................................. 24,380 921,212
Dyckerhoff AG (pfd.) (Producer of cement, ready-mixed concrete and finishing
products) .......................................................................... 2,840 952,364
Hochtief AG (Construction and civil engineering services) ............................. 25,550 734,393
Metro AG (Operator of building, clothing and food stores and supermarkets) ............ 30,200 1,247,822
RWE AG (pfd.) (Producer and marketer of petroleum and chemical products) .............. 20,930 971,958
----------
4,827,749
----------
Hong Kong 1.0%
HSBC Holdings Ltd. (Bank) ............................................................. 22,400 410,489
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
121
<PAGE>
AARP INTERNATIONAL GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ireland 2.9%
Allied Irish Bank PLC (Bank) .......................................................... 80,476 1,178,660
----------
Italy 4.5%
La Rinascente SpA di Risparmio (Department store chain) ............................... 210,200 892,707
Telecom Italia SpA (Telecommunications, electronics, network construction) ............ 198,700 950,404
----------
1,843,111
----------
Japan 8.3%
East Japan Railway Co. (Railroad operator) ............................................ 79 393,409
Nintendo Co., Ltd. (Game equipment manufacturer) ...................................... 11,000 1,034,346
Nippon Meat Packers, Inc. (Leading meat processor) .................................... 88,000 1,019,524
Nippon Telegraph & Telephone Corp. (Leading telecommunications company) ............... 126 918,125
----------
3,365,404
----------
Netherlands 6.8%
KLM Royal Dutch Air Lines NV (World-wide full service airline) ........................ 20,900 527,189
Koninklijke KPN NV (Provider of telecommunications services) .......................... 15,850 489,868
Koninklijke Nedlloyd Groep NV (Container shipping and transportation) ................. 41,810 552,848
Royal Dutch Petroleum Co. (Owner of 60% of Royal Dutch/Shell Group) ................... 13,900 690,165
TNT Post Group NV (Provider of transportation services) ............................... 20,400 519,994
----------
2,780,064
----------
Norway 1.4%
Christiania Bank og Kreditkasse (Commercial bank) ..................................... 183,120 576,892
----------
Portugal 1.2%
Portugal Telecom S.A. (Telecommunication services) .................................... 13,600 495,361
----------
Spain 4.7%
Autopistas del Mare Nostrum S.A. (Builder and operator of toll motorways) ............. 43,323 963,208
Iberdrola S.A. (Electric utility) ..................................................... 56,320 938,634
----------
1,901,842
----------
Sweden 5.1%
AssiDoman AB (Forestry group) ......................................................... 23,800 458,481
OM Gruppen AB (Operator of exchanges and clearing organizations for options,
futures, and stock loans) .......................................................... 74,700 1,286,534
Svedala Industri AB (Manufacturer of machinery for construction, mineral
processing and materials handling) ................................................. 23,290 356,548
----------
2,101,563
----------
Switzerland 3.9%
Georg Fischer AG (Registered) (Manufacturer of automotive products and piping
systems) ........................................................................... 2,375 658,958
Sika Finanz AG (Manufacturer of water management products and systems) ................ 16,281 925,861
----------
1,584,819
----------
United Kingdom 17.7%
Bank of Scotland (Bank) ............................................................... 81,300 775,821
British Airways PLC (Provider of passenger and cargo airline services) ................ 122,656 750,434
British Telecom PLC (Telecommunication services) ...................................... 79,200 1,067,382
Courtaulds Textiles PLC (Producer of clothing, fabrics and home furnishings) .......... 39,161 126,453
Dorling Kindersley Holdings PLC (Book publisher) ...................................... 187,024 622,981
EMI Group PLC (Music recording and retailing company) ................................. 99,165 611,346
</TABLE>
The accompanying notes are an integral part of the financial statements
122
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) ................................. 66,150 483,415
Laporte PLC (Producer of specialty chemicals) ........................................ 67,500 475,212
Man (ED&F) Group PLC (Commodities trading company) .................................... 80,040 391,761
Royal & Sun Alliance Insurance Group PLC (Multi-line insurance holding
company) ........................................................................... 78,503 680,421
Tomkins PLC (Manufacturer of fluid controls, industrial products, garden and
leisure products) .................................................................. 118,470 555,698
Transport Development Group PLC (Distribution, storage and transport
services) .......................................................................... 174,000 671,269
----------
7,212,193
----------
Total Common Stocks (Cost $39,837,801) ................................................ 37,167,059
----------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $43,682,039) (a) ..................................... 100.3 40,886,297
Other Assets and Liabilities, Net ..................................................... (0.3) (114,477)
----- ----------
Net Assets ............................................................................ 100.0 40,771,820
===== ==========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) At September 30, 1998, the net unrealized depreciation on
investments based on cost for federal income tax purposes of
$43,768,338 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an excess
of value over tax cost ............................ $ 1,519,032
Aggregate gross unrealized depreciation
for all investments in which there is an excess
of tax cost over value ............................ (4,401,073)
-----------
Net unrealized depreciation ....................... $(2,882,041)
===========
At September 30, 1998, outstanding written call options were as
follows:
<TABLE>
<CAPTION>
Number of Market
Expiration Date Contracts Strike Price Value ($)
--------------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Bayer AG ............................ 3/19/1999 17,325 75.00 DEM 41,706
Royal Dutch Petroleum ............... 4/16/1999 92 105.00 NLG 33,222
RWE AG .............................. 3/19/1999 18,540 90.00 DEM 63,171
-------
Total outstanding written options (premiums received $148,779) ................................ 138,099
=======
</TABLE>
The accompanying notes are an integral part of the financial statements
123
<PAGE>
AARP INTERNATIONAL GROWTH AND INCOME FUND
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Transactions in written options for the year ended September 30, 1998 were:
<TABLE>
<CAPTION>
Options on Securities
-----------------------------------------------------------
Premiums
Contracts Received ($)
--------- ------------
<S> <C> <C>
Outstanding at September 30, 1997 ...... -- --
------- -------
Written:
Royal & Sun Alliance ................... 29,122 8,972
General Electric Co., PLC .............. 47,071 6,631
Bayer AG ............................... 17,325 52,362
Royal Dutch Petroleum ................. 92 29,087
RWE AG ................................ 18,540 67,330
Exercised:
Royal & Sun Alliance ................... (29,122) (8,972)
General Electric Co., PLC .............. (47,071) (6,631)
-------
Outstanding at September 30, 1998 ................................................ 148,779
=======
</TABLE>
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1998 aggregated $46,052,752
and $23,066,412, 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 reported in the Statement of Assets and
Liabilities.
- --------------------------------------------------------------------------------
From November 1, 1997 through September 30, 1998, the Fund incurred
approximately $166,000 of net realized capital losses on investments. As
permitted by tax regulations, the Fund intends to elect to defer these
losses and treat them as arising in the fiscal year ended September 30,
1999.
Currency Abbreviations (These abbreviations have been used throughout this
report.)
DEM German Deutschemark
NLG Netherlands Guilder
The accompanying notes are an integral part of the financial statements
124
<PAGE>
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET 15.8%
AARP High Quality Money Fund (Cost $15,488,479) ........................................ 15,488,479 15,488,479
----------
FIXED INCOME 61.0%
- -----------------------------------------------------------------------------------------------------------------------------
AARP Bond Fund for Income .............................................................. 1,911,880 29,462,068
AARP GNMA and U.S. Treasury Fund ....................................................... 1,958,492 30,160,777
----------
Total Fixed Income (Cost $58,454,742) .................................................. 59,622,845
----------
EQUITY 23.4%
- -----------------------------------------------------------------------------------------------------------------------------
AARP Global Growth Fund ................................................................ 308,979 5,598,691
AARP Growth and Income Fund ............................................................ 198,533 9,879,016
AARP Small Company Stock Fund .......................................................... 166,098 2,812,039
AARP U.S. Stock Index Fund ............................................................. 240,885 4,639,438
----------
Total Equity (Cost $24,378,785) ........................................................ 22,929,184
----------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $98,322,006) (a) ...................................... 100.2 98,040,508
Other Assets and Liabilities, Net ...................................................... (0.2) (204,961)
----- ----------
Net Assets ............................................................................. 100.0 97,835,547
===== ==========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1998, the net unrealized depreciation on
investments based on cost for federal income tax purposes of
$98,322,253 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an excess
of value over tax cost .............................. $ 1,340,868
Aggregate gross unrealized depreciation
for all investments in which there is an excess
of tax cost over value .............................. (1,622,613)
-----------
Net unrealized depreciation ......................... $ (281,745)
===========
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the year ended September 30, 1998, aggregated
$49,532,840 and $3,035,416, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of
the Fund. The total net assets of the Fund are comprised of the
Fund's investment portfolio, other assets and liabilities. The
percentage of the investment portfolio may be greater or less than
100% due to the inclusion of the Fund's assets and liabilities in
the calculation. The Fund's other assets and liabilities are
reported in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
125
<PAGE>
AARP DIVERSIFIED GROWTH PORTFOLIO
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET 2.7%
- -----------------------------------------------------------------------------------------------------------------------------
AARP High Quality Money Fund (Cost $3,469,734) ......................................... 3,469,734 3,469,734
-----------
FIXED INCOME 35.5%
- -----------------------------------------------------------------------------------------------------------------------------
AARP Bond Fund for Income .............................................................. 1,632,968 25,164,035
AARP GNMA and U.S. Treasury Fund ....................................................... 1,372,730 21,140,040
-----------
Total Fixed Income (Cost $45,600,537) .................................................. 46,304,075
-----------
EQUITY 61.7%
- -----------------------------------------------------------------------------------------------------------------------------
AARP Capital Growth Fund ............................................................... 95,100 4,872,947
AARP Global Growth Fund ................................................................ 415,369 7,526,481
AARP Growth and Income Fund ............................................................ 615,753 30,639,853
AARP International Growth and Income Fund .............................................. 506,513 8,382,785
AARP Small Company Stock Fund .......................................................... 727,493 12,316,456
AARP U.S. Stock Index Fund ............................................................. 866,003 16,679,219
-----------
Total Equity (Cost $85,526,858) ........................................................ 80,417,741
-----------
<CAPTION>
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $134,597,129) (a) ..................................... 99.9 130,191,550
Other Assets and Liabilities, Net ...................................................... 0.1 141,778
----- -----------
Net Assets ............................................................................. 100.0 130,333,328
===== ===========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1998, the net unrealized depreciation on
investments based on cost for federal income tax purposes of
$134,598,173 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an excess
of value over tax cost ............................... $ 1,278,866
Aggregate gross unrealized depreciation
for all investments in which there is an excess
of tax cost over value ............................... (5,685,489)
-----------
Net unrealized depreciation .......................... $(4,406,623)
===========
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the year ended September 30, 1998, aggregated
$79,056,105 and $5,508,322, 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
reported in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
126
<PAGE>
/5/
-------------------------------------------------------------------
FINANCIAL STATEMENTS
The information contained in this section is legally
required by Federal Securities Law and monitored by the
Securities and Exchange Commission (SEC) as it concerns
the financial status of each AARP Mutual Fund.
Shareholders are required to receive financial statements
audited by an independent accounting firm on an annual
basis. The independent accountant of the AARP Investment
Program's Annual Report is PricewaterhouseCoopers LLP.
Financial Statements are records of the financial status
of an organization and are prepared by management.
Financial Statements must conform to Generally Accepted
Accounting Principles (GAAP), which are standards
established by the Financial Accounting Standards Board
(FASB), the SEC, and various committees of the American
Institute of Certified Public Accountants (AICPA).
This section consists of three different financial
statements for the Funds: 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 reflected in the Financial
Statements.
127
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
The Statements of Assets and Liabilities show the net
assets of the Funds in the AARP Investment Program.
Assets include such items as:
o Investments at value: The market value of the AARP
Mutual Fund's holdings on the last day of the reporting
period;
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: Proceeds that the Fund will receive
from investments sold which settle at a later date;
o Fund shares sold: Proceeds that the Fund will receive
from shares sold to shareholders;
o Dividends and interest earned on the Funds' securities
but not yet paid to the Fund;
o Expense reimbursements due from the Fund manager.
o Daily variation margin on open futures contracts:
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 such items as:
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 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;
o Unrealized appreciation (or depreciation) on
investments: Represents the current value of
investments held less their cost;
128
<PAGE>
o Accumulated net realized capital gain (loss): An AARP
Mutual Fund's accumulated realized gains and losses
from sales of investments, less distributions paid from
net realized gains;
o Paid-in capital: Represents the dollars invested by
shareholders, less the amount of money redeemed since
the applicable AARP Mutual 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, deducting liabilities, and then dividing this
amount by the total number of capital shares outstanding.
STATEMENTS OF OPERATIONS
The Statements of Operations include 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, 1998. The Statements
of Operations also show net gains and losses for various
categories of investments, both realized and unrealized
gains and losses, for securities sold and held in each
AARP Mutual Fund's portfolio. The bottom line tells you
whether an AARP Mutual Fund's net assets have increased
or decreased as a result of Fund operations.
STATEMENTS OF CHANGES
The Statements of Changes compare 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 section Fund Share Transactions
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.
129
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AARP High AARP High
AARP High Quality Tax Free Quality Short Term
September 30, 1998 Quality Money Fund Money Fund Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
Investments, at value (for cost, see accompanying
lists of investment portfolios) .................. $ 578,130,564 $ 96,565,000 $ 465,179,224
Cash ................................................ 1,202,208 402,657 6,179
Receivable on investments sold ...................... - 400,000 -
Investment income receivable ........................ 1,431,193 351,254 4,168,709
Receivable on Fund shares sold ...................... 1,998,832 33,291 69,904
Daily variation margin on futures contracts ......... - - -
Premiums receivable for written options ............. - - -
Reimbursement from Fund Manager ..................... - - -
Deferred organization expenses ...................... - - -
Other assets ........................................ 7,058 2,074 6,037
-------------------- --------------------- ---------------------
Total assets ........................................ 582,769,855 97,754,276 469,430,053
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
Investments purchased ............................... - - 20,581,250
Fund shares redeemed ................................ 1,362,571 22,684 185,743
Dividends payable ................................... 149,230 39,489 584,911
Daily variation margin on futures contracts ......... - - -
Unrealized depreciation on forward currency
exchange contracts ............................... - - -
Management fee payable .............................. 181,762 31,364 172,207
Written options, at market .......................... - - -
Other payables and accrued expenses ................. 336,046 64,505 231,308
-------------------- --------------------- ---------------------
Total liabilities ................................... 2,029,609 158,042 21,755,419
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at value ................................. $ 580,740,246 $ 97,596,234 $ 447,674,634
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net
investment income ................................ $ - $ - $ 240,718
Net unrealized appreciation (depreciation) on:
Investments ...................................... (122,643) - 6,106,435
Futures contracts ................................ - - -
Written options .................................. - - -
Foreign currency related transactions ............ - - -
Accumulated net realized capital gain (loss) ........ (129,345) (758,442) (1,782,490)
Paid-in capital ..................................... 580,992,234 98,354,676 443,109,971
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at value ................................. $ 580,740,246 $ 97,596,234 $ 447,674,634
- ------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding* .......... 580,860,195 97,601,942 27,254,456
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price
per share ........................................ $1.00 $1.00 $16.43
- ------------------------------------------------------------------------------------------------------------------------------
</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
130
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AARP GNMA AARP Insured AARP Bond
and U.S. Tax Free General Bond Fund for AARP Balanced AARP Growth and
Treasury Fund Fund Income Stock and Bond Fund Income Fund
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 4,672,319,209 $ 1,717,569,698 $ 180,749,107 $ 733,010,707 $ 6,384,182,086
389 201,164 804 700 355
189,427,567 60,000 2,048,363 6,245,317 87,920,174
28,314,489 19,116,504 2,344,258 4,864,268 18,174,486
1,739,088 355,804 427,625 420,761 2,086,358
- - - - -
- - - - -
- - 307,681 - -
- - 9,538 2,995 -
85,489 18,387 - 3,516 40,914
- ---------------------- --------------------- --------------------- -------------------- --------------------
4,891,886,231 1,737,321,557 185,887,376 744,548,264 6,492,404,373
- -----------------------------------------------------------------------------------------------------------------------------
284,359,675 - 4,768,205 3,332,471 31,457,482
2,101,936 258,430 246,615 515,634 4,900,461
9,909,559 2,631,217 260,200 - -
- 1,750,784 - - -
- - - - -
1,504,826 665,232 - 298,693 2,494,774
- - - - -
953,265 235,697 171,729 338,875 1,684,344
- ---------------------- --------------------- --------------------- -------------------- --------------------
298,829,261 5,541,360 5,446,749 4,485,673 40,537,061
- -----------------------------------------------------------------------------------------------------------------------------
$ 4,593,056,970 $ 1,731,780,197 $ 180,440,627 $ 740,062,591 $ 6,451,867,312
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
$ - $ - $ - $ 489,400 $ 5,829,789
85,538,241 197,303,644 660,882 53,685,802 884,948,312
- (3,851,663) - - -
- - - - -
- - - 2,843 210,523
(247,101,242) (38,355,651) 2,028,270 40,192,220 707,889,787
4,754,619,971 1,576,683,867 177,751,475 645,692,326 4,852,988,901
- -----------------------------------------------------------------------------------------------------------------------------
$ 4,593,056,970 $ 1,731,780,197 $ 180,440,627 $ 740,062,591 $ 6,451,867,312
- -----------------------------------------------------------------------------------------------------------------------------
298,216,939 91,878,322 11,708,636 37,071,341 129,663,295
- -----------------------------------------------------------------------------------------------------------------------------
$15.40 $18.85 $15.41 $19.96 $49.76
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
131
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AARP Capital
AARP U.S. Growth
September 30, 1998 Stock Index Fund Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Investments, at value (for cost, see accompanying
lists of investment portfolios) .......................... $ 127,455,773 $ 1,250,662,994
Cash ........................................................ 87 480
Receivable on investments sold .............................. - 9,526,977
Investment income receivable ................................ 171,878 1,082,687
Receivable on Fund shares sold .............................. 348,760 277,704
Daily variation margin on futures contracts ................. - -
Premiums receivable for written options ..................... - -
Reimbursement from Fund Manager ............................. 272,508 -
Deferred organization expenses .............................. 11,545 -
Unrealized appreciation on forward currency
exchange contracts ....................................... - -
Other assets ................................................ - 7,152
-------------------- ---------------------
Total assets ................................................ 128,260,551 1,261,557,994
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
Investments purchased ....................................... 3,959,983 12,223,564
Fund shares redeemed ........................................ 184,871 972,342
Dividends payable ........................................... - -
Daily variation margin on open futures contracts ............ 44,994 -
Management fee payable ...................................... - 582,804
Written options, at market .................................. - -
Other payables and accrued expenses ......................... 388,422 443,662
-------------------- ---------------------
Total liabilities ........................................... 4,578,270 14,222,372
- ------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................................... $ 123,682,281 $ 1,247,335,622
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income ................................................... $ 23,173 $ 5,606,304
Net unrealized appreciation (depreciation) on:
Investments .............................................. 904,321 235,507,520
Futures contracts ........................................ (50,548) -
Written options .......................................... - -
Foreign currency related transactions .................... 9 (355)
Accumulated net realized capital gain (loss) ................ 37,677 157,734,890
Paid-in capital ............................................. 122,767,649 848,487,263
- ------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................................... $ 123,682,281 $ 1,247,335,622
- ------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding* .................. 6,422,055 24,342,283
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per
share .................................................... $19.26 $51.24
- ------------------------------------------------------------------------------------------------------------------------
</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
132
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AARP Small AARP Global AARP International AARP Diversified AARP Diversified
Company Growth Growth and Income with Growth
Stock Fund Fund Income Fund Growth Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 97,669,632 $ 142,564,480 $ 40,886,297 $ 98,040,508 $ 130,191,550
724 557,784 320,918 - -
251,320 11,004,787 1,693,467 - -
80,937 483,032 169,993 370,867 250,643
35,980 40,551 16,145 46,487 195,234
- - - - -
- - 149,163 - -
- - 78,020 - -
8,692 6,579 8,692 - -
- 35,381 - - -
- 715 - - -
- ---------------------- --------------------- --------------------- -------------------- --------------------
98,047,285 154,693,309 43,322,695 98,457,862 130,637,427
- -----------------------------------------------------------------------------------------------------------------------------
1,049,875 9,596,930 2,283,368 370,604 250,550
110,191 116,372 11,415 56,668 53,549
- - - 195,043 -
- - - - -
63,827 99,242 - - -
- - 138,099 - -
131,904 190,855 117,993 - -
- ---------------------- --------------------- --------------------- -------------------- --------------------
1,355,797 10,003,399 2,550,875 622,315 304,099
- -----------------------------------------------------------------------------------------------------------------------------
$ 96,691,488 $ 144,689,910 $ 40,771,820 $ 97,835,547 $ 130,333,328
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
$ 14,982 $ 1,499,016 $ 420,251 $ 25,142 $ 2,556,239
(11,821,373) 7,827,680 (2,796,127) (281,498) (4,405,579)
- - - - -
- - 11,064 - -
- 48,760 13,562 - -
(208,069) 7,071,647 (252,077) 1,178,069 2,013,766
108,705,948 128,242,807 43,375,147 96,913,834 130,168,902
- -----------------------------------------------------------------------------------------------------------------------------
$ 96,691,488 $ 144,689,910 $ 40,771,820 $ 97,835,547 $ 130,333,328
- -----------------------------------------------------------------------------------------------------------------------------
5,710,713 7,984,664 2,463,545 6,114,823 7,580,420
- -----------------------------------------------------------------------------------------------------------------------------
$16.93 $18.12 $16.55 $16.00 $17.19
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
133
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AARP High AARP High
AARP High Quality Tax Free Quality Short Term
Year Ended September 30, 1998 Quality Money Fund Money Fund Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------------------------
Income:
Interest ....................................... $ 27,614,805 $ 3,602,900 $ 29,658,410
Dividends ...................................... - - -
-------------------- --------------------- ---------------------
27,614,805 3,602,900 29,658,410
Less foreign taxes withheld .................... - - -
-------------------- --------------------- ---------------------
27,614,805 3,602,900 29,658,410
- ------------------------------------------------------------------------------------------------------------------------------
Expenses:
Management fee ................................. 1,866,955 380,516 2,092,824
Services to shareholders ....................... 1,994,042 249,532 1,531,811
Trustees' fees and expenses .................... 21,776 21,680 21,819
Shareholder communications ..................... 195,917 66,841 169,261
Legal .......................................... 11,495 10,917 15,748
Audit and tax services ......................... 26,130 27,441 50,044
Custodian and accounting fees .................. 77,451 38,479 85,917
Registration expenses .......................... 51,161 14,166 17,481
Amortization of organization expenses .......... - - -
Other .......................................... 33,378 19,974 19,508
-------------------- --------------------- ---------------------
Total expenses before reductions .................. 4,278,305 829,546 4,004,413
Expense reductions ................................ - - -
-------------------- --------------------- ---------------------
Expenses, net ..................................... 4,278,305 829,546 4,004,413
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income ............................. 23,336,500 2,773,354 25,653,997
- ------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments .................................. 6,791 (222) 8,343,306
Futures contracts ............................ - - (30,894)
Written options .............................. - - -
Foreign currency related transactions ........ - - -
Net unrealized appreciation (depreciation) on:
Investments .................................. (2,180) - (317,792)
Futures contracts ............................ - - -
Written options .............................. - - -
Foreign currency related transactions ........ - - -
-------------------- --------------------- ---------------------
Net gain (loss) on investments .................... 4,611 (222) 7,994,620
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ................................ $ 23,341,111 $ 2,773,132 $ 33,648,617
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
134
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AARP GNMA AARP Insured AARP Bond
and U.S. Tax Free General Bond Fund for AARP Balanced AARP Growth and
Treasury Fund Fund Income Stock and Bond Fund Income Fund
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 322,969,525 $ 91,369,157 $ 7,488,845 $ 18,606,027 $ 13,514,801
- - - 13,089,197 194,085,942
- ---------------------- --------------------- --------------------- -------------------- --------------------
322,969,525 91,369,157 7,488,845 31,695,224 207,600,743
- - - (94,342) (2,621,458)
- ---------------------- --------------------- --------------------- -------------------- --------------------
322,969,525 91,369,157 7,488,845 31,600,882 204,979,285
- -----------------------------------------------------------------------------------------------------------------------------
18,153,539 8,035,738 615,552 3,420,192 33,479,324
7,822,002 1,938,277 352,678 2,107,983 11,106,569
21,819 21,818 21,856 21,945 21,821
688,940 208,618 17,052 281,520 1,386,542
16,469 10,058 13,441 9,285 21,441
59,135 57,657 35,574 35,752 42,214
783,516 271,776 52,968 164,554 888,976
44,151 39,940 16,908 71,601 279,759
- - 2,599 8,895 -
101,237 40,396 5,642 18,871 122,968
- ---------------------- --------------------- --------------------- -------------------- --------------------
27,690,808 10,624,278 1,134,270 6,140,598 47,349,614
- - (923,233) - -
- ---------------------- --------------------- --------------------- -------------------- --------------------
27,690,808 10,624,278 211,037 6,140,598 47,349,614
- -----------------------------------------------------------------------------------------------------------------------------
295,278,717 80,744,879 7,277,808 25,460,284 157,629,671
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
66,806,970 6,543,876 2,121,093 45,125,839 768,350,523
2,116,048 (17,266,994) (38,690) (115,285) -
- - - - -
- - - 568 (195,411)
1,993,609 56,298,873 (194,239) (67,517,918) (1,245,583,702)
- (1,576,767) - - -
- - - - -
- - - 2,712 197,602
- ---------------------- --------------------- --------------------- -------------------- --------------------
70,916,627 43,998,988 1,888,164 (22,504,084) (477,230,988)
- -----------------------------------------------------------------------------------------------------------------------------
$ 366,195,344 $ 124,743,867 $ 9,165,972 $ 2,956,200 $ (319,601,317)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
135
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AARP Capital
AARP U.S. Growth
Year Ended September 30, 1998 Stock Index Fund Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------------------
Income:
Interest ................................................... $ 169,881 $ 3,669,746
Dividends .................................................. 1,379,594 14,725,994
Income distributions from Underlying Funds ................. - -
-------------------- ---------------------
1,549,475 18,395,740
Less foreign taxes withheld ................................ (8,053) (255,061)
-------------------- ---------------------
1,541,422 18,140,679
- ------------------------------------------------------------------------------------------------------------------------
Expenses:
Management fee ............................................. 201,960 7,953,203
Services to shareholders ................................... 340,251 2,876,457
Trustees' fees and expenses ................................ 21,856 21,699
Shareholder communications ................................. 28,594 376,765
Legal ...................................................... 8,718 16,664
Audit and tax services ..................................... 33,961 44,771
Custodian and accounting fees .............................. 139,283 185,500
Registration expenses ...................................... 58,073 29,612
Amortization of organization expenses ...................... 3,198 -
Other ...................................................... 7,127 27,423
-------------------- ---------------------
Total expenses before reductions .............................. 843,021 11,532,094
Expense reductions ............................................ (474,469) -
-------------------- ---------------------
Expenses, net ................................................. 368,552 11,532,094
- ------------------------------------------------------------------------------------------------------------------------
Net investment income ......................................... 1,172,870 6,608,585
- ------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ............................................. 154,719 158,605,643
Futures contracts ........................................ (25,920) -
Written options .......................................... - -
Foreign currency related transactions .................... 10 (410)
Capital gain distributions from Underlying Funds ........... - -
Net unrealized appreciation (depreciation) on:
Investments .............................................. (2,832,007) (218,002,127)
Futures contracts ........................................ (59,887) -
Written options .......................................... - -
Foreign currency related transactions .................... 9 (355)
-------------------- ---------------------
Net gain (loss) on investments ................................ (2,763,076) (59,397,249)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ............................................ $ (1,590,206) $ (52,788,664)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
136
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AARP Small AARP Global AARP International AARP Diversified AARP Diversified
Company Growth Growth and Income with Growth
Stock Fund Fund Income Fund Growth Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 195,648 $ 1,526,320 $ 174,429 $ - $ -
1,374,011 2,794,115 940,231 - -
- - - 3,490,913 3,258,440
- ---------------------- --------------------- --------------------- -------------------- --------------------
1,569,659 4,320,435 1,114,660 3,490,913 3,258,440
(1,336) (255,343) (104,090) - -
- ---------------------- --------------------- --------------------- -------------------- --------------------
1,568,323 4,065,092 1,010,570 3,490,913 3,258,440
- -----------------------------------------------------------------------------------------------------------------------------
718,086 1,277,487 292,161 - -
579,107 787,886 211,314 - -
23,431 23,940 23,001 - -
48,883 85,552 17,360 - -
8,289 8,392 8,489 - -
35,964 34,744 34,556 - -
72,475 290,408 161,255 - -
52,309 22,042 40,219 - -
2,599 2,571 2,599 - -
9,182 9,861 7,556 - -
- ---------------------- --------------------- --------------------- -------------------- --------------------
1,550,325 2,542,883 798,510 - -
(43,315) - (218,739) - -
- ---------------------- --------------------- --------------------- -------------------- --------------------
1,507,010 2,542,883 579,771 - -
- -----------------------------------------------------------------------------------------------------------------------------
61,313 1,522,209 430,799 3,490,913 3,258,440
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
(208,069) 8,637,037 (213,216) 605,019 284,208
- - - - -
- - - - -
- (52,171) (35,085) - -
- - - 696,009 2,068,563
(19,455,499) (14,467,944) (4,228,410) (2,116,072) (8,351,965)
- - - - -
- - 5,366 - -
- 300,039 14,212 - -
- ---------------------- --------------------- --------------------- -------------------- --------------------
(19,663,568) (5,583,039) (4,457,133) (815,044) (5,999,194)
- -----------------------------------------------------------------------------------------------------------------------------
$ (19,602,255) $ (4,060,830) $ (4,026,334) $ 2,675,869 $ (2,740,754)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
137
<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,
1998 1997 1998 1997
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income .......................... $ 23,336,500 $ 20,990,921 $ 2,773,354 $ 2,927,078
Net realized gain (loss) on investment
transactions ................................. 6,791 - (222) -
Net unrealized appreciation (depreciation) on
investment transactions during the period .... (2,180) 14,657 - -
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets resulting
from operations ................................ 23,341,111 21,005,578 2,773,132 2,927,078
-------------------------------------------------------------------------------
Distributions to shareholders:
Net investment income .......................... (23,339,437) (20,990,921) (2,773,354) (2,927,078)
Net realized gains ............................. - - - -
----------------- ---------------- ----------------- ----------------
Total distributions ............................... (23,339,437) (20,990,921) (2,773,354) (2,927,078)
-------------------------------------------------------------------------------
Fund share transactions:
Proceeds from sale of shares ................... 742,177,737 586,180,766 31,796,782 28,579,750
Net asset value of shares issued to
shareholders in reinvestment of distributions 21,266,236 18,980,197 2,238,469 2,345,700
Cost of shares redeemed ........................ (654,016,268) (545,990,946) (39,052,688) (39,576,285)
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets from Fund
share transactions ............................. 109,427,705 59,170,017 (5,017,437) (8,650,835)
----------------- ---------------- ----------------- ----------------
Increase (decrease) in net assets ................. 109,429,379 59,184,674 (5,017,659) (8,650,835)
Net assets at beginning of period ................. 471,310,867 412,126,193 102,613,893 111,264,728
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) ................... $ 580,740,246 $ 471,310,867 $ 97,596,234 $ 102,613,893
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 471,432,488 412,261,312 102,619,379 111,270,214
----------------- ---------------- ----------------- ----------------
Shares sold ....................................... 742,177,739 586,181,925 31,796,782 28,579,750
Shares issued to shareholders in reinvestment of
distributions .................................. 21,266,236 18,980,197 2,238,469 2,345,700
Shares redeemed ................................... (654,016,268) (545,990,946) (39,052,688) (39,576,285)
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in Fund shares ............ 109,427,707 59,171,176 (5,017,437) (8,650,835)
----------------- ---------------- ----------------- ----------------
Shares outstanding at end of period ............... 580,860,195 471,432,488 97,601,942 102,619,379
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes undistributed (overdistributed) net
investment income $ - $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of the financial statements
138
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AARP High AARP GNMA AARP Insured
Quality Short Term and U.S. Tax Free General
Bond Fund Treasury Fund Bond Fund
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended Years Ended
September 30, September 30, September 30,
1998 1997 1998 1997 1998 1997
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$ 25,653,997 $ 27,958,146 $ 295,278,717 $ 306,582,822 $ 80,744,879 $ 83,718,654
8,312,412 (1,677,305) 68,923,018 (7,559,113) (10,723,118) (3,663,217)
(317,792) 10,994,171 1,993,609 85,972,174 54,722,106 61,740,321
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
33,648,617 37,275,012 366,195,344 384,995,883 124,743,867 141,795,758
- ---------------------------------------------------------------------------------------------------------------------------------
(25,653,997) (27,958,146) (295,278,717) (306,582,822) (80,744,879) (83,718,654)
- - - - (4,608,507) (8,693,174)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(25,653,997) (27,958,146) (295,278,717) (306,582,822) (85,353,386) (92,411,828)
- ---------------------------------------------------------------------------------------------------------------------------------
52,198,337 38,051,215 454,389,480 305,492,609 124,316,305 103,693,632
17,897,962 19,402,825 170,131,728 175,180,674 50,996,040 55,906,529
(85,285,803) (123,806,554) (686,361,325) (879,545,728) (194,930,797) (252,388,145)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(15,189,504) (66,352,514) (61,840,117) (398,872,445) (19,618,452) (92,787,984)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(7,194,884) (57,035,648) 9,076,510 (320,459,384) 19,772,029 (43,404,054)
454,869,518 511,905,166 4,583,980,460 4,904,439,844 1,712,008,168 1,755,412,222
- ---------------------------------------------------------------------------------------------------------------------------------
$ 447,674,634 $ 454,869,518 $ 4,593,056,970 $ 4,583,980,460 $ 1,731,780,197 $ 1,712,008,168
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
28,196,489 32,366,706 302,304,535 328,879,292 92,944,577 98,088,821
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
3,213,267 2,386,782 29,865,850 20,334,844 6,709,199 5,746,587
1,102,614 1,215,401 11,174,231 11,645,941 2,748,404 3,094,529
(5,257,914) (7,772,400) (45,127,677) (58,555,542) (10,523,858) (13,985,360)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(942,033) (4,170,217) (4,087,596) (26,574,757) (1,066,255) (5,144,244)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
27,254,456 28,196,489 298,216,939 302,304,535 91,878,322 92,944,577
- ---------------------------------------------------------------------------------------------------------------------------------
$ 240,718 $ 176,290 $ - $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of the financial statements
139
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AARP Bond AARP Balanced
Fund for Stock and Bond
Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------
Period
Year Ended Ended Years Ended
September 30, September 30, September 30,
1998 1997 (a) 1998 1997
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income .......................... $ 7,277,808 $ 1,266,014 $ 25,460,284 $ 18,953,996
Net realized gain (loss) on investment
transactions ................................. 2,082,403 32,537 45,011,122 27,065,207
Net unrealized appreciation (depreciation) on
investment transactions during the period .... (194,239) 855,121 (67,515,206) 79,619,125
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets resulting
from operations ................................ 9,165,972 2,153,672 2,956,200 125,638,328
-------------------------------------------------------------------------------
Distributions to shareholders:
Net investment income .......................... (7,273,651) (1,266,014) (25,262,963) (19,390,434)
Net realized gains ............................. (105,326) - (30,730,876) (5,003,640)
----------------- ---------------- ----------------- ----------------
Total distributions (7,378,977) (1,266,014) (55,993,839) (24,394,074)
-------------------------------------------------------------------------------
Fund share transactions:
Proceeds from sale of shares ................... 146,283,322 59,830,356 230,950,072 193,384,596
Net asset value of shares issued to
shareholders in reinvestment of distributions 5,248,778 959,174 51,664,577 22,371,689
Cost of shares redeemed ........................ (31,202,614) (3,354,542) (127,870,676) (81,824,221)
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets from Fund
share transactions ............................. 120,329,486 57,434,988 154,743,973 133,932,064
----------------- ---------------- ----------------- ----------------
Increase (decrease) in net assets ................. 122,116,481 58,322,646 101,706,334 235,176,318
Net assets at beginning of period ................. 58,324,146 1,500 638,356,257 403,179,939
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................... $ 180,440,627 $ 58,324,146 $ 740,062,591 $ 638,356,257
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 3,836,332 100 29,829,626 22,865,594
----------------- ---------------- ----------------- ----------------
Shares sold ....................................... 9,571,994 3,995,177 10,797,928 10,047,891
Shares issued to shareholders in reinvestment of
distributions .................................. 343,356 63,663 2,505,030 1,156,073
Shares redeemed ................................... (2,043,046) (222,608) (6,061,243) (4,239,932)
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in Fund shares ............ 7,872,304 3,836,232 7,241,715 6,964,032
----------------- ---------------- ----------------- ----------------
Shares outstanding at end of period ............... 11,708,636 3,836,332 37,071,341 29,829,626
- ------------------------------------------------------------------------------------------------------------------------------------
(a) These Funds commenced operations on February 1, 1997.
(b) Includes undistributed (overdistributed) net
investment income $ - $ - $ 489,400 $ 225,657
</TABLE>
The accompanying notes are an integral part of the financial statements
140
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AARP Growth AARP U.S. AARP Capital
and Income Stock Index Growth
Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Year Period
Ended Ended
Years Ended September 30, September 30, Years Ended
September 30, 1998 1997 (a) September 30,
1998 1997 1998 1997
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$ 157,629,671 $ 124,954,648 $ 1,172,870 $ 266,300 $ 6,608,585 $ 7,016,141
768,155,112 532,817,544 128,809 208,409 158,605,233 100,379,274
(1,245,386,100) 1,169,023,017 (2,891,885) 3,745,667 (218,002,482) 279,281,585
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(319,601,317) 1,826,795,209 (1,590,206) 4,220,376 (52,788,664) 386,677,000
- ---------------------------------------------------------------------------------------------------------------------------------
(150,480,599) (126,615,982) (1,166,480) (277,755) (6,661,535) (7,776,073)
(581,929,952) (167,523,016) (299,527) - (92,509,359) (75,674,469)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(732,410,551) (294,138,998) (1,466,007) (277,755) (99,170,894) (83,450,542)
- ---------------------------------------------------------------------------------------------------------------------------------
1,314,868,507 1,183,350,802 113,869,347 36,277,789 278,559,039 155,757,996
671,791,394 268,600,153 1,351,979 242,587 94,606,720 79,684,673
(1,088,793,618) (597,577,667) (26,567,905) (2,379,424) (202,250,533) (136,425,886)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
897,866,283 854,373,288 88,653,421 34,140,952 170,915,226 99,016,783
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(154,145,585) 2,387,029,499 85,597,208 38,083,573 18,955,668 402,243,241
6,606,012,897 4,218,983,398 38,085,073 1,500 1,228,379,954 826,136,713
- ---------------------------------------------------------------------------------------------------------------------------------
$ 6,451,867,312 $ 6,606,012,897 $ 123,682,281 $ 38,085,073 $ 1,247,335,622 $ 1,228,379,954
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
113,474,683 96,018,596 2,117,187 100 21,237,515 19,005,749
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
23,135,455 23,887,562 5,583,188 2,243,958 4,843,341 3,214,860
12,743,832 5,612,664 68,996 14,065 1,855,396 1,860,053
(19,690,675) (12,044,139) (1,347,316) (140,936) (3,593,969) (2,843,147)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
16,188,612 17,456,087 4,304,868 2,117,087 3,104,768 2,231,766
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
129,663,295 113,474,683 6,422,055 2,117,187 24,342,283 21,237,515
- ---------------------------------------------------------------------------------------------------------------------------------
$ 5,829,789 $ 3,321,388 $ 23,173 $ 6,274 $ 5,606,304 $ 6,420,037
</TABLE>
The accompanying notes are an integral part of the financial statements
141
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AARP Small AARP Global
Company Growth
Stock Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------
Period
Year Ended Ended Years Ended
September 30, September 30, September 30,
1998 1997 (a) 1998 1997
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income .......................... $ 61,313 $ 54,756 $ 1,522,209 $ 609,798
Net realized gain (loss) on investment
transactions ................................. (208,069) 243,254 8,584,866 3,282,024
Capital gain distributions from
Underlying Funds ............................. - - - -
Net unrealized appreciation (depreciation) on
investment transactions during the period .... (19,455,499) 7,634,126 (14,167,905) 21,062,454
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets resulting
from operations ................................ (19,602,255) 7,932,136 (4,060,830) 24,954,276
-------------------------------------------------------------------------------
Distributions to shareholders:
Net investment income .......................... (123,413) - (1,240,117) (336,444)
Net realized gains ............................. (246,828) - (4,107,884) -
----------------- ---------------- ----------------- ----------------
Total distributions (370,241) - (5,348,001) (336,444)
-------------------------------------------------------------------------------
Fund share transactions:
Proceeds from sale of shares ................... 99,397,378 45,455,488 35,909,431 67,490,929
Net asset value of shares issued to
shareholders in reinvestment of distributions 359,305 - 5,161,710 321,411
Cost of shares redeemed ........................ (33,364,172) (3,117,651) (35,001,773) (22,052,777)
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets from Fund
share transactions ............................. 66,392,511 42,337,837 6,069,368 45,759,563
----------------- ---------------- ----------------- ----------------
Increase (decrease) in net assets ................. 46,420,015 50,269,973 (3,339,463) 70,377,395
Net assets at beginning of period ................. 50,271,473 1,500 148,029,373 77,651,978
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................... $ 96,691,488 $ 50,271,473 $ 144,689,910 $ 148,029,373
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 2,510,889 100 7,693,438 5,012,508
----------------- ---------------- ----------------- ----------------
Shares sold ....................................... 4,874,857 2,689,583 1,837,149 3,954,573
Shares issued to shareholders in reinvestment of
distributions .................................. 18,267 - 288,364 19,853
Shares redeemed ................................... (1,693,300) (178,794) (1,834,287) (1,293,496)
----------------- ---------------- ----------------- ----------------
Net increase (decrease) in Fund shares ............ 3,199,824 2,510,789 291,226 2,680,930
----------------- ---------------- ----------------- ----------------
Shares outstanding at end of period ............... 5,710,713 2,510,889 7,984,664 7,693,438
- ------------------------------------------------------------------------------------------------------------------------------------
(a) These Funds commenced operations on February 1, 1997.
(b) Includes undistributed (overdistributed) net
investment income $ 14,982 $ 71,236 $ 1,499,016 $ 1,144,886
</TABLE>
The accompanying notes are an integral part of the financial statements
142
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AARP AARP AARP
International Growth Diversified Income Diversified
and Income Fund with Growth Portfolio Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Year Period Year Period Year Period
Ended Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, September 30, September 30,
1998 1997 (a) 1998 1997 (a) 1998 1997 (a)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$ 430,799 $ 156,217 $ 3,490,913 $ 880,498 $ 3,258,440 $ 645,438
(248,301) 175,100 605,019 44,276 284,208 82,133
- - 696,009 - 2,068,563 -
(4,208,832) 1,437,331 (2,116,072) 1,834,574 (8,351,965) 3,946,386
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(4,026,334) 1,768,648 2,675,869 2,759,348 (2,740,754) 4,673,957
- ---------------------------------------------------------------------------------------------------------------------------------
(156,766) - (3,476,487) (869,781) (1,347,639) -
(213,771) - (167,236) - (421,138) -
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(370,537) - (3,643,723) (869,781) (1,768,777) -
- ---------------------------------------------------------------------------------------------------------------------------------
36,124,571 20,394,042 74,011,331 45,476,743 104,833,263 60,765,788
359,913 - 2,974,714 671,013 1,724,532 -
(11,574,855) (1,905,128) (21,629,062) (4,640,905) (33,511,754) (3,692,927)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
24,909,629 18,488,914 55,356,983 41,506,851 73,046,041 57,072,861
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
20,512,758 20,257,562 54,389,129 43,396,418 68,536,510 61,746,818
20,259,062 1,500 43,446,418 50,000 61,796,818 50,000
- ---------------------------------------------------------------------------------------------------------------------------------
$ 40,771,820 $ 20,259,062 $ 97,835,547 $ 43,446,418 $ 130,333,328 $ 61,796,818
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
1,166,775 100 2,721,909 3,333 3,551,018 3,333
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
1,912,515 1,283,093 4,539,735 2,973,907 5,804,982 3,770,457
21,853 - 183,854 42,898 100,909 -
(637,598) (116,418) (1,330,675) (298,229) (1,876,489) (222,772)
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
1,296,770 1,166,675 3,392,914 2,718,576 4,029,402 3,547,685
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
2,463,545 1,166,775 6,114,823 2,721,909 7,580,420 3,551,018
- ---------------------------------------------------------------------------------------------------------------------------------
$ 420,251 $ 155,031 $ 25,142 $ 10,717 $ 2,556,239 $ 645,438
</TABLE>
The accompanying notes are an integral part of the financial statements
143
<PAGE>
This page
intentionally
left blank.
144
<PAGE>
/5/
-------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The Financial Highlights are part of the Financial
Statements and are provided to shareholders on an annual
basis, as required by Federal Securities Law and
monitored by the SEC. The independent accountant of the
AARP Investment Program's Annual Report is
PricewaterhouseCoopers LLP.
The information in this section explains the statistical
per share income and expense ratio(s) from operations,
dividends paid to shareholders, total returns, and other
financial information.
This section is designed to help you understand how each
AARP Fund performed and allows you to compare this year's
performance and expenses to prior years.
145
<PAGE>
FINANCIAL HIGHLIGHTS
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and
other performance information derived from the
financial statements. Years Ended September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
<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 ................................... .048 .046 .045 .049 .028
Distributions from net investment income ................ (.048) (.046) (.045) (.049) (.028)
---------------------------------------------------
Net asset value, end of period ............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------------------------------------------------
Total Return (%) ........................................... 4.86 4.72 4.62 4.99 2.84
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 581 471 412 384 333
Ratio of operating expenses to average daily net
assets (%) .............................................. .87 .91 .96 .98 1.13
Ratio of net investment income to average daily net
assets (%) .............................................. 4.76 4.63 4.54 4.89 2.89
</TABLE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and
other performance information derived from the
financial statements. Years Ended September 30,
----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------
<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 .028 .029 .017
Distributions from net investment income ................ (.028) (.028) (.028) (.029) (.017)
----------------------------------------------------
Net asset value, end of period ............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------------------------------------------------
Total Return (%) ........................................... 2.82 2.80 2.80 2.99 1.76(a)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 98 103 111 120 129
Ratio of operating expenses, net, to average daily
net assets (%) .......................................... .83 .85 .85 .87 .90
Ratio of operating expenses, before expense
reductions, to average daily net assets (%) ............. .83 .85 .85 .87 .91
Ratio of net investment income to average daily net
assets (%) .............................................. 2.78 2.76 2.77 2.94 1.75
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
146
<PAGE>
AARP HIGH QUALITY SHORT TERM BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and
other performance information derived from the
financial statements. Years Ended September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 16.13 $ 15.82 $ 16.01 $ 15.05 $ 17.19
---------------------------------------------------
Income from investment operations:
Net investment income .................................. .94 .93 .92 .94 .85
Net realized and unrealized gain (loss) on
investments ........................................... .30 .31 (.19) .95 (1.76)
---------------------------------------------------
Total from investment operations ........................... 1.24 1.24 .73 1.89 (.91)
---------------------------------------------------
Less distributions from:
Net investment income ................................... (.94) (.93) (.92) (.93) (.85)
Net realized gains on investments ....................... - - - - -
In excess of net realized gains on investments .......... - - - - (.38)
---------------------------------------------------
Total distributions ........................................ (.94) (.93) (.92) (.93) (1.23)
---------------------------------------------------
Net asset value, end of period ............................. $ 16.43 $ 16.13 $ 15.82 $ 16.01 $ 15.05
---------------------------------------------------
Total Return (%) ........................................... 7.90 8.15 4.59 12.98 (5.55)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 448 455 512 533 568
Ratio of operating expenses to average daily net
assets (%) .............................................. .90 .93 .91 .95 .95
Ratio of net investment income to average daily net
assets (%) .............................................. 5.77 5.84 5.76 6.13 5.31
Portfolio turnover rate (%) ................................ 137.60 83.26 169.96 201.07 63.75
</TABLE>
AARP GNMA AND U.S. TREASURY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and
other performance information derived from the
financial statements. Years Ended September 30,
----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 15.16 $ 14.91 $ 15.19 $ 14.73 $ 15.96
----------------------------------------------------
Income from investment operations:
Net investment income .................................. .99 .98 .99 1.01 .93
Net realized and unrealized gain (loss) on
investments ........................................... .24 .25 (.28) .46 (1.23)
----------------------------------------------------
Total from investment operations ........................... 1.23 1.23 .71 1.47 (.30)
----------------------------------------------------
Less distributions from:
Net investment income ................................... (.99) (.98) (.99) (.98) (.93)
Tax return of capital ................................... - - - (.03) -
----------------------------------------------------
Total distributions ........................................ (.99) (.98) (.99) (1.01) (.93)
----------------------------------------------------
Net asset value, end of period ............................. $ 15.40 $ 15.16 $ 14.91 $ 15.19 $ 14.73
----------------------------------------------------
Total Return (%) ........................................... 8.40 8.49 4.79 10.31 (1.90)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 4,593 4,584 4,904 5,252 5,585
Ratio of operating expenses to average daily net
assets (%) .............................................. .61 .65 .64 .67 .66
Ratio of net investment income to average daily net
assets (%) .............................................. 6.52 6.51 6.55 6.77 6.09
Portfolio turnover rate (%) ................................ 160.40 86.76 83.44 70.35 114.54
</TABLE>
147
<PAGE>
FINANCIAL HIGHLIGHTS
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and
other performance information derived from the
financial statements. Years Ended September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 18.42 $ 17.90 $ 17.74 $ 16.93 $ 19.00
---------------------------------------------------
Income from investment operations:
Net investment income ................................... .88 .88 .87 .87 .86
Net realized and unrealized gain (loss) on
investments ........................................... .48 .61 .16 .81 (1.67)
---------------------------------------------------
Total from investment operations ........................... 1.36 1.49 1.03 1.68 (.81)
---------------------------------------------------
Less distributions from:
Net investment income ................................... (.88) (.88) (.87) (.87) (.86)
Net realized gains on investments ....................... (.05) (.09) - - (.34)
In excess of net realized gains on investments .......... - - - - (.06)
---------------------------------------------------
Total distributions ........................................ (.93) (.97) (.87) (.87) (1.26)
---------------------------------------------------
Net asset value, end of period ............................. $ 18.85 $ 18.42 $ 17.90 $ 17.74 $ 16.93
---------------------------------------------------
Total Return (%) ........................................... 7.57 8.57 5.88 10.21 (4.48)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 1,732 1,712 1,755 1,807 1,914
Ratio of operating expenses to average daily net
assets (%) .............................................. .62 .66 .66 .69 .68
Ratio of net investment income to average daily
net assets (%) .......................................... 4.73 4.87 4.83 5.06 4.80
Portfolio turnover rate (%) ................................ 6.21 7.61 18.69 17.45 38.39
</TABLE>
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
The following table includes selected data for a February 1,
share outstanding throughout each period and Year Ended 1997 (c) to
other performance information derived from the September 30, September 30,
financial statements. 1998 1997
---------------------------------
<S> <C> <C>
Net asset value, beginning of period ..................................... $ 15.20 $ 15.00
---------------------------------
Income from investment operations:
Net investment income ................................................. 1.02 .69
Net realized and unrealized gain (loss) on investments ................ .23 .20
---------------------------------
Total from investment operations ......................................... 1.25 .89
---------------------------------
Less distributions from:
Net investment income ................................................. (1.02) (.69)
Net realized gains on investments ..................................... (.02) -
---------------------------------
Total distributions ...................................................... (1.04) (.69)
---------------------------------
Net asset value, end of period ........................................... $ 15.41 $ 15.20
---------------------------------
Total Return (%) (d) ..................................................... 8.47 6.06(a)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................................... 180 58
Ratio of operating expenses, net, to average daily net assets (%) ........ .19 -(b)
Ratio of operating expenses, before expense reductions, to average daily
net assets (%) ........................................................ 1.04 1.53(b)
Ratio of net investment income to average daily net assets (%) ........... 6.66 7.03(b)
Portfolio turnover rate (%) .............................................. 130.56 13.69(b)
</TABLE>
(a) Not Annualized (b) Annualized
(c) Commencement of operations.
(d) Total return would have been lower had certain expenses not been reduced.
148
<PAGE>
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and For the Period
other performance information derived from the February 1,
financial statements. Years Ended September 30, 1994 (c) to
----------------------------------------- September 30,
1998(d) 1997(d) 1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 21.40 $ 17.63 $ 16.40 $ 14.64 $ 15.00
---------------------------------------------------------
Income from investment operations:
Net investment income ................................... .75 .72 .66 .61 .25
Net realized and unrealized gain (loss) on investments .. (.46) 3.98 1.44 1.79 (.37)
---------------------------------------------------------
Total from investment operations ........................... .29 4.70 2.10 2.40 (.12)
---------------------------------------------------------
Less distributions from:
Net investment income ................................... (.73) (.72) (.66) (.60) (.24)
Net realized gains on investments ....................... (1.00) (.21) (.21) (.04) -
---------------------------------------------------------
Total distributions ........................................ (1.73) (.93) (.87) (.64) (.24)
---------------------------------------------------------
Net asset value, end of period ............................. $ 19.96 $ 21.40 $ 17.63 $ 16.40 $ 14.64
---------------------------------------------------------
Total Return (%) ........................................... 1.26 27.34 13.08 16.80 (.78)(a)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 740 638 403 247 175
Ratio of operating expenses to average daily net
assets (%) .............................................. .84 .91 .88 1.01 1.31(b)
Ratio of net investment income to average daily net
assets (%) .............................................. 3.50 3.71 4.09 4.12 3.58(b)
Portfolio turnover rate (%) ................................ 56.69 26.79 35.22 63.77 49.32(b)
</TABLE>
(a) Not Annualized (b) Annualized
(c) Commencement of operations.
(d) Based on monthly average shares outstanding during the period.
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and
other performance information derived from the
financial statements. Years Ended September 30,
---------------------------------------------------
1998(a) 1997(a) 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............................. $ 58.22 $ 43.94 $ 38.36 $ 34.13 $ 32.91
---------------------------------------------------
Income from investment operations:
Net investment income ......................................... 1.25 1.19 1.17 1.11 .94
Net realized and unrealized gain (loss) on investments ........ (3.45) 16.00 6.40 5.44 1.62
---------------------------------------------------
Total from investment operations ................................. (2.20) 17.19 7.57 6.55 2.56
---------------------------------------------------
Less distributions from:
Net investment income ......................................... (1.19) (1.19) (1.15) (1.09) (1.13)
Net realized gains on investments ............................. (5.07) (1.72) (.84) (1.23) (.21)
---------------------------------------------------
Total distributions .............................................. (6.26) (2.91) (1.99) (2.32) (1.34)
---------------------------------------------------
Net asset value, end of period ................................... $ 49.76 $ 58.22 $ 43.94 $ 38.36 $ 34.13
---------------------------------------------------
Total Return (%) ................................................. (4.22) 40.70 20.20 20.43 7.99
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................... 6,452 6,606 4,219 3,007 2,312
Ratio of operating expenses to average daily
net assets (%) ................................................ .67 .71 .69 .72 .76
Ratio of net investment income to average daily
net assets (%) ................................................ 2.22 2.38 2.94 3.28 3.00
Portfolio turnover rate (%) ...................................... 40.19 33.40 25.02 31.26 31.82
</TABLE>
(a) Based on monthly average shares outstanding during the period.
149
<PAGE>
FINANCIAL HIGHLIGHTS
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
The following table includes selected data for a February 1,
share outstanding throughout each period (a) and Year Ended 1997 (b) to
other performance information derived from the September 30, September 30,
financial statements. 1998 1997
---------------------------------
<S> <C> <C>
Net asset value, beginning of period ......................................... $ 17.99 $ 15.00
---------------------------------
Income from investment operations:
Net investment income ..................................................... .32 .20
Net realized and unrealized gain (loss) on investments .................... 1.37 2.97
---------------------------------
Total from investment operations ............................................. 1.69 3.17
---------------------------------
Less distributions from:
Net investment income ..................................................... (.29) (.18)
Net realized gain on investments .......................................... (.13) -
---------------------------------
Total distributions .......................................................... (.42) (.18)
---------------------------------
Net asset value, end of period ............................................... $ 19.26 $ 17.99
---------------------------------
Total Return (%) (c) ......................................................... 9.39 21.22(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ....................................... 124 38
Ratio of operating expenses, net, to average daily net assets (%) ............ .50 .50(e)
Ratio of operating expenses, before expense reductions, to average daily net
assets (%) ................................................................ 1.13 2.38(e)
Ratio of net investment income to average daily net assets (%) ............... 1.58 1.94(e)
Portfolio turnover rate (%) .................................................. 1.11 14.52(e)
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) Total return would have been lower had certain expenses not been reduced.
(d) Not Annualized (e) Annualized
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period and
other performance information derived from the
financial statements. Years Ended September 30,
---------------------------------------------------
1998(a) 1997(a) 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $ 57.84 $ 43.47 $ 38.36 $ 31.74 $ 36.20
---------------------------------------------------
Income from investment operations:
Net investment income ..................................... .28 .34 .42 .36 -
Net realized and unrealized gain (loss) on investments .... (2.26) 18.43 5.59 6.91 (1.51)
---------------------------------------------------
Total from investment operations ............................. (1.98) 18.77 6.01 7.27 (1.51)
---------------------------------------------------
Less distributions from:
Net investment income ..................................... (.31) (.41) (.39) (.01) (.05)
Net realized gains on investments ......................... (4.31) (3.99) (.51) (.64) (2.90)
---------------------------------------------------
Total distributions .......................................... (4.62) (4.40) (.90) (.65) (2.95)
---------------------------------------------------
Net asset value, end of period ............................... $ 51.24 $ 57.84 $ 43.47 $ 38.36 $ 31.74
---------------------------------------------------
Total Return (%) ............................................. (3.39) 46.72 15.97 23.47 (4.70)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ....................... 1,247 1,228 826 692 683
Ratio of operating expenses to average daily net
assets (%) ................................................ .87 .92 .90 .95 .97
Ratio of net investment income to average daily net
assets (%) ................................................ .50 .70 1.05 1.00 .02
Portfolio turnover rate (%) .................................. 53.18 39.04 64.84 98.44 79.65
</TABLE>
(a) Based on monthly average shares outstanding during the period.
150
<PAGE>
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
The following table includes selected data for a February 1,
share outstanding throughout each period (a) Year Ended 1997 (b) to
and other performance information derived from September 30, September 30,
the financial statements. 1998 1997
---------------------------------
<S> <C> <C>
Net asset value, beginning of period ......................................... $ 20.02 $ 15.00
---------------------------------
Income from investment operations:
Net investment income ..................................................... .01 .04
Net realized and unrealized gain (loss) on investments .................... (2.98) 4.98
---------------------------------
Total from investment operations ............................................. (2.97) 5.02
Less distributions from:
Net investment income ..................................................... (.04) -
Net realized gains on investments ......................................... (.08) -
---------------------------------
Total distributions .......................................................... (.12) -
---------------------------------
Net asset value, end of period ............................................... $ 16.93 $ 20.02
---------------------------------
Total Return (%) (c) ......................................................... (14.91) 33.53(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ....................................... 97 50
Ratio of operating expenses, net, to average daily net assets (%) ............ 1.75 1.75(e)
Ratio of operating expenses, before expense reductions, to average daily net
assets (%) ................................................................ 1.80 2.79(e)
Ratio of net investment income to average daily net assets (%) ............... .07 .40(e)
Portfolio turnover rate (%) .................................................. 12.21 5.01(e)
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) Total return would have been lower had certain expenses not been reduced.
(d) Not Annualized (e) Annualized
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table includes selected data for a
share outstanding throughout each period (a) For the Period
and other performance information derived from Years Ended February 1, 1996
the financial statements. September 30, (b) to
--------------------------- September 30,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period .............................. $ 19.24 $ 15.49 $ 15.00
----------------------------------------------
Income from investment operations:
Net investment income .......................................... .19 .09 .06
Net realized and unrealized gain (loss) on investments ......... (.62) 3.72 .43
----------------------------------------------
Total from investment operations .................................. (.43) 3.81 .49
----------------------------------------------
Less distributions from:
Net investment income .......................................... (.16) (.06) -
Net realized gain on investments ............................... (.53) - -
----------------------------------------------
Total distributions ............................................... (.69) (.06) -
----------------------------------------------
Net asset value, end of period .................................... $ 18.12 $ 19.24 $ 15.49
----------------------------------------------
Total Return (%) .................................................. (2.19) 24.67(c) 3.27(c)(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................ 145 148 78
Ratio of operating expenses, net, to average daily net assets (%) 1.65 1.75 1.75(e)
Ratio of operating expenses, before expense reductions, to
average daily net assets (%) ................................... - 1.82 2.31(e)
Ratio of net investment income to average daily net assets (%) .... .99 .55 1.03(e)
Portfolio turnover rate (%) ....................................... 59.15 31.34 12.56(e)
</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
151
<PAGE>
FINANCIAL HIGHLIGHTS
AARP INTERNATIONAL GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
The following table includes selected data for a February 1,
share outstanding throughout each period (a) Year Ended 1997 (b) to
and other performance information derived from September 30, September 30,
the financial statements. 1998 1997
---------------------------------
<S> <C> <C>
Net asset value, beginning of period ........................................ $ 17.36 $ 15.00
---------------------------------
Income from investment operations:
Net investment income ................................................... .28 .23
Net realized and unrealized gain (loss) on investments ................... (.83) 2.13
---------------------------------
Total from investment operations ............................................ (.55) 2.36
Less distributions from:
Net investment income .................................................... (.11) -
Net realized gains on investments ........................................ (.15) -
---------------------------------
Total distributions ......................................................... (.26) -
---------------------------------
Net asset value, end of period .............................................. $ 16.55 $ 17.36
---------------------------------
Total Return (%) (e) ........................................................ (3.16) 15.73(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ...................................... 41 20
Ratio of operating expenses, net, to average daily net assets (%) ........... 1.75 1.75(d)
Ratio of operating expenses, before expense reductions, to average daily net
assets (%) ............................................................... 2.41 4.28(d)
Ratio of net investment income to average daily net assets (%) .............. 1.30 2.35(d)
Portfolio turnover rate (%) ................................................. 75.28 50.73(d)
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) Not Annualized (d) Annualized
(e) Total return would have been lower had certain expenses not been reduced.
AARP DIVERSIFIED INCOME WITH GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
The following table includes selected data for a February 1,
share outstanding throughout each period (a) and Year Ended 1997 (b) to
other performance information derived from the September 30, September 30,
financial statements. 1998 1997
---------------------------------
<S> <C> <C>
Net asset value, beginning of period ................................ $ 15.96 $ 15.00
---------------------------------
Income from investment operations:
Net investment income ............................................ .82 .43
Net realized and unrealized gain (loss) on investments ........... .03 .96
---------------------------------
Total from investment operations .................................... .85 1.39
---------------------------------
Less distribution from:
Net investment income ............................................ (.76) (.43)
Net realized gains on investments ................................ (.05) -
---------------------------------
Total distributions ................................................. (.81) (.43)
---------------------------------
Net asset value, end of period ...................................... $ 16.00 $ 15.96
---------------------------------
Total Return (%) (e) ................................................ 5.38 9.35(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) .............................. 98 43
Ratio of operating expenses to average daily net assets (%) (f) ..... - -
Ratio of net investment income to average daily net assets (%) ...... 5.05 5.13(d)
Portfolio turnover rate (%) ......................................... 5.12 5.57(d)
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) Not Annualized (d) Annualized
(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.
(f) 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.
152
<PAGE>
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
The following table includes selected data for a February 1,
share outstanding throughout each period (a) Year Ended 1997 (b) to
and other performance information derived from September 30, September 30,
the financial statements. 1998 1997
---------------------------------
<S> <C> <C>
Net asset value, beginning of period ............................ $ 17.40 $ 15.00
---------------------------------
Income from investment operations:
Net investment income ........................................ .58 .34
Net realized and unrealized gain (loss) on investments ....... (.37) 2.06
---------------------------------
Total from investment operations ................................ .21 2.40
---------------------------------
Less distributions from:
Net investment income ........................................ (.32) -
Net realized gain on investment .............................. (.10) -
---------------------------------
Total distributions ............................................. (.42) -
---------------------------------
Net asset value, end of period .................................. $ 17.19 $ 17.40
---------------------------------
Total Return (%) (e) ............................................ 1.22 16.00(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......................... 130 62
Ratio of operating expenses to average daily net assets (%) (f) - -
Ratio of net investment income to average daily net assets (%) .. 3.21 3.52(d)
Portfolio turnover rate (%) ..................................... 5.55 7.67(d)
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) Not Annualized
(d) Annualized
(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.
(f) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the periods presented, the Portfolio did
bear its share of the operating, administrative and advisory expenses of the
Underlying AARP Funds.
153
<PAGE>
This page
intentionally
left blank.
154
<PAGE>
/5/
-------------------------------------------------------------------
NOTES TO
FINANCIAL STATEMENTS
More definitive information about the Financial
Statements is found in the Notes section. This
information includes further elaboration on Expenses,
Organization Cost, and Transactions, as well as
Management Fees and Commitments.
155
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies.
The following AARP Mutual Funds (the "AARP Funds" or the "Funds") from
Scudder Kemper Investments, Inc. ("Scudder Kemper" or the "Fund Manager") are a
series of five entities 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 (the "Trusts").
Trust name: Series name:
-------------------------------------------------------------------------------
AARP Cash Investment Funds:
AARP High Quality Money Fund
AARP Income Trust:
AARP High Quality Short Term Bond Fund
(formerly AARP High Quality 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 Capital Growth Fund
AARP Small Company Stock Fund
AARP Global Growth Fund
AARP International Growth and Income Fund
(formerly AARP International Stock
Fund)
AARP Managed Investment Portfolios
Trust:
AARP Diversified Income with Growth
Portfolio
(formerly 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 Funds within
the AARP Managed Investment Portfolios Trust (the "AARP Diversified Portfolios")
invest primarily in existing AARP Mutual Funds from Scudder Kemper (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 under 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.
156
<PAGE>
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 are
no such bid and asked quotations the most recent bid quotation is used. Unlisted
securities quoted on the Nasdaq Stock Market, Inc. (Nasdaq), for which there
have been sales, are valued at the most recent sale price reported on Nasdaq. If
there are no such sales, the value is the high or "inside" bid quotation.
Unlisted securities which are not quoted on the Nasdaq System but are traded in
another over-the-counter market are valued at the most recent sale price on such
market. If 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, whose 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 with Growth 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 and the Funds in the AARP Growth Trust 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 GNMA and U.S. Treasury 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 Short Term Bond Fund, the AARP GNMA and
U.S. Treasury Fund, the AARP Balanced Stock and Bond Fund and the AARP Bond Fund
for Income 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
157
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 applicable Fund if the option is exercised.
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 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 of the AARP Growth Trust
may purchase put and call options on stock indices.
During the period, the AARP International Growth and Income Fund purchased
call options to enhance potential gain. Also, during the period, the AARP High
Quality Short Term Bond Fund, the AARP Balanced Stock and Bond Fund and the AARP
Bond Fund for Income purchased call options on futures to manage duration. The
AARP International Growth and Income Fund wrote call options on securities
during the period as a hedge against potential adverse price movements in the
value of portfolio assets.
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 prices 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
158
<PAGE>
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.
F. Forward Currency Exchange Contracts. The Funds of the AARP Growth Trust,
the AARP High Quality Short Term 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 rate. During the period, 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.
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-dividend 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. In addition, acquisition discount is accreted on securities
purchased with an original maturity of one year or greater for the AARP Bond
Fund for Income. Premiums on securities purchased by the AARP Tax Free Income
Trust are 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 with Growth 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.
159
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 of the AARP Income
Trust and the AARP Tax Free Income Trust are declared daily and distributed
monthly. Dividends from the AARP Diversified Income with Growth Portfolio, the
AARP Balanced Stock and 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
Growth and Income 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, Real Estate Investment Trusts (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, each Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of each Fund.
K. Expenses. Each Fund (except for the AARP Diversified Income with Growth
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 with Growth and Diversified Growth Portfolios
("the Portfolios") have entered into a Special Servicing Agreement with Scudder
Kemper, 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 with
Growth and Diversified Growth Portfolios during the period. For the year ended
September 30, 1998, the Fund Manager paid expenses in the amount approximately
$115,492 and $254,868, on behalf of the Diversified Income with Growth and
Diversified Growth Portfolios, respectively. Additionally, the Fund Manager has
assumed the organization costs of each Portfolio.
160
<PAGE>
For the year ended September 30, 1998, the amounts charged to the Underlying
AARP Funds under the Special Servicing Agreement, as shown in the Statement of
Operations as part of the Services to shareholders expense, were as follows:
<TABLE>
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $ 78,278 AARP Capital Growth Fund $24,979
AARP GNMA and U.S. Treasury Fund $244,447 AARP Small Company Stock Fund $72,150
AARP Bond Fund for Income $124,401 AARP Global Growth Fund $76,935
AARP Growth and Income Fund $149,301 AARP International Growth and
AARP U.S. Stock Index Fund $ 56,145 Income Fund $31,493
</TABLE>
The AARP High Quality Tax Free Money Fund, the AARP High Quality Short
Term Bond Fund, the AARP Insured Tax Free General Bond Fund, and the
AARP Balanced Stock and Bond Fund are not subject to the Special
Servicing Agreement.
L.Organization Cost. Costs incurred by the AARP Balanced Stock and Bond Fund,
the AARP Global Growth Fund, the AARP U.S. Stock Index Fund, the AARP Bond Fund
for Income, the AARP International Growth and Income Fund, and the AARP Small
Company Stock Fund in connection with their organization and initial
registration of shares have been deferred and are being amortized on a
straight-line basis over a five-year period. The Fund Manager has assumed the
organization costs of the AARP Diversified Growth and the AARP Diversified
Income with Growth Portfolios.
M. Transactions in Securities of Affiliated Issuers. The AARP Growth and
Income Fund had transactions in securities of affiliated issuers. An affiliated
issuer is a company in which the Fund has ownership of at least 5% of the voting
securities. A summary of the Fund's transactions with companies which are or
were affiliates for the year ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Beginning Purchases Sales Market Value
Affiliate Cost ($) Cost ($) Cost ($) Ending Cost ($) ($)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Growth
Properties, Inc. 49,335,005 -- -- 49,335,005 71,424,563
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
Realized Gain/Loss ($) Dividend Income ($)
-----------------------------------------------------
Affiliated Issuers.... -- 3,689,016
Unaffiliated Issuers.. 768,350,523 188,841,505
-----------------------------------------------------
Total................. 768,350,523 192,530,521
-----------------------------------------------------
-----------------------------------------------------
The AARP 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, 1998, the Diversified Income with Growth Portfolio
held 5% or more of the following Underlying AARP Funds' outstanding shares:
approximately 16% of the AARP Bond Fund for Income. The Diversified Growth
Portfolio held 5% or more of the following Underlying AARP Funds' outstanding
shares at September 30, 1998: approximately 21% of the AARP International Growth
and Income Fund; 14% of the AARP Bond Fund for Income; 13% of the U.S. Stock
Index Fund; 13% of the AARP Small Company Stock Fund; and 5% of the AARP Global
Growth Fund.
Note 2. Management Fee and other Related Transactions.
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and
The Zurich Insurance Company ("Zurich"), an international insurance and
financial services organization, formed a new global investment organization by
combining Scudder's business with that of Zurich's subsidiary, Zurich Kemper
Investments, Inc. As a result of the transaction, Scudder changed its name to
Scudder Kemper Investments, Inc. The transaction between Scudder and Zurich
resulted in the termination of the Funds' Investment Management Agreement with
Scudder. However, a new Investment Management Agreement (the "Management
Agreement") between each Trust, on behalf of its Funds, and Scudder Kemper was
approved by the Trusts' Board of Trustees and by each
161
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Fund's Shareholders. Each Management Agreement, which is effective December 31,
1997, is the same in all material respects as the corresponding previous
Investment Management Agreement, except that Scudder Kemper is the new
investment adviser to the Funds.
On September 7, 1998, Zurich, majority owner of the adviser, entered into an
agreement with B.A.T Industries p.l.c. ("B.A.T") pursuant to which the financial
services businesses of B.A.T were combined with Zurich's businesses to form a
new global insurance and financial services company known as Zurich Financial
Services. Upon consummation of the transaction, each Fund's investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board of Trustees of the Funds approved new
investment management agreements with Scudder Kemper, which are substantially
identical to the former investment management agreements, except for the dates
of execution and termination. The Board of Trustees of the Funds will seek
shareholder approval of the new investment management agreements through a proxy
solicitation that is currently scheduled to conclude in mid-December.
Under the investment management and advisory agreement (the "Management
Agreement") between each Trust (excluding the AARP Diversified Portfolios) 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 with Growth 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 with Growth and the Diversified Growth Portfolios).
The Annual Base Fee is calculated as follows:
<TABLE>
<S><C> <C>
.35% of the first $2.0 billion of such assets .26% of the next $3.0 billion of such assets
.33% of the next $2.0 billion of such assets .25% of the next $3.0 billion of such assets
.30% of the next $2.0 billion of such assets .24% of such assets thereafter
.28% of the next $2.0 billion of such assets
</TABLE>
In addition to the Base Fee, each Fund (excluding the AARP Diversified Income
with Growth 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, and 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 $71,250 for the period ended September 30, 1998.
The Individual Fund Fee Rate is calculated at the following percentages of
the average daily net assets of each Fund:
<TABLE>
<CAPTION>
Fund Rate Fund Rate
------------------------------------------ ----------- ------------------------------------------- ----------
<S> <C> <C> <C>
AARP High Quality Money Fund .10% AARP Balanced Stock and Bond Fund .19%
AARP High Quality Tax Free Money Fund .10% AARP Growth and Income Fund .19%
AARP High Quality Short Term Bond Fund .19% AARP Capital Growth Fund .32%
AARP GNMA and U.S. Treasury Fund .12% AARP Small Company Stock Fund .55%
AARP Insured Tax Free General Bond Fund .19% AARP Global Growth Fund .55%
AARP Bond Fund for Income .28% AARP International Growth and Income Fund .60%
</TABLE>
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
162
<PAGE>
Services Corp. ("AFSC"), a subsidiary of AARP, and pays portions of its
investment management and advisory fee to AFSC.
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, 1999: AARP Bond Fund for Income,
0.00% until January 31, 1998 and 0.25% of average daily net assets thereafter;
AARP U.S. Stock Index Fund, 0.50% of average daily net assets; AARP Small
Company Stock Fund, 1.75% of average daily net assets; and AARP International
Growth and Income 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, 1998, as follows: AARP Bond
Fund for Income $615,552; AARP U.S. Stock Index Fund $201,960; AARP Small
Company Stock Fund $43,315; and AARP International Growth and Income Fund
$218,739. In addition, during the year ended September 30, 1998, the Adviser
paid the AARP Capital Growth Fund $818,177 to reimburse the Fund for losses
incurred in connection with equity securities trading.
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 year ended September 30, 1998, the amounts charged by SSC and SFAC to
the Funds were as follows:
<TABLE>
<CAPTION>
Amount Total SSC Amount Total SFAC
Charged To Unpaid at Charged To Unpaid at
Fund by September 30 Fund by September 30,
Fund SSC(a) 1998* SFAC(b) 1998*
----------------------------------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $1,468,693 $122,515 $ 55,805 $ 5,113
AARP High Quality Tax Free Money Fund 223,127 17,611 30,000 2,500
AARP High Quality Short Term Bond Fund 1,289,889 102,861 67,802 5,629
AARP GNMA and U.S. Treasury Fund 6,193,111 498,878 511,379 44,737
AARP Insured Tax Free General Bond Fund 1,592,232 128,242 160,713 13,420
AARP Bond Fund for Income -- -- -- --
AARP Balanced Stock and Bond Fund 1,791,697 152,948 113,887 9,843
AARP Growth and Income Fund 8,952,348 765,506 406,629 31,740
AARP U.S. Stock Index Fund -- -- -- --
AARP Capital Growth Fund 2,369,216 206,839 129,318 10,405
AARP Small Company Stock Fund 435,353 40,967 50,709 3,848
AARP Global Growth Fund 600,827 49,291 128,117 11,324
AARP International Growth and Income Fund 150,764 13,513 55,689 5,389
</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 and AARP U.S. Stock Index Fund, amounting to $185,110, and
$241,377, respectively.
(b) SFAC did not impose any or a portion of its fee for the AARP Bond Fund
for Income and AARP U.S. Stock Index Fund, amounting to $41,412, and
$91,841, respectively.
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NOTES TO FINANCIAL STATEMENTS
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Funds. For the year ended September 30,
1998, the amount charged to the AARP GNMA and U.S. Treasury Fund and the AARP
Balanced Stock and Bond Fund amounted to $4,188 and $4,452, respectively, all of
which remains unpaid at September 30, 1998. The amount charged to the AARP U.S.
Stock Index Fund amounted to $4,199, all of which was not imposed.
The AARP Investment Program pays each Trustee unaffiliated with Scudder
Kemper or AARP an annual retainer, plus 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.
Note 3. Commitments.
As of September 30, 1998, the AARP Global Growth Fund had entered into the
following forward currency exchange contracts resulting in net unrealized
appreciation of $35,381.
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
Contracts to Deliver In Exchange For Settlement Date (U.S.$)
---------------------- --------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
USD 3,415,139 JPY 450,115,280 3/29/99 $ 35,381
========
</TABLE>
Note 4. Lines of Credit.
Effective December 1, 1997, the AARP Small Company Stock Fund, the AARP
International Growth and Income Fund, the AARP Global Growth Fund, and several
other Scudder Funds (the "Participants") share in a $500 million revolving
credit facility for temporary or emergency purposes, including the meeting of
redemption requests that otherwise might require the untimely disposition of
securities. The Participants are charged an annual commitment fee which is
allocated among each of the Participants. Interest is calculated based on the
market rates at the time of the borrowing. Each Fund may borrow up to a maximum
of 33 percent of its net assets under the agreement. In addition, all of the
AARP Funds also maintain an uncommitted line of credit.
During the year ended September 30, 1998, the AARP Growth and Income Fund
periodically borrowed amounts from a bank under the uncommitted line of credit
arrangement at the existing prime rates. The arrangement with the bank allows
the Fund to borrow a maximum amount based on total net assets. During the year
ended September 30, 1998, the weighted average outstanding daily balance of bank
loans (based on the average number of days the loans were outstanding) was
approximately $22.7 million, with a weighted average interest rate of 6.20%.
Interest expense for the year ended September 30, 1998, was approximately
$43,000 (less than $.003 per share).
164
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REPORT OF INDEPENDENT ACCOUNTANTS
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 lists of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial 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, 1998, 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, 1998 by correspondence with the custodian and brokers provide a
reasonable basis for the opinion expressed above.
/s/ Pricewaterhouse Coopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 9, 1998
165
<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, 1998, 100%
constituted exempt-interest dividends for regular federal income tax
purposes.
The AARP Insured Tax Free General Bond Fund, 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 and the AARP Global Growth
Fund paid $0.03, $0.84, $4.83, $0.035, $2.975 and $0.35 per share,
respectively, from net long-term capital gains during its year ended
September 30, 1998, of which 40%, 67.3%, 64.6%, 100%, 43% and 54.3%
represents 20% rate gains, respectively.
Pursuant to Section 852 of the Internal Revenue Code, the AARP Insured
Tax Free General Bond Fund, the AARP Bond Fund for Income, 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, AARP Diversified Income with Growth Fund and the AARP
Diversified Growth Fund designate $5,000,000, $210,000, $42,000,000,
$805,000,000, $30,000, $175,000,000, $7,000,000, $1,300,000 and
$2,100,000, respectively, as capital gain dividends for their fiscal
years ended September 30, 1998, of which 100%, 100%, 100%, 100%, 100%,
100%, 100%, 78% and 67% represents 20% rate gains, respectively.
Pursuant to Section 853 of the Internal Revenue Code, the AARP Global
Growth Fund and the AARP International Growth and Income Fund designate
$0.04 and $0.04 per share (representing a total of $255,343 and
$104,091) of foreign taxes and $0.15 and $0.18 per share (representing
a total of $1,144,628 and $450,769) of foreign source income as having
been paid in the fiscal year ended September 30, 1998, respectively.
Pursuant to Section 854 of the Internal Revenue Code, the percentages
of ordinary income dividends paid which qualify for the dividends
received deduction for corporations are as follow: AARP Balanced Stock
and Bond Fund 100%, AARP Capital Growth Fund 100%, AARP U.S. Stock
Index Fund 100%, and AARP Growth and Income Fund 100%.
In January 1999 you will receive federal tax information on all
distributions paid to your account in calendar year 1998.
166
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OFFICERS AND TRUSTEES
The Officers and Trustees of the AARP Investment
Program from Scudder act on behalf of all shareholders
of the AARP Funds. They are responsible for ensuring
that each AARP Fund is administered in accordance with
the terms set forth in the Fund Prospectus and in
accordance with government regulations.
Chosen for their diverse backgrounds -- which
appropriately reflect the diversity of the AARP
membership -- each Trustee brings with them a wealth of
personal and business experiences.
167
<PAGE>
OFFICERS AND TRUSTEES
CAROLE LEWIS ANDERSON
------------------------------------------------------------------------
Trustee of AARP Funds; President, MASDUN Capital Advisors; 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; Founder
and Director, Forum for Women Corporate Directors, New York City.
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 (1981-1996); 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 Managed Investment Portfolios Trust and AARP Income
Trust; Vice President, American Association of Retired Persons; Trustee
and Chair, AARP Group Health Insurance Plan; Board Liaison, National
Volunteer Leadership Network Advisory Committee; Board Member, Board
Operations Committee; Board Member, Board Committee on Strategic
Planning; 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 Kemper Investments, Inc.
HORACE B. DEETS
------------------------------------------------------------------------
Vice Chairman of each AARP Trust and Trustee of AARP Cash Investment
Funds, AARP Growth Trust and AARP Tax Free Income Trust; 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.
168
<PAGE>
ROBERT J. MYERS
------------------------------------------------------------------------
Trustee of AARP Funds; Actuarial Consultant; Formerly Executive
Director, National Commission on Social Security Reform; Director:
Manufacturers Investment Trust; Formerly Director, Board of Pensions,
Evangelical Lutheran Church in America; Formerly Chairman, Commission on
Railroad Retirement Reform; Former 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.
JEAN GLEASON STROMBERG
------------------------------------------------------------------------
Trustee of AARP Funds; Consultant; Formerly Director, Financial
Institutions Issues, U.S. General Accounting Office; Formerly Partner,
Fulbright & Jaworski Law Firm.
CORNELIA SMALL* HOWARD SCHNEIDER*
------------------------------------------------------------------------
President Vice President
WILLIAM F. GLAVIN, JR.* THOMAS F. MCDONOUGH*
------------------------------------------------------------------------
Vice President Vice President and Assistant
Secretary
THOMAS W. JOSEPH* KATHRYN L. QUIRK*
------------------------------------------------------------------------
Vice President Vice President, Treasurer and
Secretary
JAMES W. PASMAN* JOHN R. HEBBLE*
------------------------------------------------------------------------
Vice President Assistant Treasurer
*Scudder Kemper Investments, 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.
169
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<PAGE>
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INVESTOR SERVICES
Information, services, and important phone numbers are
available in this section. Shareholders are encouraged
to contact our highly skilled Mutual Fund
Representatives regarding their account or the
Investment Program.
171
<PAGE>
INVESTOR SERVICES
AARP Automatic Take advantage of dollar cost averaging-- a simple,
Investment Plan systematic approach to managing risk. By investing a
specific amount of money into one or more of the AARP
Mutual Funds from Scudder on a regular basis (usually
monthly), you can potentially reduce your average price
per share. By purchasing shares at different prices
over time, dollar cost averaging can offer the
potential for a lower cost per share. You can begin
your Automatic Investment Plan with as little as $50
per month.
AARP Lump Sum If you need help on what to do with a lump sum payment
Service from a retirement plan or life insurance policy, for
example, you can now work directly with a specially
trained AARP Retirement Plan Specialist who can help
you with your distribution options. Our specialists are
trained in the area of tax implications, investment
options, and dealing with the "red tape" that is
sometimes involved with lump sum distributions.
AARP Investment The AARP web site provides investors timely information
Program Web Site regarding a variety of issues that affect their lives,
from general information on the financial markets and
investing, to interactive tools to help with retirement
planning. Other site features include a Weekly Update
on the Financial Markets, The Learning Center,
investment guides such as Planning for Retirement,
Financial Planning for Women, and Managing Your Money
in Retirement. You can also submit your questions and
comments directly through the site. Visit us often at
htpp://aarp.scudder.com, as content is updated
regularly.
AARP Legacy The Legacy Planning Service was developed to help
Planning Service shareholders feel confident that their investments will
pass to their spouse or other heirs the way they
intended. The Service consists of two parts: the Legacy
Planner, an informational guide which provides
suggestions for putting financial affairs in order, and
the Legacy Transfer Guide, a service available to
families who have recently experienced a death, the
intent of which is to help family members understand
and protect their inheritance.
Financial Planning Despite the advances women have made in all aspects of
for Women Guide society, they still have a long way to go in attaining
the same status as their male counterparts in the area
of finance. Financial Planning for Women, an
easy-to-read investment guide, was designed for women
investors in the AARP Investment Program from Scudder
who want to increase their investment knowledge and
improve their financial skills. For information on how
to receive your copy of Financial Planning for Women,
visit our web site at http://aarp.scudder.com, or
contact one of our highly trained Mutual Fund
Representatives.
For more information on the AARP Investment Program's
Investor Services, please contact our highly trained
Mutual Fund Representatives at 1-800-253-2277.
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<PAGE>
HOW TO CONTACT US:
TDD (Telecommunications AARP members with hearing or speech impairments and
Device for the Deaf and access to TDD equipment can communicate with the AARP
Speech Impaired) Investment Program Monday through Friday, between 8:00
1-800-634-9454 a.m. and 5:00 p.m. Eastern time. Transactions can be
made between 8:00 a.m. and 4:00 p.m., Eastern Time.
Easy-Access Line Shareholders with a Touch-Tone telephone may call this
1-800-631-4636 automated line to obtain AARP Fund performance and
account information, or to exchange or sell (redeem)
AARP Mutual Fund Shares. This service is available 24
hours a day, 7 days a week.
Shareholder Our knowledgeable AARP Mutual Fund Representatives are
Service Line available to answer your questions regarding the AARP
1-800-253-2277 Investment Program, or your account, Monday through
Friday, between 8:00 a.m. and 8:00 p.m., Eastern Time.
Transactions can be made Monday through Friday, between
8:00 a.m. and 4:00 p.m., Eastern Time.
If you need to write to us:
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
Transactions If you need to fax us: 1-800-821-6234. You can fax your
by Fax confidential transaction requests to us. Please be
1-800-821-6234 aware that any exchange or redemption request received
after 4:00 p.m. on business days or on weekends will be
processed the next business day.
Investment Visit us at our Web site for the latest updates and
Program Web Site information from the AARP Investment Program from
http://aarp.scudder.com Scudder. Visitors have access to a broad range of
information, including performance of AARP Mutual
Funds, which is updated daily, and the complete
prospectus.
173
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174
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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 barbell if the clusters of bonds
on either end were illustrated.
Basis Point The smallest measure used in quoting yields on bonds and
notes. One basis point equals 0.01% of yield.
Call Protection The length of time during which a security cannot be
redeemed by the issuer. Most government securities are not
callable. However some 30-year Treasury bonds can be
redeemed after 25 years. Corporate and municipal issuers
generally provide 10 years of call protection. Investors
who plan on living off the income from bonds should make
sure that the bonds are not callable.
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.
Cyclical Securities that tend to rise quickly when the economy
turns up and to fall quickly when the economy turns down.
Examples include housing and automobiles. Non-cyclical
securities are those less affected by the economy, such as
food and pharmaceuticals.
Dividend Distribution of earnings to shareholders. The amount is
determined by a company's Board of Directors and is
usually paid on a quarterly basis, usually in the form of
money or stock. Dividends must be declared as income in
the year in which they are received.
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.
Investment Grade Bonds with a rating of AAA or BBB. Investment grade bonds
are considered the most secure bonds and therefore pay
lower yields than lower quality bonds, but offer a higher
degree of safety.
175
<PAGE>
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.
Price to Earnings The price of a stock divided by its earnings per share,
(P/E's) also known as price multiple. The price to earnings
informs investors how much they are actually paying for a
company's earning power.
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.
Sector Groups of stocks, usually found in one industry.
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 by 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 Curve A graph depicting interest rates by plotting the yields of
all bonds of the same quality with maturities ranging from
the shortest to the longest available. The resulting curve
shows if short-term rates are higher or lower than
long-term rates. If short-term rates are lower, it is
called a positive yield curve. If short-term rates are
higher, it is called a negative yield curve. Fixed income
analysts study the yield curve carefully in order to make
judgments about the direction of interest rates.
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.
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THE EXPENSE OF PUBLISHING THIS REPORT
Some shareholders have appropriately inquired about the
expense of publishing this report. While the report is legally
required by Federal Securities Law and monitored by the
Securities and Exchange Commission (SEC), the AARP Investment
Program also seeks to provide easy-to-understand information
about the Program's Funds, as well as provide updates and
timely information which directly affect our shareholders.
We go to great lengths to assure easy reading, utilizing
larger typeface and the liberal use of white space. Our
challenge is to accomplish this as cost-effectively as
possible. Other measures that we take to reduce our costs are
the use of less expensive paper and whenever possible, mailing
one report to each household, rather than to each shareholder
or account holder.
We have also determined that a consolidated report is less
expensive than producing fifteen individual reports. This
year's report cost approximately 95 cents to produce.
Viewed from the standpoint of expense ratios, the total
publication cost is approximately 1/24 of one basis point for
the AARP family of fifteen mutual funds, with average expenses
of 82 basis points. This compares favorably to the Lipper
average fund expenses of 123 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 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.
(recycle logo) Printed on recycled paper
(inside back cover)
