SCUDDER
INVESTMENTS(SM)
[LOGO]
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RISK MANAGED
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Class AARP and Class S Shares
Scudder Capital Growth
Fund
Scudder Small Company
Stock Fund
Scudder GNMA Fund
Prospectus
July 17, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder Risk Managed
How the funds work
2 Scudder Capital Growth Fund
6 Scudder Small Company Stock Fund
10 Scudder GNMA Fund
14 Other Policies and Risks
15 Who Manages and Oversees the Funds
19 Financial Highlights
How to invest in the funds
23 How to Buy, Sell and Exchange
Class AARP Shares
25 How to Buy, Sell and Exchange
Class S Shares
27 Policies You Should Know About
31 Understanding Distributions and Taxes
<PAGE>
How the funds work
On the next few pages, you'll find information about each fund's investment
goal, and the main risks that could affect its performance.
Whether you are considering investing in a fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
This prospectus offers two classes of shares for each of the funds described.
Class AARP shares have been created especially for AARP members. Class S shares
are available to all investors. Unless otherwise noted, all information in this
prospectus applies to both classes.
You can find Scudder prospectuses on the Internet for Class AARP shares at
aarp.scudder.com and for Class S shares at www.scudder.com.
<PAGE>
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ticker symbol | Class AARP ACGFX fund number | Class AARP 198
Class S 398
Scudder Capital Growth Fund
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Investment Approach
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk compared with other growth mutual funds. The fund invests
at least 65% of total assets in equities, mainly common stocks of U.S.
companies. Although the fund can invest in companies of any size, it generally
focuses on established companies with market values of $3 billion or more. In
addition, the fund does not invest in securities issued by tobacco-producing
companies.
In choosing stocks, the portfolio managers look for individual companies that
have displayed above-average earnings growth compared to other growth companies
and that have strong product lines, effective management and leadership
positions within core markets. The managers also analyze each company's
valuation, stock price movements and other factors.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including:
o focusing on high quality companies with reasonable valuations
o diversifying broadly among companies, industries and sectors
o limiting the majority of the portfolio to 3.5% in any one issuer (other
funds may invest 5% or more)
Depending on their outlook, the managers may increase or reduce the fund's
exposure to a given industry or company. The fund will normally sell a stock
when the managers believe it is too highly valued, its fundamental qualities
have deteriorated or its potential risks have increased. other investments
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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OTHER INVESTMENTS
While most of the fund's investments are common stocks, some may be other types
of equities, such as convertible securities and preferred stocks.
Although the fund is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
2 | Scudder Capital Growth Fund
<PAGE>
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[ICON] This fund may make sense for investors interested in a long-term
investment that seeks to lower its share price volatility compared with
other growth mutual funds.
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Main Risks to Investors
There are several risk factors that could hurt fund performance, cause you to
lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the medium and large growth company portions of
the U.S. stock market. When prices of these stocks fall, you should expect the
value of your investment to fall as well. At times, large or medium company
stocks may not perform as well as stocks of smaller companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
To the extent that the fund invests in a given industry, any factors affecting
that industry could affect portfolio securities. For example, a rise in
unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
3 | Scudder Capital Growth Fund
<PAGE>
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[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over
time.
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The Fund's Track Record
The bar chart shows how the total returns of the fund's Class AARP
shares have varied from year to year, which may give some idea of
risk. The table shows average annual total returns of the fund's
Class AARP shares and a broad-based market index (which, unlike the
fund, does not have any fees or expenses). The performance of both
the fund and the index varies over time. All figures on this page
assume reinvestment of dividends and distributions. On July 17,
2000, the fund was reorganized from AARP Capital Growth Fund, a
series of AARP Growth Trust, into Class AARP of Scudder Capital
Growth Fund, a newly created series of Investment Trust. The
performance of Class AARP in the bar chart and performance table
reflects the performance of AARP Capital Growth Fund.
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Annual Total Returns (%) as of 12/31 each year Class AARP
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
'90 -15.78
'91 40.53
'92 4.72
'93 15.98
'94 -10.04
'95 30.54
'96 20.62
'97 35.08
'98 23.73
'99 35.44
2000 Total Return as of June 30: 3.12%
Best Quarter: 25.83%, Q4 1998 Worst Quarter: -21.27%, Q3 1990
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Average Annual Total Returns (%) as of 12/31/1999
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1 Year 5 Years 10 Years
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Fund -- Class AARP* 35.44 28.94 16.51
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Index 21.04 28.56 18.21
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Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
4 | Scudder Capital Growth Fund
<PAGE>
How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
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Fee Table
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Shareholder Fees (paid directly from your investment) None
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Annual Operating Expenses (deducted from fund assets)
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Management Fee 0.58%
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Distribution (12b-1) Fee None
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Other Expenses* 0.30%
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Total Annual Operating Expenses 0.88%
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* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement.
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Expense Example
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This example helps you compare this fund's expenses to those of
other mutual funds. The example assumes the expenses above remain
the same. It also assumes that you invested $10,000, earned 5%
annual returns, reinvested all dividends and distributions and sold
your shares at the end of each period. This is only an example;
your actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
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$90 $281 $488 $1,084
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5 | Scudder Capital Growth Fund
<PAGE>
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ticker symbol | Class AARP ASCSX fund number | Class AARP 139
Class S 339
Scudder Small Company Stock Fund
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Investment Approach
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk as compared with other small company stock funds. It does
this by investing at least 65% of total assets in common stocks of small U.S.
companies with potential for above-average long-term capital growth. The fund
normally focuses on companies whose market capitalizations are below $2 billion.
In addition, the fund does not invest in securities issued by tobacco-producing
companies.
The portfolio managers use a multi-step process to select small company stocks.
A quantitative stock valuation model ranks stocks favoring those with strong
potential for growth of earnings, reasonable valuations in light of business
prospects and positive stock price movements.
The managers then assemble the fund's portfolio from among the qualifying
stocks, using a portfolio optimizer -- sophisticated portfolio management
software that analyzes the expected return and risk characteristics of each
stock and the overall portfolio.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups.
The managers use several strategies in seeking to reduce downside risk,
including:
o focusing on attractively valued securities
o diversifying broadly among industries and companies (typically over
150)
o limiting the majority of the portfolio to 2% in any one issuer (other
funds may invest 5% or more)
The fund will normally sell a stock when it no longer qualifies as a small
company, when it is no longer considered undervalued or when the managers
believe other investments offer better opportunities.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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OTHER INVESTMENTS
While the fund invests primarily in common stocks, it may invest up to 20% of
total assets in U.S. government securities.
Although the fund is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
6 | Scudder Small Company Stock Fund
<PAGE>
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[ICON] This fund is designed for long-term investors who are looking for a
fund that seeks to temper the risks of investing in small company
stocks.
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Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the small company portion of the U.S. market.
When small company stock prices fall, you should expect the value of your
investment to fall as well. Small company stocks tend to be more volatile than
stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry, factors affecting that
industry could affect the value of portfolio securities. For example, a rise in
unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o value stocks may be out of favor for certain periods
o the managers could be wrong in their analysis of companies
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, it might be hard to value some investments or to get an
attractive price for them
7 | Scudder Small Company Stock Fund
<PAGE>
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[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over
time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns of the fund's Class AARP
shares have varied from year to year, which may give some idea of
risk. The table shows average annual total returns of the fund's
Class AARP shares and a broad-based market index (which, unlike the
fund, does not have any fees or expenses). The performance of both
the fund and the index varies over time. All figures on this page
assume reinvestment of dividends and distributions. On July 17,
2000, the fund was reorganized from AARP Small Company Stock Fund,
a series of AARP Growth Trust, into Class AARP of Scudder Small
Company Stock Fund, a newly created series of Investment Trust. The
performance of Class AARP in the bar chart and performance table
reflects the performance of AARP Small Company Stock Fund.
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Annual Total Returns (%) as of 12/31 each year Class AARP
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
'98 -6.24
'99 -3.53
2000 Total Return as of June 30: -1.72%
Best Quarter: 19.49%, Q2 1999 Worst Quarter: -17.20%, Q3 1998
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Average Annual Total Returns (%) as of 12/31/1999
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1 Year Since Inception
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Fund -- Class AARP* -3.53 6.74**
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Index 21.26 12.71***
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Index: Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2,000 small U.S. stocks.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
** Inception of Fund: 2/1/1997.
*** Index comparison begins 1/31/1997.
In the chart, total returns for 1998 would have been lower if operating expenses
hadn't been reduced.
In the table, total returns from inception through 1998 would have been lower if
operating expenses hadn't been reduced.
8 | Scudder Small Company Stock Fund
<PAGE>
How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
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Fee Table
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Shareholder Fees (paid directly from your investment) None
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Annual Operating Expenses (deducted from fund assets)
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Management Fee 0.75%
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Distribution (12b-1) Fee None
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Other Expenses* 0.46%
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Total Annual Operating Expenses 1.21%
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* Includes a fixed rate administrative fee of 0.45%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement.
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Expense Example
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This example helps you compare this fund's expenses to those of other mutual
funds. The example assumes the expenses above remain the same. It also assumes
that you invested $10,000, earned 5% annual returns, reinvested all dividends
and distributions and sold your shares at the end of each period. This is only
an example; your actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
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$123 $384 $665 $1,466
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9 | Scudder Small Company Stock Fund
<PAGE>
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ticker symbol | Class AARP AGNMX fund number | Class AARP 193
Class S 393
Scudder GNMA Fund
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Investment Approach
The fund seeks to produce a high level of income while actively seeking to
reduce downside risk compared with other GNMA mutual funds. It does this by
investing at least 65% of net assets in "Ginnie Maes": mortgage-backed
securities that are issued or guaranteed by the Government National Mortgage
Association (GNMA). The fund also invests in U.S. Treasury securities. With both
types of securities, the timely payment of interest and principal is guaranteed
by the full faith and credit of the U.S. government. In addition, the fund does
not invest in securities issued by tobacco-producing companies.
In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of Ginnie Maes compared to Treasuries
and decide on allocations for each. Their decisions are generally based on a
number of factors, including changes in supply and demand within the bond
market.
In choosing individual bonds, the managers review each fund's bond
characteristics and compare the yields of shorter maturity bonds to those of
longer maturity bonds.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. In seeking to reduce downside risk, the managers will generally maintain
a shorter duration than other GNMA funds (duration is a measure of sensitivity
to interest rate movements).
While the fund is permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, currencies or securities), the managers
don't intend to use them as principal investments, and might not use them at
all.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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CREDIT QUALITY POLICIES
This fund normally invests at least 65% of total assets in Ginnie Maes (and
typically more than that). To the extent that it does buy other securities, they
generally carry the same "full faith and credit" guarantee of the U.S.
Government.
This guarantee doesn't protect the fund against market-driven declines in the
prices or yields of these securities, nor does it apply to shares of the fund
itself. But it does guard against the risk of payment default of principal or
interest with respect to securities that are guaranteed.
10 | Scudder GNMA Fund
<PAGE>
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[ICON] This fund may interest investors who can accept moderate volatility and
are seeking higher yield than Treasuries, yet don't want to sacrifice
credit quality.
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Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices -- and, in turn, a
fall in the value of your investment. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) An increase in its
duration would make the fund more sensitive to this risk.
Ginnie Maes carry additional risks and may be more volatile than many other
types of debt securities. Any unexpected behavior in interest rates could hurt
the performance of these securities. For example, a large fall in interest rates
could cause these securities to be paid off earlier than expected, forcing the
fund to reinvest the money at a lower rate. Another example: if interest rates
rise or stay high, these securities could be paid off later than expected,
forcing the fund to endure low yields. In both of these examples, changes in
interest rates may involve the risk of capital losses. The result for the fund
could be an increase in the volatility of its share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
11 | Scudder GNMA Fund
<PAGE>
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[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over
time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the returns of the fund's Class AARP shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class AARP shares and a broad-based market
index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions. On July 17, 2000, the
fund changed its name from AARP GNMA and U.S. Treasury Fund to Scudder GNMA
Fund. At the same time, the fund changed its strategy to eliminate investment
requirements in U.S. Treasury securities. Consequently, the performance may have
been different if the current strategy had been in place. Also at this time,
shares of AARP GNMA and U.S. Treasury Fund were redesignated Class AARP of
Scudder GNMA Fund. The performance of Class AARP in the bar chart and
performance table reflects the performance of AARP GNMA and U.S. Treasury Fund.
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Annual Total Returns (%) as of 12/31 each year Class AARP
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
'90 9.72
'91 14.38
'92 6.56
'93 5.96
'94 -1.68
'95 12.83
'96 4.44
'97 8.00
'98 6.79
'99 0.59
2000 Total Return as of June 30: 3.73%
Best Quarter: 4.88%, Q3 1991 Worst Quarter: -2.44%, Q1 1994
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Average Annual Total Returns (%) as of 12/31/1999
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1 Year 5 Years 10 Years
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Fund -- Class AARP* 0.59 6.45 6.65
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Index 1.93 8.08 7.87
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Index: Lehman Brothers GNMA Index, an unmanaged market-weighted measure of all
fixed-rate securities backed by mortgage pools of GNMA.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
12 | Scudder GNMA Fund
<PAGE>
How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
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Fee Table
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Shareholder Fees (paid directly from your investment) None
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Annual Operating Expenses (deducted from fund assets)
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Management Fee 0.40%
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Distribution (12b-1) Fee None
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Other Expenses* 0.30%
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Total Annual Operating Expenses 0.70%
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* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
This example helps you compare this fund's expenses to those of
other mutual funds. The example assumes the expenses above remain
the same. It also assumes that you invested $10,000, earned 5%
annual returns, reinvested all dividends and distributions and sold
your shares at the end of each period. This is only an example;
your actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
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$72 $224 $390 $871
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13 | Scudder GNMA Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, a fund's Board could
change that fund's investment goal without seeking shareholder
approval.
o As a temporary defensive measure, each fund could shift up to 100% of
its assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
o These funds may trade securities actively. This could raise transaction
costs (and lower performance) and could mean higher taxable
distributions.
Euro conversion
Funds that invest in foreign securities could be affected by accounting
differences, changes in tax treatment or other issues related to the conversion
of certain European currencies into the euro, which is already underway. The
investment adviser is working to address euro-related issues as they occur and
has been notified that other key service providers are taking similar steps.
Still, there's some risk that this problem could materially affect a fund's
operation (including its ability to calculate net asset value and to handle
purchases and redemptions), its investments or securities markets in general.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
14 | Other Policies and Risks
<PAGE>
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[ICON] Scudder Kemper, the company with overall responsibility for managing
the funds, takes a team approach to asset management.
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Who Manages and Oversees the Funds
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Each fund is managed by a team of investment professionals, who individually
represent different areas of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the fund managers are
Scudder Kemper's many economists, research analysts, traders and other
investment specialists, located in offices across the United States and around
the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of
average daily net assets.
Fund Name Fee Paid
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Scudder Capital Growth Fund 0.60%*
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Scudder Small Company Stock Fund 0.83%**
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Scudder GNMA Fund 0.40%***
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* Reflects management fee paid by AARP Capital Growth Fund.
** Reflects management fee paid by AARP Small Company Stock Fund.
*** Reflects management fee paid by AARP GNMA and U.S. Treasury Fund.
15 | Who Manages and Oversees the Funds
<PAGE>
Each fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the fee rates for each fund and the effective date
of these agreements.
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New Investment Management Fee as of July 17, 2000
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Average Daily Net Assets Fee Rate
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Scudder Capital Growth Fund
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first $3 billion 0.580%
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next $1 billion 0.555%
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more than $4 billion 0.530%
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Scudder Small Company Stock Fund
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first $500 million 0.75%
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next $500 million 0.70%
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more than $1 billion 0.65%
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Scudder GNMA Fund
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first $5 billion 0.400%
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next $1 billion 0.385%
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more than $6 billion 0.370%
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Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in return
for advice and other services relating to investments by AARP members in AARP
Class shares of each fund. This fee is calculated on a daily basis as a
percentage of the combined net assets of the AARP Classes of all funds managed
by Scudder Kemper. The fee rates, which decrease as the aggregate net assets of
the AARP Classes become larger, are as follows: 0.07% for the first $6 billion
in net assets, 0.06% for the next $10 billion and 0.05% thereafter.
16 | Who Manages and Oversees the Funds
<PAGE>
The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder Capital Growth Fund Scudder GNMA Fund
William F. Gadsen Richard L. Vandenberg
Co-lead Portfolio Manager Lead Portfolio Manager
o Began investment career o Began investment career
in 1981 in 1975
o Joined the adviser in 1983 o Joined the adviser in 1993
Bruce F. Beaty Scott E. Dolan
Co-lead Portfolio Manager o Began investment career
o Began investment career in 1989
in 1980 o Joined the adviser in 1989
o Joined the adviser in 1991
John E. Dugenske
Scudder Small Company o Began investment career
Stock Fund in 1990
o Joined the adviser in 1998
James M. Eysenbach
Lead Portfolio Manager
o Began investment career
in 1984
o Joined the adviser in 1991
Calvin S. Young
o Began investment career
in 1988
o Joined the adviser in 1990
17 | Who Manages and Oversees the Funds
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders. The following people comprise
each fund's Board.
Linda C. Coughlin Joan E. Spero
o Managing Director, Scudder o President, Doris Duke
Kemper Investments, Inc. Charitable Foundation
o President of each fund
Jean Gleason Stromberg
Henry P. Becton, Jr. o Consultant
o President and General Manager,
WGBH Educational Foundation Jean C. Tempel
o Managing Director, First
Dawn-Marie Driscoll Light Capital (Venture
o Executive Fellow, Center for capital fund)
Business Ethics, Bentley College
o President, Driscoll Associates Steven Zaleznick
(consulting firm) o President and Chief
Executive Officer, AARP
Edgar Fiedler Services, Inc.
o Senior Fellow and Economic
Counsellor, The Conference
Board, Inc.
Keith R. Fox
o Private equity investor
o President, Exeter Capital
Management Corporation
18 | Who Manages and Oversees the Funds
<PAGE>
Financial Highlights
This table is designed to help you understand each fund's financial performance
in recent years. The figures in the first part of each table are for a single
share. The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. Except for the six month periods ended March 31,
2000, this information has been audited by PricewaterhouseCoopers LLP, whose
report, along with each fund's financial statements, is included in that fund's
annual report (see "Shareholder reports" on the back cover). On July 17, 2000,
Scudder Capital Growth Fund and Scudder Small Company Stock Fund were
reorganized from AARP Growth Trust into two newly created series of Investment
Trust. The Financial Highlights provided are for the AARP Capital Growth Fund
and AARP Small Company Stock Fund, both series of AARP Growth Trust. On July 17,
2000, Scudder GNMA Fund changed its name from AARP GNMA and U.S. Treasury Fund,
a series of AARP Income Trust. The Financial Highlights provided are for the
AARP GNMA and U.S. Treasury Fund.
<TABLE>
<CAPTION>
Scudder Capital Growth Fund -- Class AARP
Six Months
Ended
March 31, Years ended September 30,
2000 -----------------------------------------
(Unaudited) 1999 (a) 1998 (a) 1997 (a) 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $62.68 $51.24 $57.84 $43.47 $38.36 $31.74
--------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) (.04) .04 .28 .34 .42 .36
--------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions 17.53 18.19 (2.26) 18.43 5.59 6.91
--------------------------------------------------------
--------------------------------------------------------------------------------------
Total from investment
operations 17.49 18.23 (1.98) 18.77 6.01 7.27
--------------------------------------------------------
--------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.04) (.24) (.31) (.41) (.39) (.01)
--------------------------------------------------------------------------------------
Net realized gains on
investment transactions (5.40) (6.55) (4.31) (3.99) (.51) (.64)
--------------------------------------------------------
--------------------------------------------------------------------------------------
Total distributions (5.44) (6.79) (4.62) (4.40) (.90) (.65)
--------------------------------------------------------
--------------------------------------------------------------------------------------
Net asset value, end of
period $74.73 $62.68 $51.24 $57.84 $43.47 $38.36
--------------------------------------------------------
--------------------------------------------------------------------------------------
Total Return (%) 28.25(b) 36.83 (3.39) 46.72 15.97 23.47
--------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 2,448 1,735 1,247 1,228 826 692
--------------------------------------------------------------------------------------
Ratio of expenses (%)
Ratio of net investment .90(c) .91 .87 .92 .90 .95
--------------------------------------------------------------------------------------
income (loss) (%) (.11)(c) .07 .50 .70 1.05 1.00
Portfolio turnover rate (%) 79(c) 68 53 39 65 98
--------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Not annualized
(c) Annualized
19 | Financial Highlights
<PAGE>
<TABLE>
<CAPTION>
Scudder Small Company Stock Fund-- Class AARP
Years ended For the Period
Six Months Ended September 30, February 1, 1997(b)
March 31, 2000 ------------- to September 30,
(Unaudited) 1999 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $17.89 $16.93 $20.02 $15.00
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income
(loss) (a) (.05) .02 .01 .04
-------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions .01(g) .96 (2.98) 4.98
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment
operations (.04) .98 (2.97) 5.02
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.02) (.02) (.04) --
-------------------------------------------------------------------------------------
Net realized gains on
investment transactions -- -- (.08) --
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (.02) (.02) (.12) --
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Net asset value, end of
period $17.83 $17.89 $16.93 $20.02
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (0.22)(d) 5.70 (14.91)(c) 33.53(c)(d)
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 52 66 97 50
-------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.93(e)(f) 1.70 1.80 2.79(e)
-------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.88(e)(f) 1.70 1.75 1.75(e)
-------------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (.43)(e) .13 .07 .40(e)
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 56(e) 17 12 5(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
(f) The annualized ratios of operating expenses excluding reorganization costs
before and after expense reductions were 1.80% and 1.75%, respectively, for
the six months ended March 31, 2000.
(g) The amount shown may not agree with the change in the aggregate gains and
losses in the portfolio securities for the period because of the timing of
sales and repurchases of the fund's shares in relation to fluctuating
market values for the portfolio.
20 | Financial Highlights
<PAGE>
<TABLE>
<CAPTION>
Scudder GNMA Fund -- Class AARP
Six Months
Ended Years ended September 30,
March 31, 2000 ------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.61 $15.40 $15.16 $14.91 $15.19 $14.73
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment
income .47 .94 .99 .98 .99 1.01
-------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) on
investment
transactions (.18) (.79) .24 .25 (.28) .46
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Total from
investment
operations .29 .15 1.23 1.23 .71 1.47
-------------------------------------------------------------------------------------
Less distributions from:
Net investment
income (.47) (.94) (.99) (.98) (.99) (.98)
-------------------------------------------------------------------------------------
Tax return of
capital -- -- -- -- -- (.03)
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (.47) (.94) (.99) (.98) (.99) (1.01)
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Net asset value, end
of period $14.43 $14.61 $15.40 $15.16 $14.91 $15.19
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) 2.00(b) 0.99 8.40 8.49 4.79 10.31
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 3,829 4,216 4,593 4,584 4,904 5,252
-------------------------------------------------------------------------------------
Ratio of expenses (%) .73(c) .65 .61 .65 .64 .67
-------------------------------------------------------------------------------------
Ratio of net
investment income (%) 6.45(c) 6.25 6.52 6.51 6.55 6.77
-------------------------------------------------------------------------------------
Portfolio turnover
rate (%) 308(a)(c) 245(a) 160 87 83 70
-------------------------------------------------------------------------------------
</TABLE>
(a) The portfolio turnover rates including mortgage dollar roll transactions
were 363% and 258% for the periods ended March 31, 2000 and September 30,
1999, respectively.
(b) Not annualized
(c) Annualized
21 | Financial Highlights
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
As noted earlier, there are two classes of shares of each fund available through
this prospectus. The instructions for buying and selling each class are slightly
different.
Instructions for buying and selling Class AARP shares, which have been created
especially for AARP members, are found on the next two pages. These are followed
by instructions for buying and selling Class S shares. Be sure to use the
appropriate table when placing any orders to buy, exchange or sell shares in
your account.
<PAGE>
<TABLE>
<CAPTION>
How to Buy, Sell and Exchange Class AARP Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."
-----------------------------------------------------------------------------------
<S> <C> <C>
Class AARP First investment Additional investments
-----------------------------------------------------------------------------------
$1,000 or more for regular $50 minimum with an Automatic
accounts Investment Plan, Payroll
$500 or more for IRAs Deduction or Direct Deposit
-----------------------------------------------------------------------------------
By mail o For enrollment forms, call Send a personalized investment
1-800-253-2277 slip or short note that
o Fill out and sign an includes:
enrollment form o fund and class name
o Send it to us at the o account number
appropriate address, along o check payable to "The AARP
with an investment check Investment Program"
-----------------------------------------------------------------------------------
By wire o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
-----------------------------------------------------------------------------------
By phone -- o Call 1-800-253-2277 for
instructions
-----------------------------------------------------------------------------------
With an automatic o Fill in the information o To set up regular investments
investment plan required on your enrollment from a bank checking account,
form and include a voided call 1-800-253-2277 (minimum
check $50)
-----------------------------------------------------------------------------------
Payroll o Select either of these o Once you specify a dollar
Deduction options on your enrollment amount (minimum $50),
Deposit form and submit it. You will investments are automatic.
or Direct receive further instructions
by mail.
-----------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-253-2277
-----------------------------------------------------------------------------------
On the Internet o Go to "services and forms -- o Call 1-800-253-2277 to ensure
how to open an account" at you have electronic services
aarp.scudder.com o Register at aarp.scudder.com
o Print out a prospectus and an o Follow the instructions for
enrollment form buying shares with money from
o Complete and return the your bank account
enrollment form with your
check
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The AARP Investment Program, PO Box 2540, Boston, MA 02208-2540
Express, registered or certified mail:
The AARP Investment Program, 66 Brooks Drive, Braintree, MA
02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
23 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
<TABLE>
<CAPTION>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
-----------------------------------------------------------------------------------
Class AARP Exchanging into another fund Selling shares
-----------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account ($500 or more for IRAs) most for over $100,000, can
only be ordered in writing; if
you're in doubt, see page 29
-----------------------------------------------------------------------------------
By phone o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
-----------------------------------------------------------------------------------
Using Easy-Access o Call 1-800-631-4636 and o Call 1-800-631-4636 and
Line follow the instructions follow the instructions
-----------------------------------------------------------------------------------
By mail or fax Your instructions should Your instructions should
(see previous include: include:
page) o your account number o your account number
o names of the funds, class and o name of the fund, class and
number of shares or dollar number of shares or dollar
amount you want to exchange amount you want to redeem
-----------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from an account,
call 1-800-253-2277
-----------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-253-2277
-----------------------------------------------------------------------------------
On the Internet o Register at aarp.scudder.com --
o Go to "services and forms"
o Follow the instructions for
making on-line exchanges
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Services For Class AARP Investors
--------------------------------------------------------------------------------------
To reach us: o Web site aarp.scudder.com
o Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m. EST
o Confidential fax line 1-800-821-6234, always open
o TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST
Services for o AARP Lump Sum Service For help in making a decision about a lump
participants: sum distribution.
o AARP Legacy Service For organizing financial documents and
planning the orderly transfer of assets to heirs.
o AARP Goal Setting and Asset Allocation Service For
allocating assets and measuring investment progress.
o For more information, please call 1-800-253-2277.
--------------------------------------------------------------------------------------
</TABLE>
24 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
<TABLE>
<CAPTION>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
-----------------------------------------------------------------------------------
Class S First investment Additional investments
-----------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
-----------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below) o Send it to us at the o fund and class name
appropriate address, along o account number
with an investment check o check payable to "The Scudder
Funds"
-----------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
-----------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
-----------------------------------------------------------------------------------
With an automatic o Fill in the information on o To set up regular investments
investment plan your application and include from a bank checking account,
a voided check call 1-800-SCUDDER
-----------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
-----------------------------------------------------------------------------------
On the Internet o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure
www.scudder.com you have electronic services
o Print out a prospectus and a o Register at www.scudder.com
new account application o Follow the instructions for
o Complete and return the buying shares with money from
application with your check your bank account
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
25 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
<TABLE>
<CAPTION>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
-----------------------------------------------------------------------------------
Class S Exchanging into another fund Selling shares
-----------------------------------------------------------------------------------
<S> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 or more for most for over $100,000, can
IRAs) only be ordered in writing; if
$100 or more for exchanges you're in doubt, see page 29
between existing accounts
-----------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
-----------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
-----------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous o the fund, class and account o the fund, class and account
page) number you're exchanging number from which you want to
out of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the o your name(s), signature(s)
fund you want to exchange into and address, as they appear
o your name(s), signature(s) on your account
and address, as they appear o a daytime telephone number
on your account
o a daytime telephone number
-----------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
-----------------------------------------------------------------------------------
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
-----------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
-----------------------------------------------------------------------------------
On the Internet o Register at www.scudder.com --
o Follow the instructions for
making on-line exchanges
-----------------------------------------------------------------------------------
</TABLE>
26 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m. and
8 p.m. Eastern time on any fund business day by calling 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
27 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. To get up-to-date information, review balances or even
place orders for exchanges, go to aarp.scudder.com (Class AARP) or
www.scudder.com (Class S).
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
For Class AARP Shares
--------------------------------------------------------------------------------
Call Easy-Access Line, the AARP Program Automated Information Line, at
1-800-631-4636
--------------------------------------------------------------------------------
For Class S Shares
--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
28 | Policies You Should Know About
<PAGE>
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the funds calculate share price
For each share class of each fund, the share price is the net asset value per
share, or NAV. To calculate NAV, each share class of each fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, a fund's value for a security is likely to be different from quoted market
prices.
To the extent that a fund invests in securities that are traded primarily in
foreign markets, the value of their holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the funds don't price their shares.
29 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o for Class AARP and Class S shareholders, close your account and send
you the proceeds if your balance falls below $1,000; for Class S
shareholders, charge you $10 a year if your account balance falls below
$2,500; in either case, we will give you 60 days' notice so you can
either increase your balance or close your account (these policies
don't apply to retirement accounts, to investors with $100,000 or more
in Scudder fund shares or in any case where a fall in share price
created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; generally, the fund won't make
a redemption in kind unless your requests over a 90-day period total
more than $250,000 or 1% of the value of the fund's net assets,
whichever is less
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
30 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds intend to pay dividends and distributions on the following schedule,
and if necessary, may do so at other times as well:
--------------------------------------------------------------------------------
Scudder Capital Growth Fund annually, December
--------------------------------------------------------------------------------
Scudder Small Company Stock Fund annually, December
--------------------------------------------------------------------------------
Scudder GNMA Fund monthly
--------------------------------------------------------------------------------
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
31 | Understanding Distributions and Taxes
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive (except from Scudder GNMA Fund).
32 | Understanding Distributions and Taxes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we mail one copy per
household. For more copies, call 1-800-253-2277 (Class AARP) or 1-800-SCUDDER
(Class S).
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC (see below). If you're a shareholder and have questions, please contact
Scudder. Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at the SEC's Public
Reference Room in Washington, DC or request them electronically at
[email protected].
AARP Investment
Program from Scudder Scudder Funds SEC
PO Box 2540 PO Box 2291 450 Fifth Street, N.W.
Boston, MA Boston, MA Washington, D.C.
02208-2540 02107-2291 20549-6009
1-800-253-2277 1-800-SCUDDER 1-202-942-8090
aarp.scudder.com www.scudder.com www.sec.gov
Fund Name SEC File #
--------------------------------------------------------------------------------
Scudder Capital Growth Fund 811-43
--------------------------------------------------------------------------------
Scudder Small Company Stock Fund 811-43
--------------------------------------------------------------------------------
Scudder GNMA Fund 811-4049
--------------------------------------------------------------------------------
<PAGE>
SCUDDER GNMA FUND
A series of Scudder Income Trust
The fund seeks to produce a high level of income
while actively seeking to reduce downside risk
compared with other GNMA mutual funds.
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
Dated July 17, 2000
--------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus for Scudder GNMA Fund dated July 17,
2000, as amended from time to time, a copy of which may be obtained without
charge by writing to Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders of the Fund, dated September 30, 1999
and the unaudited Semi-Annual Report dated March 31, 2000 are incorporated by
reference and are hereby deemed to be part of this Statement of Additional
Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES..................................................................1
General Investment Objective and Policies............................................................1
Master/feeder Structure.............................................................................13
INVESTMENT RESTRICTIONS......................................................................................14
PURCHASES....................................................................................................15
Additional Information About Opening an Account.....................................................15
Additional Information About Making Subsequent Investments..........................................16
Minimum balances....................................................................................16
Additional Information About Making Subsequent Investments By Quickbuy..............................17
Checks..............................................................................................17
Wire Transfer of Federal Funds......................................................................17
Share Price.........................................................................................18
Share Certificates..................................................................................18
Other Information...................................................................................18
EXCHANGES AND REDEMPTIONS....................................................................................19
Exchanges...........................................................................................19
Redemption By Telephone.............................................................................19
Redemption By Quicksell.............................................................................20
Redemption By Mail Or Fax...........................................................................21
Redemption-in-Kind..................................................................................21
Other Information...................................................................................21
FEATURES AND SERVICES OFFERED BY THE FUND....................................................................22
The No-Load Concept.................................................................................22
Internet Access.....................................................................................22
Dividends and Capital Gains Distribution Options....................................................23
THE SCUDDER FAMILY OF FUNDS..................................................................................23
SPECIAL PLAN ACCOUNTS........................................................................................26
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations
and Self-Employed Individuals..................................................................26
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals......................................................................26
Scudder IRA: Individual Retirement Account..........................................................26
Scudder Roth IRA: Individual Retirement Account.....................................................27
Scudder 403(b) Plan.................................................................................27
Automatic Withdrawal Plan...........................................................................27
Group or Salary Deduction Plan......................................................................28
Automatic Investment Plan...........................................................................28
Uniform Transfers/Gifts to Minors Act...............................................................29
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS....................................................................28
PERFORMANCE INFORMATION......................................................................................29
Average Annual Total Return.........................................................................29
Cumulative Total Return.............................................................................30
Total Return........................................................................................31
Comparison of Fund Performance......................................................................31
FUND ORGANIZATION............................................................................................32
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TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER...........................................................................................33
Investment Adviser..................................................................................33
AMA InvestmentLink(SM) Program......................................................................36
TRUSTEES AND OFFICERS........................................................................................36
REMUNERATION.................................................................................................38
Responsibilities of the Board -- Board and Committee Meetings.......................................38
Compensation of Officers and Trustees...............................................................38
DISTRIBUTOR..................................................................................................39
Administrative Fee..................................................................................40
TAXES........................................................................................................41
PORTFOLIO TRANSACTIONS.......................................................................................44
Brokerage Commissions...............................................................................44
Portfolio Turnover..................................................................................45
NET ASSET VALUE..............................................................................................46
ADDITIONAL INFORMATION.......................................................................................47
Experts.............................................................................................47
Other Information...................................................................................47
FINANCIAL STATEMENTS.........................................................................................48
</TABLE>
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THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
Scudder GNMA Fund (the "Fund") is a series of Scudder Income Trust (the
"Trust"), an open-end management investment company which continuously offers
and redeems shares at net asset value. The Fund is a company of the type
commonly known as a mutual fund and is advised by Scudder Kemper Investments,
Inc. (the "Adviser"). The Fund offers two classes of shares, Class S and Class
AARP. On July 17, 2000, the fund changed its name from AARP GNMA and U.S.
Treasury Fund to Scudder GNMA Fund, and all shares outstanding prior to that
date were redesignated as Class AARP Shares.
Except as otherwise indicated, the Fund's objectives and policies are
not fundamental and may be changed without a shareholder vote. There can be no
assurance that the Fund will achieve its objective. If there is a change in the
Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of its then current financial
position and needs.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Fund may engage or a
financial instrument which the Fund may purchase (such as financial futures,
etc.) are meant to describe the spectrum of investments that Scudder Kemper
Investments, Inc. (the "Adviser"), in its discretion, might, but is not required
to, use in managing the Fund's portfolio assets. The Adviser may, in its
discretion, at any time employ such practice, technique or instrument for the
fund but not for all funds advised by it. Furthermore, it is possible that
certain types of financial instruments or investment techniques described herein
may not be available, permissible, economically feasible or effective for their
intended purposes in all markets. Certain practices, techniques, or instruments
may not be principal activities of the Fund but, to the extent employed, could
from time to time have a material impact on the Fund's performance.
General Investment Objective and Policies
The Fund is designed to produce a high level of current income but with
less risk of loss to the Fund's portfolio than other GNMA mutual funds, measured
by the frequency and amount by which total return fluctuates downward. The Fund
is designed for investors who are seeking high current income from high quality
securities and who wish to receive a degree of protection from bond market price
risk. The Fund's investment objective is to produce a high level of current
income while actively seeking to reduce downside risk compared with other GNMA
mutual funds. It does this by investing at least 65% of net assets in "Ginnie
Maes": mortgage-backed securities that are issued or guaranteed by the
Government National Mortgage Association (GNMA). In seeking to reduce downside
risk, the managers will generally maintain a shorter duration than other GNMA
funds (duration is a measure of sensitivity to interest rate movements). The
Fund also invests in U.S. Treasury securities. With both types of securities,
the timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. government. In addition, the Fund does not invest in
securities issued by tobacco-producing companies.
In deciding which types of securities to buy and sell, the portfolio
managers first consider the relative attractiveness of Ginnie Maes compared to
Treasuries and decide on allocation for each. Their decisions are generally
based on a number of factors, including changes in supply and demand within the
bond market.
In choosing individual bonds, the managers review each fund's bond
characteristics and compare the yields of shorter maturity bonds to those of
longer maturity bonds.
The Fund has been designed with the conservative, safety-conscious
investor in mind. Although past performance is no guarantee of future
performance, historically, this Fund offers higher yields than such short-term
investments as insured savings accounts, insured six month certificates of
deposit, and fixed-price money market funds.
The Fund invests in U.S. Treasury bills, notes and bonds; other
securities issued or backed by the full faith and credit of the U.S. Government
as to principal and interest, including, but not limited to, Government National
Mortgage Association ("GNMA") mortgage-backed securities, Merchant Marine Bonds
guaranteed by the Maritime Administration and obligations of the Export-Import
Bank; financial futures contracts with respect to such securities;
<PAGE>
options on either such securities or such financial futures contracts; and bank
repurchase agreements. The Fund may also utilize hedging techniques involving
limited use of financial futures contracts and the purchase and writing
(selling) of put and call options on such contracts. Under certain market
conditions, these strategies may reduce current income. At any time, the Fund
may have a substantial portion of its assets in securities of a particular type
or maturity. The Fund may also write covered call options on portfolio
securities and purchase "when-issued" securities.
GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed
securities representing part ownership of a pool of mortgage loans. These loans,
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). A "pool" or group of
such mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, a Government
corporation within the U.S. Department of Housing and Urban Development, the
timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government. This is not, however, a guarantee
related to the Fund's yield or the value of your investment principal.
As mortgage-backed securities, GNMAs differ from bonds in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. GNMAs are called "pass-through" securities
because both interest and principal payments including prepayments are passed
through to the holder of the security (in this case, the Fund).
Mortgage-backed securities are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations as further described below.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and may expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities. Mortgage-backed securities are subject to the risk or prepayment and
the risk that the underlying loans will not be repaid. Because principal may be
prepaid at any time, mortgage-backed securities may involve significantly
greater price and yield volatility than traditional debt securities.
When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of a mortgage-related security and increasing the
price volatility of that security, affecting the price volatility of the Fund's
shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Because principal may be prepaid at any
time, mortgage-backed securities may involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association ("GNMA") are described as "modified pass-through." These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the GNMA. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the U.S. Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of FHA-insured or VA-guaranteed mortgages. These guarantees,
however, do
2
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not apply to the market value or yield of mortgage-backed securities or to the
value of Fund shares. Also, GNMA securities often are purchased at a premium
over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include Fannie Mae and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Fannie Mae is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. Fannie Mae purchases
conventional (i.e., not insured or guaranteed by any governmental agency)
mortgages from a list of approved seller/servicers which include state and
federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by Fannie Mae are guaranteed as to timely payment of principal and
interest by Fannie Mae but are not backed by the full faith and credit of the
U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Adviser determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
The payment of principal on the underlying mortgages may exceed the
minimum required by the schedule of payments for the mortgages. Such prepayments
are made at the option of the mortgagors for a wide variety of reasons
reflecting their individual circumstances and may involve capital losses if the
mortgages were purchased at a premium. For example, mortgagors may speed up the
rate at which they prepay their mortgages when interest rates decline
sufficiently to encourage refinancing. The Fund, when such prepayments are
passed through to it, may be able to reinvest them only at a lower rate of
interest. The Adviser, in determining the attractiveness of GNMAs relative to
alternative fixed-income securities, and in choosing specific GNMA issues, will
have made assumptions as to the likely speed of prepayment. Actual experience
may vary from this assumption resulting in a higher or lower investment return
than anticipated. When interest rates rise, mortgage prepayment rates tend to
decline, thus lengthening the life of a mortgage-related security and increasing
the price volatility of that security, affecting the price volatility of the
Fund's shares.
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Some investors may view the Fund as an alternative to a bank
certificate of deposit. While an investment in the Fund is not federally
insured, and there is no guarantee of price stability, an investment in the
Fund--unlike a certificate of deposit -- is not locked away for any period, may
be redeemed at any time without incurring early withdrawal penalties, and may
provide a higher yield.
The Fund may also invest in dollar roll transactions, mortgage-backed
and mortgage pass-though securities, reverse repurchase agreements, warrants,
illiquid securities, securities purchased on a "forward delivery" or
"when-issued" basis, and covered call options.
For temporary defensive purposes, the fund may temporarily invest up to
100% of assets in cash or cash equivalents.
Investments
Dollar Roll Transactions. Dollar roll transactions consist of the sale by the
Fund to a bank or broker/dealers (the "counterparty") of GNMA certificates or
other mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The Fund
receives a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a different purchase and repurchase price fixed and a cash
settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Fund agrees to buy a security on a future date.
The Fund will not use dollar rolls for leveraging purposes and,
accordingly, will segregate cash, U.S. Government securities or other liquid
assets in an amount sufficient to meet their purchase obligations under the
transactions. The Fund will also maintain asset coverage of at least 300% for
all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of
the Fund because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Fund.
For example, while the Fund receives a fee as consideration for agreeing to
repurchase the security, the Fund forgoes the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Fund, thereby effectively
charging the Fund interest on their borrowing. Further, although the Fund can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of the Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
The Trustees of Scudder Income Trust have adopted guidelines to ensure
that those securities received are substantially identical to those sold. To
reduce the risk of default, the Fund will engage in such transactions only with
counterparties selected pursuant to such guidelines.
U.S. Government Securities. U.S. Treasury securities, backed by the
full faith and credit of the U.S. Government, include a variety of securities
which differ in their interest rates, maturities and times of issuance. Treasury
bills have original maturities of one year or less. Treasury notes have original
maturities of one to ten years and Treasury bonds generally have original
maturities of greater than ten years.
4
<PAGE>
U.S. Government agencies and instrumentalities which issue or guarantee
securities include, for example, the Export-Import Bank of the United States,
the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the
Fannie Mae, the Small Business Administration and the Federal Farm Credit Bank.
Obligations of some of these agencies and instrumentalities, such as the
Export-Import Bank, are supported by the full faith and credit of the United
States; others, such as the securities of the Federal Home Loan Bank, by the
ability of the issuer to borrow from the Treasury; while still others, such as
the securities of the Federal Farm Credit Bank, are supported only by the credit
of the issuer. No assurance can be given that the U.S. Government would provide
financial support to the latter group of U.S. Government instrumentalities, as
it is not obligated to do so.
Interest rates on U.S. Government obligations which the Fund may
purchase may be fixed or variable. Interest rates on variable rate obligations
are adjusted at regular intervals, at least annually, according to a formula
reflecting then current specified standard rates, such as 91-day U.S. Treasury
bill rates. These adjustments tend to reduce fluctuations in the market value of
the securities.
Repurchase Agreements. The Fund may enter into repurchase agreements
with any member bank of the Federal Reserve System and any broker-dealers which
are recognized as a reporting government securities dealer, whose
creditworthiness has been determined by the Adviser to be at least equal to that
of issuers of commercial paper rated within the two highest grades assigned by
any of the nationally-recognized rating agencies including Moody's and S&P. A
repurchase agreement, which provides a means for the Fund to earn income on
monies for periods as short as overnight, is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund at the time of
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the Obligation itself. For purposes of the Investment Company Act of
1940, as amended ("1940 Act") a repurchase agreement is deemed to be a loan to
the seller of the Obligation and is therefore covered by the Fund's investment
restriction applicable to loans. Each repurchase agreement entered into by the
Fund requires that if the market value of the Obligation becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
Obligation, on a daily basis to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. In the event that the Fund is unsuccessful in seeking to
enforce the contractual obligation to deliver additional securities, and the
seller defaults on its obligation to repurchase, the Fund bears the risk of any
drop in market value of the Obligation(s). In the event that bankruptcy or
insolvency proceedings were commenced with respect to a bank or broker-dealer
before its repurchase of the Obligation, the Fund may encounter delay and incur
costs before being able to sell the security. Delays may involve loss of
interest or decline in price of the Obligation. In the case of repurchase
agreements, it is not clear whether a court would consider a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund. If a court were to characterize the transaction as a loan and the Fund had
not perfected a security interest in the Obligation, the Fund could be required
to return the Obligation to the bank's estate and be treated as an unsecured
creditor. As an unsecured creditor, the Fund would be at the risk of losing some
or all of the principal and income involved in that transaction. The Adviser
seeks to minimize the risk of loss through repurchase agreements by analyzing
the creditworthiness of the obligor, in this case the seller of the Obligations.
Securities subject to a repurchase agreement are held in a segregated
account, and the amount of such securities is adjusted so as to provide a market
value at least equal to the repurchase price on a daily basis.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them such securities at an agreed time and
price. The Fund maintains a segregated account in connection with outstanding
reverse repurchase agreements. Reverse repurchase agreements are deemed to be
borrowings subject to the Fund's investment restrictions on borrowing. The Fund
will enter into reverse repurchase agreements only when the Adviser Investment
Manager believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction. Such transaction may increase fluctuations in the market value of
Fund assets and its yield.
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Warrants. Each Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by a Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Illiquid Securities. The Fund may occasionally purchase securities other than in
the open market. While such purchases may often offer attractive opportunities
for investment not otherwise available on the open market, the securities so
purchased are often "restricted securities", i.e., securities which cannot be
sold to the public without registration under the Securities Act of 1933 or the
availability of an exemption from registration (such as Rules 144 or 144A), or
which are "not readily marketable" because they are subject to other legal or
contractual delays in or restrictions on resale. It is the Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 10%
of the value of the Fund's net assets. The Fund's Board of Trustees has approved
guidelines for use by the Adviser in determining whether a security is illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers or (iii) in limited quantities after they have been
held for a specified period of time and other conditions are met pursuant to an
exemption from registration. Issuers of restricted securities may not be subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. Each Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, each Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of each Fund's Board of Trustees. In reaching
liquidity decisions, the Adviser will consider the following factors: (1) the
frequency of trades and quotes for the security, (2) the number of dealers
wishing to purchase or sell the security and the number of their potential
purchasers, (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (i.e. the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
Collateralized Mortgage Obligations ("CMOs"). CMOs are hybrids between
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
Fannie Mae, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The
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<PAGE>
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
Zero Coupon Securities. Zero coupon securities pay no cash income and
are sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest (cash). Zero coupon securities which are convertible
into common stock offer the opportunity for capital appreciation as increases
(or decreases) in market value of such securities closely follow the movements
in the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks, as they usually are issued with maturities of 15 years or less and are
issued with options and/or redemption features exercisable by the holder of the
obligation entitling the holder to redeem the obligation and receive a defined
cash payment.
Zero coupon securities include municipal securities, securities issued
directly by the U.S. Treasury, and U.S. Treasury bonds or notes and their
unmatured interest coupons and receipts for their underlying principal
("coupons") which have been separated by their holder, typically a custodian
bank or investment brokerage firm, from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the SEC no longer considers
such privately stripped obligations to be U.S. Government securities, as defined
in the Investment Company Act of 1940; therefore, the Fund intends to adhere to
this staff position and will not treat such privately stripped obligations to be
U.S. Government securities for the purpose of determining if the Fund is
"diversified" under the 1940 Act.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "TAXES" herein).
Loans of Portfolio Securities. Mutual funds may lend their portfolio
securities provided: (1) the loan is secured continuously by collateral
consisting of U.S. Government securities or cash or cash equivalents adjusted
daily to have a market value at least equal to the current market value of the
securities loaned; (2) the Fund may at any time call
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the loan and regain the securities loaned; (3) the Fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the Fund, unless otherwise restricted by the Fund's policies
(see "Investment Restrictions" on page 36). In addition, many mutual funds share
with the borrower some of the income received on the collateral for the loan or
that it will be paid a premium for the loan. In determining whether to lend
securities, a mutual fund's investment adviser considers all relevant factors
and circumstances including the creditworthiness of the borrower. The Fund has
no current intention of lending its portfolio securities, except to the extent
that entry into repurchase agreements and the purchase of debt instruments or
interests in indebtedness in accordance with the Fund's investment objectives
and policies may be deemed to be loans.
Securities Purchased on a "Forward Delivery" or "When-Issued" Basis.
Debt securities, including municipal obligations when originally issued, are
frequently offered on a "forward delivery" or "when-issued" basis. When so
offered, the price, which may be expressed in yield terms, is fixed at the time
the commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase of securities. During the period between
purchase and settlement, no payment is made on behalf of the Fund and no
interest accrues to the Fund. To the extent that assets of the Fund are not
invested prior to the settlement of a purchase of securities, the Fund will earn
no income; however, it is the intention of the Fund to be fully invested to the
extent practicable, subject to the policies stated above. While securities
purchased on a forward delivery or when-issued basis may be sold prior to the
settlement date, the Fund intends to purchase such securities with the purpose
of actually acquiring them for its portfolio unless a sale appears desirable for
investment reasons. At the time the commitment to purchase a debt security on a
forward delivery or when-issued basis is made, the transaction will be recorded
and the value of the security will be reflected in determining its net asset
value. The market value of the when-issued or forward delivery securities may be
more or less than the purchase price payable at settlement date. The Fund does
not believe that their net asset value or income will be adversely affected by
their purchase of debt securities on a when-issued or forward delivery basis.
The Fund will establish with its custodian a segregated account in which it will
maintain cash, U.S. Government securities and other liquid assets equal in value
to commitments for when-issued or forward delivery securities. Such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date.
Strategic Transactions and Derivatives. The Fund may, but is not
required to, utilize various other investment strategies as described below for
a variety of purposes, such as hedging various market risks, managing the
effective maturity or duration of the Fund's portfolio, or enhancing potential
gain. These strategies may be executed through the use of derivative contracts.
Such strategies are generally accepted as a part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other instruments, purchase and sell
futures contracts and options thereon and enter into various transactions such
as swaps, caps, floors or collars (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur.
Strategic Transactions may be used without limit (subject to limits
imposed by the 1940 Act) to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio, or to establish a position in the derivatives markets
as a substitute for purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of the Fund's assets will be committed to Strategic Transactions entered into
for non-hedging purposes. Any or all of these investment techniques may be used
at any time and in any combination, and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
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Transactions will not be used to alter fundamental investment purposes and
characteristics of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
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The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers," or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission (the
"SEC") currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in
over-the-counter markets, and on securities indices and futures contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
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The Fund may purchase and sell put options on securities, including
U.S. Treasury and agency securities (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's total assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate or fixed-income market changes, and for duration
management, and for risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio management and return enhancement purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
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rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, index and other swaps and the purchase or sale
of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
In general, either the full amount of any obligation by the Fund to pay or
deliver securities or assets must be covered at all times by the securities or
instruments required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by the Fund will require the Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate cash or liquid assets sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the
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Fund to own portfolio securities which correlate with the index or to segregate
cash or liquid assets equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Fund requires the Fund to
segregate cash or liquid assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures contract, it could purchase a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held. Other Strategic Transactions may also be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
cash or liquid assets equal to any remaining obligation would need to be
segregated.
Master/feeder Structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder structure fund as described below.
A master/feeder fund structure is one in which the Fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
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Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Adviser. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, the
Fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objectives and policies
(for instance, money market funds would normally participate only as lenders and
tax exempt funds only as borrowers). Interfund loans and borrowings may extend
overnight, but could have a maximum duration of seven days. Loans may be called
on one day's notice. The Fund may have to borrow from a bank at a higher
interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Fund is actually
engaged in borrowing through the interfund lending program, the Fund, as a
matter of non-fundamental policy, may not borrow for other than temporary or
emergency purposes (and not for leveraging), except that the Fund may engage in
reverse repurchase agreements and dollar rolls for any purpose.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to the Fund
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (i) 67% of the shares
of such Fund present at a meeting if the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of such Fund.
The Fund has elected to be classified as a diversified open-end
management investment company. In addition, as a matter of fundamental policy,
the Fund may not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction from
time to time;
(3) purchase physical commodities or contracts relating to
physical commodities;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
or
(7) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction from time to time.
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Nonfundamental policies may be changed without shareholder approval.
The Fund does not intend to, as a nonfundamental policy:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(3) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(4) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(5) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(6) lend portfolio securities in an amount greater than 5% of its
total assets.
The foregoing nonfundamental policies are in addition to policies
otherwise stated in the Prospectus or Statement of Additional Information.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Fund.
PURCHASES
Additional Information About Opening an Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and members of their immediate
families, members of the National Association of Securities Dealers, Inc.
("NASD") and banks may, if they prefer, subscribe initially for at least $2,500
of Class S and $1,000 for Class AARP through Scudder Investor Services, Inc. by
letter, fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have certified a tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. Investors interested in Class S must call
1-800-SCUDDER to get an account number. During the call the investor will be
asked to indicate the Fund name, class name, amount to be wired ($2,500 minimum
for Class S and $1,000 for Class AARP), name of bank or trust company from which
the wire will be sent, the exact registration of the new account, the tax
identification number or Social
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Security number, address and telephone number. The investor must then call the
bank to arrange a wire transfer to The Scudder Funds, Boston, MA 02101, ABA
Number 011000028, DDA Account 9903-5552. The investor must give the Scudder fund
name, class name, account name and the new account number. Finally, the investor
must send a completed and signed application to the Fund promptly. Investors
interested in investing in Class AARP should call 800-253-2277 for further
instructions.
The minimum initial purchase amount is less than $2,500 for Class S
under certain plan accounts and is $1,000 for Class AARP.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the Fund or the principal underwriter by reason of such
cancellation. If the purchaser is a shareholder, the Trust shall have the
authority, as agent of the shareholder, to redeem shares in the account in order
to reimburse the Fund or the principal underwriter for the loss incurred. Net
losses on such transactions which are not recovered from the purchaser will be
absorbed by the principal underwriter. Any net profit on the liquidation of
unpaid shares will accrue to the Fund.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S and $1,000 for Class AARP. For fiduciary accounts such as IRAs, and
custodial accounts such as Uniform Gift to Minor Act, and Uniform Trust to Minor
Act accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for Class AARP and
fiduciary/custodial accounts) is established. Scudder group retirement plans and
certain other accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S shareholders, assess an annual $10 per Fund charge
(with the Fee to be paid to the Fund) for any
non-fiduciary/non-custodial account without an automatic
investment plan (AIP) in place and a balance of less than
$2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days written notice to applicable shareholders.
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Additional Information About Making Subsequent Investments By Quickbuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Investors interested in making subsequent investments in Class AARP
should call 1-800-253-2277 and Class S should call 1-800-SCUDDER for further
instruction.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser may be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
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Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
per Share next computed after receipt of the application in good order. Net
asset value normally will be computed for each class as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than the Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Boston by the close of regular
trading on the Exchange.
There is no sales charge in connection with the purchase of shares of
any class of the Fund.
Share Certificates
Due to the desire of the Trustee's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Fund's
Transfer Agent for cancellation and credit to such shareholder's account.
Shareholders who prefer may hold the certificates in their possession until they
wish to exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Board of Trustees and the Distributor may suspend or
terminate the offering of shares of the Fund at any time for any reason.
The "Tax Identification Number" section of the Application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status), will be
returned to the investor. The Fund reserves the right, following 30 days'
notice, to redeem all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the Fund with a tax identification number during the
30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
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EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500 for Class S and
$1,000 for Class AARP. When an exchange represents an additional investment into
an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Systematic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Corporation and the Transfer Agent each reserves the right to
suspend or terminate the privilege of the Systematic Exchange Program at any
time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares and therefore
may result in tax consequences (gain or loss) to the shareholder, and the
proceeds of such an exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Fund
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated. The exchange
privilege may not be available for certain Scudder Funds or classes of Scudder
Funds. For more information, please call 1-800-SCUDDER (Class S) or1-
800-253-2277(Class AARP).
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption By Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request by telephone to have
the proceeds mailed or wired to their predesignated bank account. In order to
request wire redemptions by telephone,
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shareholders must have completed and returned to the Transfer Agent the
application, including the designation of a bank account to which the redemption
proceeds are to be sent.
(a) NEW INVESTORS wishing to establish the telephone redemption
privilege must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder pension and profit-sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request), or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for a redemption to a shareholder's bank account is made
by telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Fund employs procedure, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption By Quicksell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of the Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. eastern time, Shares will be redeemed at the net
asset value per Share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing the following business day. QuickSell
transactions are not available for Scudder IRA accounts and most other
retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account. New investors wishing to establish QuickSell may
so indicate on the application. Existing shareholders who wish to add QuickSell
to their account may do so by completing a QuickSell Enrollment Form. After
sending in an enrollment form, shareholders should allow for 15 days for this
service to be available.
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The Fund employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption By Mail Or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven (7) days of payment for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-SCUDDER.
Redemption-in-Kind
The Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. A wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including redemptions undertaken to effect an exchange for
shares of another Scudder fund, may result in tax consequences (gain or loss) to
the shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
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The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times during which (a) the Exchange is closed, other than customary
weekend and holiday closings, (b) trading on the Exchange is restricted for any
reason, (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
the SEC has by order permitted such a suspension for the protection of the
Trust's shareholders, provided that applicable rules and regulations of the SEC
(or any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b) or (c) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not the
Fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of the Fund's average annual net assets, and the maximum
charge for a service fee is 0.25% of the Fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of the Fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other no-load funds. Scudder
pioneered the no-load concept when it created the nation's first no-load fund in
1928, and later developed the nation's first family of no-load mutual funds.
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for the Class AARP of shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
goals and provides access to the Scudder investor relations department via
e-mail. The sites also enable users to access or view fund prospectuses and
profiles with links between summary information in Profiles and details in the
Prospectus. Users can fill out new account forms on-line, order free software,
and request literature on funds.
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web sites. Using a
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secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of the Fund. A change of instructions for the method
of payment may be given to the Transfer Agent in writing at least five days
prior to a dividend record date. Shareholders may change their dividend option
by calling 1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP or by
sending written instructions to the Transfer Agent. Please include your account
number with your written request.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the same class of the Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of Automated Clearing House Network (ACH) can have income and
capital gain distributions automatically deposited to their personal bank
account usually within three business days after the Fund pays its distribution.
A Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP. Confirmation Statements will be
mailed to shareholders as notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Transaction Summaries
Annual summaries of all transactions in the Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds; a list of Scudder's
family of funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
Scudder Government Money Market Series+
----------------------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
23
<PAGE>
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series+
TAX FREE
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
----------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
24
<PAGE>
Scudder S&P 500 Index Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Value Fund
Scudder Micro Cap Fund Growth
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Fund
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund
-----------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
25
<PAGE>
Scudder Tax Managed Small Company Fund
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an
26
<PAGE>
active participant in a qualified plan and whose spouse is also not an active
participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
27
<PAGE>
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional Shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s). Any
such requests must be received by the Fund's transfer agent ten days prior to
the date of the first automatic withdrawal. An Automatic Withdrawal Plan may be
terminated at any time by the shareholder, the Corporation or its agent on
written notice, and will be terminated when all Shares of the Fund under the
Plan have been liquidated or upon receipt by the Corporation of notice of death
of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments in all classes
through automatic deductions from checking accounts by completing the
appropriate form and providing the necessary documentation to establish this
service. The minimum investment is $50 for Class S shares.
Shareholders may arrange to make periodic investments in the Class AARP
of the Fund through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $50. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic Investment Plan
will be able to open the Fund account for less than $500 if they agree to
increase their investment to $500 within a 10 month period. Investors may also
invest in any Class AARP for $500 a month if they establish a plan with a
minimum automatic investment of at least $100 per month. This feature is only
available to Gifts to Minors Account investors. The Automatic Investment Plan
may be discontinued at any time without prior notice to a shareholder if any
debit from their bank is not paid, or by written notice to the shareholder at
least thirty days prior to the next scheduled payment to the Automatic
Investment Plan.
28
<PAGE>
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment after paying the
related federal income taxes for which the shareholders may then be asked to
claim a credit against their federal income tax liability. (See "TAXES.") If the
Fund does not distribute the amount of capital gain and/or ordinary income
required to be distributed by an excise tax provision of the Code, that Fund may
be subject to that excise tax. In certain circumstances, the Fund may determine
that it is in the interest of shareholders to distribute less than the required
amount. (See "TAXES.")
Earnings and profits distributed to shareholders on redemptions of Fund
shares may be utilized by the Fund, to the extent permissible, as part of the
Fund's dividends paid deduction on its federal tax return.
The Fund intends to distribute dividends from their net investment
income annually in December. The Fund intends to distribute net realized capital
gains after utilization of capital loss carryforwards, if any, in November or
December to prevent application of a federal excise tax. An additional
distribution may be made, if necessary.
Both types of distributions will be made in shares of the Fund and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent. Distributions of
investment company taxable income and net realized capital gains are taxable
(See "TAXES"), whether made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
From time to time, quotations of the Fund's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures will be calculated in the
following manner for the Fund:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for the periods of one year and the life of the Fund, ended on the last
day of a recent calendar quarter. Average annual total return quotations reflect
29
<PAGE>
changes in the price of the Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the
value, at the end of the applicable
period, of a hypothetical $1,000
investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Total Return
------------
Six Months One Year Five Years Ten Years
Ended Ended Ended Ended
03/31/00 3/31/00 3/31/00 3/31/00
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Class AARP of Scudder GNMA Fund* 2.00 2.04 6.11 6.83
</TABLE>
* On July 17, 2000, the fund changed its name from AARP GNMA and U.S.
Treasury Fund. At the same time, the Fund changed its investment policy
to eliminate the investment requirement in U.S. Treasury securities.
Consequently, performance may have been different if the current
objective had been in place.
As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average annual
total return for the Fund will vary based on changes in market conditions and
the level of the Fund's expenses.
In connection with communicating its average annual total return to
current or prospective shareholders, the Fund also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
to unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative Total Return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
Total Return quotations reflect changes in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative Total Return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
30
<PAGE>
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the
value, at the end of the applicable
period, of a hypothetical $1,000
investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Total Return
------------
Six Months One Year Five Years Ten Years
Ended Ended Ended Ended
03/31/00 03/31/00 03/31/00 03/31/00
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class AARP of Scudder GNMA Fund* 2.00 2.04 34.54 93.61
</TABLE>
* On July 17, 2000, the fund changed its name from AARP GNMA and U.S.
Treasury Fund. At the same time, the Fund changed its investment
objective to eliminate the investment requirement in U.S. Treasury
securities. Consequently, performance may have been different if the
current objective had been in place.
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
Comparison of Fund Performance
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond
31
<PAGE>
funds these factors include, but are not limited to, a fund's overall investment
objective, the average portfolio maturity, credit quality of the securities
held, and interest rate movements. For equity funds, factors include a fund's
overall investment objective, the types of equity securities held and the
financial position of the issuers of the securities. The risks/returns
associated with an investment in international bond or equity funds also will
depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about the Fund.
FUND ORGANIZATION
The Fund is a separate series of a Massachusetts business trust,
Scudder Income Trust (formerly AARP Income Trust). The Trust was established
under a separate Declaration of Trust dated June 8, 1984. The Trust's shares of
beneficial interest of $.01 par value per share are issued in separate series.
Other series may be established and/or offered by the Trust in the future. Each
share of a series represents an interest in that series which is equal to each
other share of that series.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to that series and
constitute the underlying assets of that series. The underlying assets of each
series of the Trust are segregated on the books of account of the Trust, and are
to be charged with the liabilities of that series. The Trustees of the Trust
have determined that expenses with respect to all series of the Trust are to be
allocated in proportion to the net asset value, or such other reasonable basis,
of the respective series in the Trust except where allocations of direct
expenses can otherwise be more fairly made. The officers of the Trust, subject
to the general supervision of the Trustees, have the power to determine which
liabilities are allocable to all the series in the Trust. The Trust's
Declaration of Trust provides that allocations made to each series of the Trust
shall be binding on all persons. While the Declaration of Trust provides that
liabilities of a series may be satisfied only out of the assets of that series,
it is possible that if a series were unable to meet its obligations, a court
might find that the assets of other series in the Trust should satisfy such
obligations. In the event of the dissolution or liquidation of the Trust, the
holders of the shares of each series are entitled to receive, as a class, the
underlying assets of that series available for distribution to shareholders.
Shareholders are entitled to one vote per share. Separate votes are
taken by each series of the Trust on all matters except where the 1940 Act
requires that a matter be decided by the vote of shareholders of all series of a
Trust voting together or where a matter affects only one series of the Trust, in
which case only shareholders of that series shall vote thereon. For example, a
change in investment policy for a series of the Trust would be voted upon only
by shareholders of the series affected. Additionally, approval of the Trust's
investment advisory agreement is determined separately by each series in the
Trust. Approval of the advisory agreement by the shareholders of one series in
the Trust is effective as to that series whether or not enough votes are
received from the shareholders of other series in the Trust to approve agreement
as to the other series.
The Trustees of the Trust are authorized to establish additional series
and to designate the relative rights and preferences as between the series. All
shares issued and outstanding of each series that is offered by a Trust will be
fully paid and non-assessable by the Trust, and redeemable as described in this
Statement of Additional Information and in the Prospectus.
32
<PAGE>
The Trust's Declaration of Trust provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of the
Trust, that the Trustees and officers will not be liable for errors of judgment
or mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust except if
it is determined in the manner provided in the Declaration of Trust that the
Trustees and Officers have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in any
of the Declarations of Trust protects or indemnifies a Trustee or officer
against any liability to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
INVESTMENT ADVISER
Investment Adviser
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On December 31, 1997, Zurich Insurance Company ("Zurich") acquired a
majority interest in the Adviser, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of the Adviser. The Adviser's name changed to Scudder
Kemper Investments, Inc. On September 7, 1998, the businesses of Zurich
(including Zurich's 70% interest in Scudder Kemper) and the financial services
businesses of B.A.T Industries p.l.c. ("B.A.T") were combined to form a new
global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over 280 open and
closed-end mutual funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund is based primarily
on the analyses of its own research department.
Certain investments may be appropriate for a fund and also for other
clients advised by the Adviser. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in
33
<PAGE>
different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients in a
manner believed by the Adviser to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by a fund. Purchase and sale orders for a fund may be combined
with those of other clients of the Adviser in the interest of achieving the most
favorable net results to that fund.
In certain cases, the investments for a fund are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser,
that have similar names, objectives and investment styles. You should be aware
that the Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Fund can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was
approved by the Trustees on February 7, 2000. The Agreement will continue in
effect until September 30, 2001 and from year to year thereafter only if its
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreement or interested persons of the Adviser or the
Trust, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the Trust's Trustees or of a majority of the
outstanding voting securities of the Fund. The Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice and automatically terminate in the event of its assignment.
The Adviser regularly provides the Fund with continuing investment
management for the Fund's portfolio consistent with the Fund's investment
objective, policies and restrictions and determines what securities shall be
purchased, held or sold and what portion of the Fund's assets shall be held
uninvested, subject to the Trust's Declaration of Trust, By-Laws, the 1940 Act,
the Code and to the Fund's investment objective, policies and restrictions, and
subject, further, to such policies and instructions as the Board of Trustees of
the Trust may from time to time establish. The Adviser also advises and assists
the officers of the Trust in taking such steps as are necessary or appropriate
to carry out the decisions of its Trustees and the appropriate committees of the
Trustees regarding the conduct of the business of the Fund.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, custodian, accountants and others); preparing and making filings with
the Commission and other regulatory agencies; assisting in the preparation and
filing of the Fund's federal, state and local tax returns; preparing and filing
the Fund's federal excise tax returns; assisting with investor and public
relations matters; monitoring the valuation of securities and the calculation of
net asset value; monitoring the registration of shares of the Fund under
applicable federal and state securities laws; maintaining the Fund's books and
records to the extent not otherwise maintained by a third party; assisting in
establishing accounting policies of the Fund; assisting in the resolution of
accounting and legal issues; establishing and monitoring the Fund's operating
budget; processing the payment of the Fund's bills; assisting the Fund in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting the Fund in the conduct of its business, subject to the
direction and control of the Trustees.
The Adviser pays the compensation and expenses (except those of
attending Board and committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Trust
affiliated with the Adviser and makes available, without expense to the Fund,
the services of such Trustees, officers and employees of the Adviser as may duly
be elected officers of the Trust, subject to their individual consent to serve
and to any limitations imposed by law, and provides the Fund's office space and
facilities.
As of July 17, 2000, for these services Scudder GNMA Fund pays the
Adviser 0.40% on the first $5 billion of average daily net assets, 0.385% on the
next $1 billion and 0.370% of such assets exceeding $6 billion, payable monthly,
34
<PAGE>
provided the Fund will make such interim payments as may be requested by the
Adviser not to exceed 75% of the amount of the fee then accrued on the books of
the Fund and unpaid.
Prior to July 17, 2000 the Fund was considered an "AARP Fund", and for
investment management services the Fund paid the Adviser a monthly fee
consisting of a base fee and an individual fund fee. The base fee was based on
average daily net assets of all AARP Funds, as follows:
Program Assets Annual Rate at Each
(Billions) Asset Level
---------- -----------
First $2 0.35%
$2-$4 0.33
$4-$6 0.30
$6-$8 0.28
$8-$11 0.26
$11-$14 0.25
Over $14 0.24
All AARP Funds paid a flat individual fund fee monthly based on the
average daily net assets of that Fund. The individual Fund fee for AARP GNMA and
U.S. Treasury Fund was 0.12%.
The advisory fees from the Management Agreement for the three fiscal
years ended September 30, 1997, 1998 and 1999 were as follows for the Class AARP
of Scudder GNMA Fund: $19,228,620, $18,153,539 and $17,789,059
Under the Agreement the Fund is responsible for all of its other
expenses including: fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing and
accounting expenses; the calculation of net asset value; taxes and governmental
fees; the fees and expenses of the Transfer Agent; the cost of preparing share
certificates or any other expenses of issue, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of Trustees, officers
and employees of the Fund who are not affiliated with the Adviser; the cost of
printing and distributing reports and notices to stockholders; and the fees and
disbursements of custodians. The Fund may arrange to have third parties assume
all or part of the expenses of sale, underwriting and distribution of shares of
the Fund. The Fund is also responsible for its expenses of shareholders'
meetings, the cost of responding to shareholders' inquiries, and its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees of the Trust with
respect thereto.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Corporation, with respect to the Fund, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Trusts' investment products and
services.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees of the Fund who are not
"interested persons" of the Adviser are represented by independent counsel at
the Fund's expense.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
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<PAGE>
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Fund, the Adviser and principal underwriter have each adopted codes
of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President and General Manager, WGBH --
WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* Trustee Managing Director of Scudder Kemper Senior Vice President
Investments, Inc.
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic --
50023 Brogden Counsellor, The Conference Board,
Chapel Hill, NC Inc.
Keith R. Fox (45) Trustee Private Equity Investor, President, --
10 East 53rd Street Exeter Capital Management Corporation
New York, NY 10022
36
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ ---------------------- --------------
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski Law
Firm (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place Capital
23rd Floor
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
(address)
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
Richard W. Desmond (62)++ Assistant Secretary Vice President of Scudder Kemper --
Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and its counsel
to be persons who are "interested persons" of the Adviser or of the Trust,
within the meaning of the Investment Company Act of 1940, as amended.
** Unless otherwise stated, all of the Trustees and officers have been
associated with their respective companies for more than five years, but
not necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
The Trustees and officers of the Fund also serve in similar
capacities with respect to other Scudder funds.
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<PAGE>
As of June 15, 2000, all Trustees and Officers of the fund, as a group,
owned beneficially (as that term is defined in Section 13 (d) of The Securities
and Exchange Act of 1934) less than 1% of the outstanding shares.
Certain accounts for which Scudder Kemper acts as investment adviser
owned 1,203,722 shares in the aggregate, or 5.48% of the outstanding shares of
as of the fund. Scudder Kemper may be deemed to be the beneficial owner of such
shares, but disclaims any beneficial ownership in such shares.
To the knowledge of the Fund, as of June 15, 2000, no person owned
beneficially more than 5% of the outstanding shares of the fund.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
Each of the Trustees who is not affiliated with Scudder or AARP will be
paid by the Trust(s) for which he or she serves as Trustee. Until September 30,
1999, each of these unaffiliated Trustees received an annual retainer of $12,000
plus $175 for each Trustees' meeting and $80 for each audit committee meeting or
meeting held for the purpose of considering arrangements between the Fund and
the Adviser or any of its affiliates attended. Each unaffiliated Trustee also
received $80 per nominating committee meeting, other than an audit committee
meeting, and $125 for each additional committee meeting attended. If any such
meetings are held jointly with meetings of one or more mutual funds advised by
the Adviser, a maximum fee of $800 for meetings of the Board, meetings of the
unaffiliated members of the Board for the purpose of considering arrangements
between the Fund and the Adviser or any of its affiliates or the audit
committees of such Funds, and $400 for all other committee meetings or meetings
of the unaffiliated members of the Board is paid, to be divided equally among
the Funds. During 1999, the Independent Trustees participated in 25 meetings of
the Fund's board or board committees, which were held on 21 different days
during the year. The newly-constituted Board may determine to change its
compensation structure.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules.
On or about July 17, 2000, the fund changed its name from AARP GNMA and
U.S. Treasury Fund to Scudder GNMA Fund, additionally, the fund was a series of
AARP Income Trust which changed its name to Scudder Income
38
<PAGE>
Trust. The following table shows the aggregate compensation received by each
Independent Trustee during 1999 from AARP Income Trust (the former Trust name
for the fund) and from all of the Scudder funds as a group.
All AARP
Trusts+ and
AARP Scudder
Name Income Trust## Fund Complex
---- -------------- ------------
Carole L. Anderson* $7,617 $40,935
(16 funds)
Adelaide Attard* $7,137 $38,375
(16 funds)
Robert N. Butler* $6,477 $34,855
(16 funds)
Edgar R. Fiedler $5,997 $54,495
(27 funds)
Eugene P. Forrester* $7,617 $40,935
(16 funds)
George L. Maddox, Jr.* $7,617 $40,935
(16 funds)
Robert J. Myers* $7,137 $38,200
(16 funds)
James H. Schulz* $6,897 $37,095
(16 funds)
Gordon Shillinglaw* $7,377 $44,280
(16 funds)
Jean Gleason Stromberg* $7,617 $40,935
(16 funds)
* No longer a current Trustee. On July 11, 2000, shareholders of each fund
elected a new Board of Trustees. See the "Trustees and Officers" section
for the newly-constituted Board of Trustees.
## AARP Income Trust formerly consisted of three Funds: AARP High Quality
Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund and AARP Bond Fund
for Income.
+ Amounts include pro rata share of Trustee's fees of AARP Managed
Investment Portfolios Trust paid by each of the Trusts pursuant to the
Service Agreement.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
DISTRIBUTOR
The Trust, on behalf of the Fund, has an underwriting agreement Scudder
Investor Services, Inc., Two International Place, Boston, MA 02110 (the
"Distributor"), a Massachusetts corporation, which is a subsidiary of the
Adviser, a Delaware corporation. The Trust's underwriting agreement dated May 8,
2000 will remain in effect until September 30, 2000 and from year to year
thereafter only if its continuance is approved annually by a majority of the
members of the Board of Trustees who are not parties to such agreement or
interested persons of any such party and either by vote of a majority of the
Board of Trustees or a majority of the outstanding voting securities of the
Fund. The underwriting agreement was last approved by the Trustees on February
7, 2000.
39
<PAGE>
Under the underwriting agreement, the Fund is responsible for the
payment of all fees and expenses in connection with the preparation and filing
with the Commission of its registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering the Fund as a
broker/dealer in various states, as required; the fees and expenses of
preparing, printing and mailing prospectuses annually to existing shareholders
(see below for expenses relating to prospectuses paid by the Distributor),
notices, proxy statements, reports or other communications to shareholders of
the Fund; the cost of printing and mailing confirmations of purchases of shares
and the prospectuses accompanying such confirmations; any issuance taxes and/or
any initial transfer taxes; a portion of shareholder toll-free telephone charges
and expenses of customer service representatives; the cost of wiring funds for
share purchases and redemptions (unless paid by the shareholder who initiates
the transaction); the cost of printing and postage of business reply envelopes;
and a portion of the cost of computer terminals used by both the Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals and
expenses of any activity which is primarily intended to result in the sale of
shares issued by the Fund, unless a Rule 12b-1 plan is in effect which provides
that the Fund shall bear some or all of such expenses.
Note: Although the Trust currently has no 12b-1 Plan with respect to
the Fund and the Trustees have no current intention of
adopting one, the Fund will also pay those fees and expenses
permitted to be paid or assumed by the Trust pursuant to a
12b-1 Plan, if any, adopted by the Trust, notwithstanding any
other provision to the contrary in the underwriting agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states. The Underwriting Agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of the Fund.
Administrative Fee
The Fund has entered into an administrative services agreement with
Scudder Kemper (the "Administration Agreement"), pursuant to which Scudder
Kemper will provide or pay others to provide substantially all of the
administrative services required by the Fund (other than those provided by
Scudder Kemper under its investment management agreement with the Fund, as
described above) in exchange for the payment by the Fund of an administrative
services fee (the "Administrative Fee") of 0.30% of average daily net assets for
the Fund, One effect of this arrangement is to make the Fund's future expense
ratio more predictable. The details of the agreement (including expenses that
are not covered) are set out below.
Various third-party service providers (the "Service Providers"), some
of which are affiliated with Scudder Kemper, provide certain services to the
Fund pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Fund and maintains its accounting records. Scudder Service Corporation, also a
subsidiary of Scudder Kemper, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Fund. Scudder Trust Company, an
affiliate of Scudder Kemper, provides subaccounting and recordkeeping services
for shareholders in certain retirement and employee benefit plans. As custodian,
State Street Bank and Trust Company holds the portfolio securities of the Fund,
pursuant to a custodian agreement. PricewaterhouseCoopers LLP audits the
financial statements of the Fund and provides other audit, tax, and related
services. Dechert Price & Rhoads acts as general counsel for the Fund. In
addition to the fees it pays under the investment management agreement with
Scudder Kemper, the Fund pays the fees and expenses associated with these
service arrangements, as well as the Fund's insurance, registration, printing,
postage and other costs.
40
<PAGE>
Scudder Kemper will pay the Service Providers for the provision of
their services to the Fund and will pay other Fund expenses, including
insurance, registration, printing and postage fees. In return, the Fund will pay
Scudder Kemper an Administrative Fee.
The Administration Agreement has an initial term of three years,
subject to earlier termination by the Fund's Board. The fee payable by the Fund
to Scudder Kemper pursuant to the Administration Agreement is reduced by the
amount of any credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Scudder Kemper under
the Administration Agreement, such as taxes, brokerage, interest and
extraordinary expenses; and the fees and expenses of the Independent Trustees
(including the fees and expenses of their independent counsel). In addition, the
Fund will continue to pay the fees required by its investment management
agreement with Scudder Kemper.
TAXES
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. Such qualification does not involve governmental
supervision or management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable to shareholders to the extent of the
Fund's earnings and profits, and would be eligible for the dividends-received
deduction in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year, and all ordinary income and capital gains for prior years
that were not previously distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by that Fund, that Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of federal income taxes paid by
that Fund on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are not expected to comprise a
substantial part of the Fund's gross income. To the extent that such dividends
constitute a portion of that Fund's gross income, a portion of the income
distributions of that Fund may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent
41
<PAGE>
the shares of that Fund with respect to which the dividends are received are
treated as debt-financed under federal income tax law, and is eliminated if
either those shares or the shares of that Fund are deemed to have been held by
that Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the Fund
have been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($52,000 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $52,000 and $62,000; $32,000 for a single individual, with a
phase-out for adjusted gross income between $32,000 and $42,000). However, an
individual not permitted to make a deductible contribution to an IRA for any
such taxable year may nonetheless make nondeductible contributions up to $2,000
to an IRA (up to $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has earnings in a given year if the
spouse elects to be treated as having no earnings (for IRA contribution
purposes) for the year.
Distributions by the Fund result in a reduction in the net asset value
of that Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on that Fund's holding period for the option, and in the case of
an exercise of a put option, on that Fund's holding period for the underlying
stock. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying stock or substantially identical stock in that Fund's portfolio. If
that Fund writes a put or call option, no gain is recognized upon its receipt of
a premium. If
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the option lapses or is closed out, any gain or loss is treated as a short-term
capital gain or loss. If a call option is exercised, any resulting gain or loss
is a short-term or long-term capital gain or loss depending on the holding
period of the underlying stock. The exercise of a put option written by the Fund
is not a taxable transaction for that Fund.
Many futures contracts entered into by the Fund and all listed
non-equity options written or purchased by the Fund (including options on
futures contracts and options on broad-based stock indices) will be governed by
Section 1256 of the Code. Absent a tax election to the contrary, gain or loss
attributable to the lapse, exercise or closing out of any such position
generally will be treated as 60% long-term and 40% short-term capital gain or
loss, and on the last trading day of that Fund's fiscal year, all outstanding
Section 1256 positions will be marked to market (i.e. treated as if such
positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term. Under
certain circumstances, entry into a futures contract to sell a security may
constitute a short sale for federal income tax purposes, causing an adjustment
in the holding period of the underlying security or a substantially identical
security in the Fund's portfolio. Under Section 988 of the Code, discussed
below, foreign currency gain or loss from foreign currency-related forward
contracts, certain futures and options and similar financial instruments entered
into or acquired by the Fund will be treated as ordinary income or loss.
Positions of the Fund which consist of at least one stock and at least
one other position with respect to a related security which substantially
diminishes that Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by that Fund.
Positions of the Fund which consist of at least one position not
governed by Section 1256 and at least one futures contract or non-equity option
governed by Section 1256 which substantially diminishes that Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The Fund intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may
require the Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if that Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of that Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that
becomes substantially worthless, that Fund will be required to recognize gain at
that time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain options, futures
and forward contracts, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to the Fund each year, even though that Fund will not receive cash
interest
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payments from these securities. This original issue discount (imputed income)
will comprise a part of the investment company taxable income of that Fund which
must be distributed to shareholders in order to maintain the qualification of
that Fund as a regulated investment company and to avoid federal income tax at
the level of that Fund. Shareholders will be subject to income tax on such
original issue discount, whether or not they elect to receive their
distributions in cash.
The Fund will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Dividend and interest income received by the Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from that Fund and on redemptions of that Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The Fund is organized as a series of a Massachusetts business trust and
is not liable for any income or franchise tax in the Commonwealth of
Massachusetts, provided that it qualifies as a regulated investment company for
federal income tax purposes.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., - - U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported
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commissions paid by others. The Adviser routinely reviews commission rates,
execution and settlement services performed and makes internal and external
comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
The Trustees review, from time to time, whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
For each year of the fiscal years ended September 30, 1997, 1998 and
1999 the Class AARP of Scudder GNMA Fund (formerly AARP GNMA and U.S. Treasury
Fund) paid no brokerage commissions.
Portfolio Turnover
Scudder GNMA Fund's average annual portfolio turnover rate, i.e. the
ratio of the lesser of sales or purchases to the monthly average value of the
portfolio (excluding from both the numerator and the denominator all securities
with maturities at the time of acquisition of one year or less), for the fiscal
years ended September 30, 1997, 1998 and 1999 was, 86.76%, 160.40% and 245.22%.
Higher levels of activity by the Fund result in higher transaction costs and may
also result in taxes on realized capital gains to be borne by the Fund's
shareholders. Purchases and sales are made for the Fund whenever necessary, in
management's opinion, to meet the Fund's objective.
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NET ASSET VALUE
The net asset value of shares of each class of the Fund is computed as
of the close of regular trading on the Exchange on each day the Exchange is open
for trading. The Exchange is scheduled to be closed on the following holidays:
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas and on the
preceding Friday or subsequent Monday when one of these holidays falls on
Saturday or Sunday, respectively. Net asset value per share is determined by
dividing the value of the total assets of the Fund, less all liabilities, by the
total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the Nasdaq Stock Market, Inc. ("Nasdaq") system will
be valued at its most recent sale price on such system as of the Value Time.
Lacking any sales, the security will be valued at the most recent bid quotation
as of the Value Time. The value of an equity security not quoted on the Nasdaq
system, but traded in another over-the-counter market, is its most recent sale
price if there are any sales of such security on such market as of the Value
Time. Lacking any sales, the security is valued at the Calculated Mean quotation
for such security as of the Value Time. Lacking a Calculated Mean quotation the
security is valued at the most recent bid quotation as of the Value Time.
Debt securities, other than money-market instruments, are valued at
prices supplied by the Fund's pricing agent(s) which reflect broker/dealer
supplied valuations and electronic data processing techniques. Money-market
instruments with an original maturity of sixty days or less maturing at par
shall be valued at amortized cost, which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
An exchange-traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
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ADDITIONAL INFORMATION
Experts
The financial highlights of the Fund included in the Fund's prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, Massachusetts 02110, independent accountants, given on the authority of
said firm as experts in accounting and auditing. PricewaterhouseCoopers LLP
audits the financial statements of the Fund and provides other audit, tax, and
related services.
Other Information
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Adviser in the light of its other portfolio holdings and
tax considerations and should not be construed as recommendations for similar
action by other investors.
The CUSIP number of Scudder GNMA Fund, Class S is 81158-104.
The CUSIP number of Scudder GNMA Fund, Class AARP is 811158-401.
The Fund has a fiscal year end of September 30.
The Fund employs State Street Bank and Trust Company as Custodian.
The law firm of Dechert Price & Rhoads acts as general counsel to the
Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value for the Fund. Prior to the implementation of the Administration
Agreement, the Fund paid Scudder Fund Accounting an annual fee equal to 0.025%
of the first $150 million of average daily net assets, 0.0075% of such assets in
excess of $150 million up to and including $1 billion, and 0.0045% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. For the fiscal year ended September 30, 1999, SFAC charged Class AARP
of Scudder GNMA Fund $628,816, of which $55,381 remained unpaid as of September
30, 1999. For the years ended September 30, 1998 and 1997, SFAC charged Class
AARP of Scudder GNMA Fund $511,379 and $480,845, respectively.
Scudder Service Corporation ("Service Corporation", or "SSC"), P.O.
Box 2291, Boston, Massachusetts, 02107-2291, a subsidiary of the Adviser, is the
transfer and dividend disbursing agent for the Fund. Service Corporation also
serves as shareholder service agent and provides subaccounting and recordkeeping
services for shareholder accounts in certain retirement and employee benefit
plans. Prior to the implementation of the Administration Agreement, the Fund
paid Service Corporation an annual fee of $26.00 for each account maintained for
a participant. For the year ended September 30, 1999, Class AARP of Scudder GNMA
Fund was charged $6,524,199, of which $459,993 remained unpaid as of September
30, 1999. For the years ended September 30, 1998 and 1997, Class AARP of Scudder
GNMA Fund was charged $6,193,111 and $6,732,169, respectively, by SSC.
Scudder Trust Company ("STC"), an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. The Fund pays Scudder Trust Company an
annual fee of $28.00 per shareholder account. For the fiscal years ended
September 30, 1999 and September 30, 1998, the Fund did not incur any fees.
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The Fund or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests generally are
held in an omnibus account.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Fund has
filed with the Commission under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Fund and the securities offered hereby. This Registration Statement and
its amendments are available for inspection by the public at the Commission in
Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio, of Class
AARP of AARP GNMA and U.S. Treasury Fund, together with the Report of
Independent Accountants, and Financial Highlights, are incorporated by reference
in the Annual Report to the Shareholders of the AARP Funds dated September 30,
1999 as filed with the Securities and Exchange Commission for AARP Income Trust
on Form N-30D on December 3, 1999, and unaudited Semi-Annual Report to the
Shareholders of the AARP Funds dated March 31, 2000 as filed with the Securities
and Exchange Commission for AARP Income Trust on Form N-30D on May 26, 2000 and
are hereby deemed to be a part of this Statement of Additional Information.
48
