Filed electronically with the Securities and Exchange Commission on
January 31, 2000
File No. 2-91577
File No. 811-4049
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_/
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 29 /X/
--
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 31 /X/
--
AARP Income Trust
-----------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-1000
--------------
John Millette
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
-----------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/_/ Immediately upon filing pursuant to paragraph (b)
/_/ 60 days after filing pursuant to paragraph (a) (1)
/_/ 75 days after filing pursuant to paragraph (a) (2)
/X/ On February 1, 2000 pursuant to paragraph (b)
/_/ On _____________ pursuant to paragraph (a) (1)
/_/ On _____________ pursuant to paragraph (a) (2) of Rule 485.
If Appropriate, check the following box:
/_/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
AARP Investment Program
- -----------------------
[LOGO] from SCUDDER
be ready
Prospectus
A family of no-load mutual funds pursuing competitive returns while actively
seeking to manage downside risk.
February 1, 2000
Money Funds
AARP High Quality Money Fund
AARP High Quality Tax Free
Money Fund
AARP Premium Money Fund
Income Funds
AARP High Quality Short Term
Bond Fund
AARP GNMA and U.S. Treasury Fund
AARP Insured Tax Free General
Bond Fund
AARP Bond Fund for Income
Growth and Income Funds
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund
Growth Funds
AARP Capital Growth Fund
AARP Small Company Stock Fund
Global Funds
AARP Global Growth Fund
AARP International Stock Fund
Managed Investment Portfolios
AARP Diversified Income with
Growth Portfolio
AARP Diversified Growth Portfolio
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>
Table of Contents
Individual Fund Descriptions
This section includes main investment and risk management strategies, main risks
and summaries of past performance and expenses for the purpose of comparison.
The AARP Mutual Funds are generally presented in order from conservative to
aggressive (with the exception of the Managed Investment Portfolios, which
invest in other AARP Mutual Funds).
2 MONEY FUNDS
4 AARP High Quality Money Fund
8 AARP High Quality Tax Free Money Fund
12 AARP Premium Money Fund
16 INCOME FUNDS
18 AARP High Quality Short Term Bond Fund
22 AARP GNMA and U.S. Treasury Fund
26 AARP Insured Tax Free General Bond Fund
30 AARP Bond Fund for Income
34 GROWTH AND INCOME FUNDS
36 AARP Balanced Stock and Bond Fund
40 AARP Growth and Income Fund
44 AARP U.S. Stock Index Fund
48 GROWTH FUNDS
50 AARP Capital Growth Fund
54 AARP Small Company Stock Fund
58 GLOBAL FUNDS
60 AARP Global Growth Fund
64 AARP International Stock Fund
68 MANAGED INVESTMENT PORTFOLIOS
70 AARP Diversified Income with Growth Portfolio
74 AARP Diversified Growth Portfolio
<PAGE>
Shareholder Information
Here you will find information relating to account policies, the investment
adviser and financial highlights.
78 YOUR ACCOUNT
This section shows how to open and maintain an account in AARP
Mutual Funds, including transaction policies.
79 Opening an AARP Mutual Fund Account
82 Making Exchanges and Redemptions
85 Tax Considerations and Distributions
87 How to Reach Us
88 The AARP Investment Program's Educational
Commitment
90 FUND DETAILS
A description of the investment adviser and additional performance
data on the AARP Mutual Funds are covered here.
90 Investment Adviser
94 Financial Highlights
Back Cover WHERE TO GET MORE INFORMATION
<PAGE>
Money Funds
AARP High Quality Money Fund
AARP High Quality Tax Free Money Fund
AARP Premium Money Fund
These funds seek current income, while maintaining stability of principal.
They all invest in high-quality short-term securities and distribute
income, if any, to shareholders monthly. Their yields are most affected by
short-term interest rates. In making your choice from the three available
funds, consider how much you can invest, what your checkwriting needs may
be and whether tax-free income makes sense for you.
The AARP Premium Money Fund's relatively high minimum initial investment
($10,000), minimum balance ($7,500) and minimum check ($1,000)
requirements are expected to reduce transaction and fund expenses, thereby
generating a higher yield.
At the direction of their trustees, these funds do not invest in
securities issued by tobacco-producing companies. Each fund's investment
goals may be changed without a vote of shareholders.
<PAGE>
Are Money Funds Right for You?
A money fund may be a good choice for you if:
o you want stability of principal
o you want some checkwriting privileges
o you are making a short-term investment
o you are looking for a fund in which to invest the cash portion of
your overall portfolio
Money Funds 3
<PAGE>
AARP High Quality
Money Fund
Goal
The fund seeks to provide current income and liquidity, consistent with
stability and safety of principal, while maintaining a constant share
price of $1.
Main Investment Strategy
The fund pursues its goal by investing principally in short-term debt
securities issued by:
o U.S. corporations and financial institutions
o the U.S. government and its agencies
The fund generally invests only in U.S. dollar-denominated securities with
credit ratings in the two highest categories as determined by one or more
nationally recognized rating services. The fund may also invest in unrated
securities that its portfolio managers believe to be of comparable
quality. The fund maintains a dollar-weighted average maturity of 90 days
or less. The fund invests in individual securities with remaining
maturities of no more than 397 days.
In selecting securities, the fund emphasizes corporate securities and
conducts thorough credit analyses to identify what appear to be the safest
investments. From this group, the fund then selects individual securities
based on the managers' perception of monetary conditions, the available
supply of appropriate investments and the managers' projections for
short-term interest rate movements.
4 AARP High Quality Money Fund
<PAGE>
Risk Management Strategies
The fund manages credit risk by investing only in high quality securities,
whose issuers are considered unlikely to default, based on their credit
rating. The fund also diversifies its portfolio across many industry
sectors and issuers.
Main Risks
As with most money market funds, the major factor affecting this fund's
performance is short-term interest rates. If short-term interest rates
fall, the fund's yield is also likely to fall. Moreover, the portfolio
managers' strategy or choice of specific investments may not perform as
expected. This fund may have lower returns than other funds that invest in
lower-quality securities. It is also possible that securities in the
fund's portfolio could be downgraded in credit rating or go into default.
Your investment in this fund is not insured or guaranteed by the FDIC or
any other government agency. Although the fund strives to maintain a $1
share price, it is possible that you could lose money by investing in the
fund.
AARP High Quality Money Fund 5
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund. The performance of the fund varies over time. All figures on
this page assume reinvestment of dividends and distributions. Keep in mind
that past performance is no guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
7.43 5.86 3.22 2.09 3.46 5.05 4.58 4.78 4.80 4.48
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
Best Quarter: 2nd Quarter '90, 1.84%
Worst Quarter: 3rd Quarter '93, 0.51%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
4.48 4.74 4.57
6 AARP High Quality Money Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.38
Distribution (12b-1) Fees None
Other Expenses* 0.49
Total Annual Fund Operating Expenses 0.87
Expense Reimbursement 0.00
Net Expenses** 0.87
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
** By contract, total annual fund operating expenses are capped at 0.95%
through 1/31/2001.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes
expenses remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$89 $278 $482 $1,073
Portfolio Managers
Frank J. Rachwalski, Jr., lead portfolio manager, joined the adviser in
1973 and began his investment career at that time.
Jerri I. Cohen, portfolio manager, joined the adviser in 1981 and began
her investment career in 1992.
AARP High Quality Money Fund 7
<PAGE>
AARP High Quality
Tax Free Money Fund
Goal
The fund seeks to provide liquidity and current income that is free from
federal income tax, consistent with stability and safety of principal,
while maintaining a constant share price of $1.
Main Investment Strategy
The fund pursues its goal by investing, under normal market conditions, at
least 80% of net assets in short-term municipal securities free from
regular federal income tax and from alternative minimum tax (AMT). This
policy may not be changed without shareholder approval.
All of the fund's investments have credit ratings within the two highest
categories as determined by one or more nationally recognized rating
services. The fund may also invest in unrated securities that its
portfolio managers believe to be of comparable quality. The fund maintains
a dollar-weighted average maturity of 90 days or less. The fund invests in
individual securities with remaining maturities of no more than 397 days.
In selecting securities, the fund conducts thorough credit analyses to
identify what appear to be the safest investments. From this group, the
fund then selects individual securities based on the managers' perception
of monetary conditions, the available supply of appropriate investments
and the managers' projections for short-term interest rate movements.
8 AARP High Quality Tax Free Money Fund
<PAGE>
Risk Management Strategies
The fund manages credit risk by investing only in high quality securities,
whose issuers are considered unlikely to default, based on their credit
ratings. The fund diversifies its portfolio across industry sectors and
issuers.
As a temporary defensive measure, the fund may invest more than 20% of
assets in taxable short-term securities. In such a case, the fund would
not be pursuing, and might not achieve, its goal.
Main Risks
As with most money market funds, the major factor affecting this fund's
performance is short-term interest rates. If short-term interest rates
fall, the fund's yield is also likely to fall. Moreover, the portfolio
managers' strategy or choice of specific investments may not perform as
expected. This fund may have lower returns than other funds that invest in
lower-quality securities. It is also possible that securities in the
fund's portfolio could be downgraded in credit rating or go into default.
To the extent that the fund invested in taxable securities, a portion of
its income would be taxable. The fund's other investment strategies entail
other risks.
Your investment in this fund is not insured or guaranteed by the FDIC or
any other government agency. Although the fund strives to maintain a $1
share price, it is possible that you could lose money by investing in the
fund.
AARP High Quality Tax Free Money Fund 9
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund. The performance of the fund varies over time. All figures on
this page assume reinvestment of dividends and distributions. Keep in mind
that past performance is no guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
6.13 4.77 2.11 1.58 2.02 3.10 2.70 2.86 2.69 2.48
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
Best Quarter: 4th Quarter '90, 2.19%
Worst Quarter: 1st Quarter '94, 0.37%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
2.48 2.77 3.04
10 AARP High Quality Tax Free Money Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.38
Distribution (12b-1) Fees None
Other Expenses* 0.47
Total Annual Fund Operating Expenses 0.85
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes
expenses remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$87 $271 $471 $1,049
Portfolio Managers
Frank J. Rachwalski, Jr., lead portfolio manager, joined the adviser in
1973 and began his investment career at that time.
Jerri I. Cohen, portfolio manager, joined the adviser in 1981 and began
her investment career in 1992.
AARP High Quality Tax Free Money Fund 11
<PAGE>
AARP Premium
Money Fund
Goal
The fund seeks to provide high current income and liquidity, consistent
with stability and safety of principal, while maintaining a constant share
price of $1.
Main Investment Strategy
The fund pursues its goal by investing principally in short-term debt
securities issued by:
o U.S. corporations and financial institutions
o the U.S. government and its agencies
The fund generally invests only in securities with credit ratings in the
two highest categories as determined by one or more nationally recognized
rating services. The fund may also invest in unrated securities that its
portfolio managers believe to be of comparable quality. The fund maintains
a dollar-weighted average maturity of 90 days or less. The fund invests in
individual securities with remaining maturities of no more than 397 days.
In selecting securities, the fund emphasizes corporate securities and
conducts thorough credit analyses to identify what appear to be the safest
investments. From this group, the fund then selects individual securities
based on the managers' perception of monetary conditions, the available
supply of appropriate investments and the managers' projections for
short-term interest rate movements.
12 AARP Premium Money Fund
<PAGE>
Risk Management Strategies
The fund manages credit risk by investing only in high quality securities,
whose issuers are considered unlikely to default, based on their credit
ratings. The fund diversifies its portfolio across many industry sectors
and issuers.
Main Risks
As with most money market funds, the major factor affecting this fund's
performance is short-term interest rates. If short-term interest rates
fall, the fund's yield is also likely to fall. Moreover, the portfolio
managers' strategy or choice of specific investments may not perform as
expected. This fund may have lower returns than other funds that invest in
lower-quality securities. It is also possible that securities in the
fund's portfolio could be downgraded in credit rating or go into default.
Your investment in this fund is not insured or guaranteed by the FDIC or
any other government agency. Although the fund strives to maintain a $1
share price, it is possible that you could lose money by investing in the
fund.
AARP Premium Money Fund 13
<PAGE>
Past Performance
Because this fund does not have a full calendar year of performance to
report as of the date of this prospectus, no bar chart and performance
table are provided.
14 AARP Premium Money Fund
<PAGE>
Fees and Expenses
The table below describes the estimated expenses you could expect as an
investor in this fund. "Annual Fund Operating Expenses" are deducted from
fund assets, and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.38
Distribution (12b-1) Fees None
Other Expenses* 0.52
Total Annual Fund Operating Expenses 0.90
Expense Reimbursement 0.40
Net Expenses** 0.50
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
** By contract, total annual fund operating expenses are capped at 0.50%
through 1/31/2001.
Based on the costs above (including one year of capped expenses in each
period), this example is designed to help you compare this fund's expenses
to those of other funds. The example assumes expenses remain the same and
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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$51 $247 $459 $1,071
Portfolio Managers
Frank J. Rachwalski, Jr., lead portfolio manager, joined the adviser in
1973 and began his investment career at that time.
Jerri I. Cohen, portfolio manager, joined the adviser in 1981 and began
her investment career in 1992.
AARP Premium Money Fund 15
<PAGE>
Income Funds
AARP High Quality Short Term Bond Fund
AARP GNMA and U.S. Treasury Fund
AARP Insured Tax Free General Bond Fund
AARP Bond Fund for Income
These funds seek high current income by investing primarily in bonds. Each
fund invests at least 65% of total assets in investment-grade debt
securities, and distributes income, if any, to shareholders monthly.
Investment-grade debt securities are those in the rating agency's top four
categories of credit quality. Each fund's performance is affected by
changes in interest rates. When interest rates rise, bond prices usually
fall, and prices of bonds with long maturities generally fall the most.
Duration, a measurement based on the estimated payback period or the term
to maturity of a bond (or portfolio of bonds), is the most widely used
gauge of sensitivity to interest rate change. Like maturity, duration is
expressed in years. The longer a fund's duration, the more sharply its
share price is likely to rise or fall when interest rates change.
Income funds are generally less risky investments than growth funds. At
the same time, they provide generally lower long-term returns than growth
funds.
At the direction of their trustees, these funds do not invest in
securities issued by tobacco-producing companies. Each fund's investment
goals may be changed without a vote of shareholders.
16
<PAGE>
Are Income Funds Right for You?
An income fund may be a good choice for you if:
o you want a source of regular monthly income
o you want to add an income component to diversify your portfolio
o you can invest in the fund for at least three years
o you can handle some ups and downs in investment performance
Income Funds 17
<PAGE>
AARP High Quality Short
Term Bond Fund
Goal
The fund seeks to produce a high level of current income while actively
seeking to reduce downside risk as compared with other short-term bond
mutual funds.
Main Investment Strategy
The fund pursues its goal by investing principally in high-quality,
short-term debt securities. It maintains an average weighted maturity of
less than three years. The fund may invest in securities issued by the
U.S. government, U.S. corporations and other fixed-income securities. The
fund may also invest in foreign debt securities that are traded in U.S.
dollars. The fund may invest in bonds with investment-grade credit ratings
as determined by one or more nationally recognized rating services. The
fund may also invest in unrated securities that its portfolio managers
believe to be of comparable quality. At least 65% of the fund's assets
must be in securities rated in the two highest categories by one or more
nationally recognized rating services.
In managing its portfolio, the fund analyzes economic trends to identify
market sectors and types of bonds that appear likely to outperform the
short-term bond market as a whole. The fund has tended to favor
asset-backed and mortgage-backed securities, both of which represent
partial ownership in pools of specific loans, such as car loans and
mortgages. In making their buy and sell decisions, the managers typically
weigh a number of factors against each other, from economic outlooks and
possible interest rate movements to changes in supply and demand within
the short-term bond market.
18 AARP High Quality Short Term Bond Fund
<PAGE>
Other Investments
The fund may also invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies, or securities), the managers don't intend to use them as
principal investments, and might not use them at all.
Risk Management Strategies
The fund uses several strategies in seeking to reduce share price
volatility. The fund's risk management strategy is to reduce its average
duration to as short as one year. The fund may seek out bonds with "call
protection," which limits an issuer's ability to pay off a loan early.
While the fund emphasizes certain market sectors and types of bonds, it
nonetheless diversifies its portfolio across industry sectors and issuers.
As a temporary defensive measure, the fund may invest up to 100% of assets
in cash or cash equivalents. In such a case, the fund would not be
pursuing, and might not achieve, its goal.
Main Risks
As with most bond funds, the major factor affecting this fund's
performance is interest rates. When interest rates rise, the prices of
bonds (and bond mutual funds) typically fall in proportion to their
duration. If interest rates drop significantly, holders of the mortgages
represented by mortgage-backed securities are more likely to refinance,
thus prepaying their obligations and potentially forcing the fund to
reinvest in securities that pay less interest.
If certain sectors or investments don't perform as the portfolio managers
expect, the fund could substantially underperform other short-term bond
mutual funds or lose money. The portfolio managers' attempts to manage
downside risk may also reduce performance in a strong market. It is also
possible that bonds in the fund's portfolio could be downgraded in credit
rating or go into default.
AARP High Quality Short Term Bond Fund 19
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
7.56 15.4 6.24 10.9 -4.41 7.26 2.75 7.91 5.48 2.16
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
Best Quarter: 3rd Quarter '91, 5.85%
Worst Quarter: 1st Quarter '94, -3.45%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
Fund 2.16 6.98 6.95
Index -0.82 7.73 7.70
Index: Lehman Brothers Aggregate Bond Index, an unmanaged measure of
Treasury securities, agency securities, corporate bonds, and mortgage
securities, weighted by market value.
20 AARP High Quality Short Term Bond Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.47
Distribution (12b-1) Fees None
Other Expenses* 0.38
Total Annual Fund Operating Expenses 0.85
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes expenses
remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$87 $271 $471 $1,049
Portfolio Managers
Robert S. Cessine, co-lead portfolio manager, joined the adviser in 1993
and began his investment career in 1982.
John E. Dugenske, co-lead portfolio manager, joined the adviser in 1998
and began his investment career in 1990.
AARP High Quality Short Term Bond Fund 21
<PAGE>
AARP GNMA and
U.S. Treasury Fund
Goal
The fund seeks to produce a high level of income while actively seeking to
reduce downside risk as compared with other GNMA mutual funds.
Main Investment Strategy
The fund pursues its goal by investing at least 65% of net assets in
high-quality GNMA and U.S. Treasury securities. GNMA, also known as Ginnie
Mae, stands for the Government National Mortgage Association. GNMA
securities represent partial ownership interest in a pool of mortgage
loans, for which GNMA guarantees timely payment of principal and interest.
In managing its portfolio, the fund considers the relative merits of
investing in GNMA or U.S. Treasury securities -- particularly yield and
availability -- in determining how it will allocate its investment between
the two. The fund seeks to maximize income and manage risk by investing in
securities of varying maturities.
22 AARP GNMA and U.S. Treasury Fund
<PAGE>
Risk Management Strategies
The fund's risk management strategy is to reduce its average duration to
as short as one year. As a temporary defensive measure, the fund may
invest up to 100% of assets in cash or cash equivalents. In such a case,
the fund would not be pursuing, and might not achieve, its goal.
Main Risks
As with most bond funds, the major factor affecting this fund's
performance is interest rates. When interest rates rise, the prices of
bonds (and bond mutual funds) typically fall in proportion to their
duration. If interest rates drop significantly, holders of the mortgages
represented by GNMA securities are more likely to refinance, thus
prepaying their obligations and potentially forcing the fund to reinvest
in securities that pay lower interest rates.
Exposure to credit risk is low because most of the fund's securities are
issued or guaranteed by the U.S. government.
This fund may trade securities more actively than many funds, which could
mean higher expenses (thus lowering return) and higher taxable
distributions.
The value of an investment in the fund will fluctuate over time and it is
possible to lose money invested in the fund.
AARP GNMA and U.S. Treasury Fund 23
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
9.72 14.3 6.56 5.96 -1.61 2.83 4.44 8.00 6.79 0.59
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
Best Quarter: 3rd Quarter '91, 4.88%
Worst Quarter: 1st Quarter '94, -2.44%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
Fund 0.59 6.45 6.65
Index 1.93 8.08 7.87
Index: Lehman Brothers GNMA Index, an unmanaged measure of all fixed-rate
securities backed by mortgage pools of GNMA.
24 AARP GNMA and U.S. Treasury Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.40
Distribution (12b-1) Fees None
Other Expenses* 0.26
Total Annual Fund Operating Expenses 0.66
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes expenses
remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$67 $211 $368 $822
Portfolio Managers
Richard L. Vandenberg, lead portfolio manager, joined the adviser in 1993
and began his investment career in 1975.
Scott E. Dolan, portfolio manager, joined the adviser in 1989 and began
his investment career at that time.
John E. Dugenske, portfolio manager, joined the adviser in 1998 and began
his investment career in 1990.
AARP GNMA and U.S. Treasury Fund 25
<PAGE>
AARP Insured Tax Free
General Bond Fund
Goal
The fund seeks to produce a high level of income that is free from federal
income taxes while actively seeking to reduce downside risk as compared
with other insured tax-free bond mutual funds.
Main Investment Strategy
The fund pursues its goal by investing, under normal market conditions, at
least 80% of net assets in high-quality, tax-exempt municipal securities.
(This policy may not be changed without shareholder approval.) Securities
comprising at least 65% of total assets of the fund carry insurance that
would pay the principal and interest in the event of default.
In managing its portfolio, the fund looks for securities that appear to
offer the best total return potential, and normally prefers those that
cannot be called in before maturity. In making their buy and sell
decisions, the managers typically weigh a number of factors against each
other, from economic outlooks and possible interest rate movements to
changes in supply and demand within the municipal bond market.
26 AARP Insured Tax Free General Bond Fund
<PAGE>
Other Investments
The fund may invest up to 20% of assets in U.S. government securities.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies, or securities), the managers don't intend to use them as
principal investments, and might not use them at all.
Risk Management Strategies
The fund manages its exposure to interest rate risk by maintaining a
duration that is generally shorter than comparable mutual funds, and
adjusting its duration in response to market conditions.
As a temporary defensive measure, the fund may invest more than 20% of
assets in taxable short-term securities. In such a case, the fund would
not be pursuing, and might not achieve, its goal.
Main Risks
As with most bond mutual funds, the major factor affecting this fund's
performance is interest rates. When interest rates rise, the prices of
bonds (and bond mutual funds) typically fall in proportion to their
duration. Moreover, this fund may have lower returns than other tax-free
bond mutual funds that invest in lower-quality securities or maintain
longer durations. It is also possible that securities in the fund's
portfolio could be downgraded in credit rating or go into default.
The value of an investment in the fund will fluctuate over time and it is
possible to lose money invested in the fund.
Although the majority of the fund's securities are privately insured to
protect against default, this insurance does not prevent the fund's share
price from falling.
AARP Insured Tax Free General Bond Fund 27
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
6.33 12.2 8.57 12.7 -6.21 6.15 3.71 8.92 5.41 -2.00
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
Best Quarter: 1st Quarter '95, 7.08%
Worst Quarter: 1st Quarter '94, -5.90%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
Fund -2.00 6.27 6.38
Index -2.06 6.91 6.89
Index: Lehman Brothers Municipal Bond Index, an unmanaged measure of
municipal bonds with maturities of at least two years, weighted by market
value.
28 AARP Insured Tax Free General Bond Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.47
Distribution (12b-1) Fees None
Other Expenses* 0.21
Total Annual Fund Operating Expenses 0.68
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes expenses
remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$69 $218 $379 $847
Portfolio Managers
Philip G. Condon, co-lead portfolio manager, joined the adviser in 1983
and began his investment career in 1977.
Ashton P. Goodfield, co-lead portfolio manager, joined the adviser in 1986
and began her investment career at that time.
AARP Insured Tax Free General Bond Fund 29
<PAGE>
AARP Bond Fund
for Income
Goal
The fund seeks to produce a high level of current income while actively
seeking to reduce downside risk as compared with other bond mutual funds.
Main Investment Strategy
The fund pursues its goal by investing, under normal market conditions, at
least 65% of total assets in investment-grade debt securities, as
determined by one or more nationally recognized rating services. The fund
may invest in unrated securities that its portfolio manager believes to be
of comparable quality. The fund may also invest up to 35% of total assets
in high-yielding securities considered to be below investment-grade.
The fund primarily focuses on corporate bonds, although it also invests in
other types of securities. In managing its portfolio, the fund analyzes
economic trends to identify market sectors and types of bonds that appear
likely to outperform the long-term bond market as a whole. In making buy
and sell decisions, the manager typically weighs a number of factors
against each other, from economic outlooks and possible interest rate
movements to changes in supply and demand within the bond market.
Other Investments
Although the manager is permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies, or securities), the manager doesn't intend to use them as
principal investments, and might not use them at all.
30 AARP Bond Fund for Income
<PAGE>
Risk Management Strategies
The fund uses several strategies in seeking to reduce share price
volatility. The fund manages its exposure to interest rate risk by
adjusting its duration. The fund may seek out bonds with "call
protection," which limits an issuer's ability to pay off a loan early. The
fund diversifies its portfolio across industry sectors and issuers.
As a temporary defensive measure, the fund may invest up to 100% of assets
in cash or cash equivalents. In such a case, the fund would not be
pursuing, and might not achieve, its goal.
Main Risks
As with most bond mutual funds, the most significant factor affecting this
fund's performance is interest rates. When interest rates rise, the price
of bonds (and bond mutual funds) typically falls in proportion to their
duration. Moreover, if certain sectors or securities don't perform as the
portfolio managers expect, the fund could substantially underperform other
bond mutual funds or lose money. It is also possible that bonds in the
fund's portfolio could be downgraded in credit rating or go into default.
Issuers whose bonds are below investment-grade may be in impaired
financial condition and may be affected by stock market shifts. The prices
of their bonds, therefore, tend to change based on stock market movements
to a greater degree than the prices of investment-grade bonds.
AARP Bond Fund for Income 31
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
6.41 -0.79
'98 '99
Best Quarter: 3rd Quarter '98, 2.17%
Worst Quarter: 2nd Quarter '99, -1.32%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
Since
1 Year Inception
--------------------------------------------------------------------------
Fund -0.79 4.86*
Index -0.82 5.79**
Index: Lehman Brothers Aggregate Bond Index, an unmanaged measure of
Treasury securities, agency securities, corporate bonds and mortgage
securities, weighted by market value.
* Fund Inception: 2/1/1997
**Index comparison begins 1/31/1997
In both the chart and the table, total returns from the date of inception
through 1999 would have been lower if operating expenses hadn't been
reduced.
32 AARP Bond Fund for Income
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.56
Distribution (12b-1) Fees None
Other Expenses* 0.34
Total Annual Fund Operating
Expenses 0.90
Expense Reimbursement 0.15
Net Expenses** 0.75
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
** By contract, total annual fund operating expenses are capped at 0.75%
through 1/31/2001.
Based on the costs above (including one year of capped expenses in each
period), this example is designed to help you compare this fund's expenses
to those of other funds. The example assumes expenses remain the same and
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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$77 $272 $484 $1,094
Portfolio Manager
Robert S. Cessine, lead portfolio manager, joined the adviser in 1993 and
began his investment career in 1982.
AARP Bond Fund for Income 33
<PAGE>
Growth and Income
Funds
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund
These funds seek a combination of capital growth and income and make
distributions, if any, to shareholders quarterly.
The advantages of growth and income mutual funds are: opportunities for
capital growth and current income in a single investment; potentially less
volatility than purely growth-oriented investments; and potentially strong
long-term growth. At the same time, growth and income mutual funds are not
likely to perform quite as well over the long term as purely
growth-oriented investments.
At the direction of their trustees, these funds do not invest in
securities issued by tobacco-producing companies. Each fund's investment
goals may be changed without a vote of shareholders.
34
<PAGE>
Are Growth and Income Funds Right for You?
A growth and income fund may be a good choice for you if:
o you want long-term growth with less risk than a purely
growth-oriented investment
o you can invest for at least three to five years in the AARP Balanced
Stock and Bond Fund, or for at least five years in the other growth
and income funds
o you can handle some ups and downs in investment performance
o you are building a diversified portfolio with a few core investments
Growth and Income Funds 35
<PAGE>
AARP Balanced Stock
and Bond Fund
Goal
The fund seeks to provide long-term capital growth and income while
actively seeking to reduce downside risk as compared with other balanced
mutual funds.
Main Investment Strategy
The fund pursues its goal by investing primarily in a diversified mix of
common stocks, high-quality bonds and cash reserves.
The fund may invest up to 70% of its assets in equity securities including
dividend-paying and non-dividend-paying stocks. In managing the equity
portion of the portfolio, the fund considers yield and other valuation and
growth factors, meaning that it focuses its investments on companies whose
dividends and earnings prospects are believed to be attractive relative to
the average derived from its benchmark index. The fund may sell securities
if their yield or growth prospects are expected to be below the benchmark
average. Typically, companies that meet these criteria are large. The fund
invests primarily in the securities of U.S. companies, but may also invest
in the equity securities of foreign companies.
The remainder of the fund's assets will be invested in investment-grade
debt securities. All of the fund's debt securities must be
investment-grade at the time of purchase, as determined by one or more
nationally recognized rating services. The fund may also invest in unrated
securities that its portfolio managers believe to be of comparable
quality. Of the fund's debt securities, 75% must be rated within the three
highest credit categories. Inside these bounds, the fund may invest in
bonds of any maturity issued by U.S. and foreign governments or
corporations.
36 AARP Balanced Stock and Bond Fund
<PAGE>
The fund generally selects individual bonds based on maturities and
yields, with an emphasis on corporate bonds.
In managing its portfolio, the fund does not attempt to time the market.
When changes in the overall financial climate -- interest rates, cash
flows or inflation -- warrant action, the portfolio managers will
generally make incremental adjustments to the fund's asset allocation.
Risk Management Strategies
The fund manages risk by diversifying widely among industries and
companies. It also invests significantly in dividend-paying stocks, whose
prices have, oftentimes, tended to fall less in down markets. The fund's
bond investments are diversified by maturity, credit quality and industry.
The fund may also, but is not required to, make limited use of certain
derivatives (financial instruments that derive their value from other
securities, commodities or indices) to attempt to manage risk.
As a temporary defensive measure, the fund may invest up to 100% of assets
in cash or cash equivalents. In such a case, the fund would not be
pursuing, and might not achieve, its goal.
Main Risks
The primary factor affecting this fund's performance is stock market
movements. If certain sectors or securities don't perform as its portfolio
managers expect, the fund could substantially underperform other balanced
mutual funds or lose money. To the extent that the fund invests in bonds,
the most significant risk is that interest rates will rise, and the prices
of bonds held by the fund will fall in proportion to their duration.
Duration is a technical measure of the sensitivity of a fund's return to
changes in market interest rates. It is also possible that bonds in the
fund's portfolio could be downgraded in credit rating or go into default.
The fund's asset allocation could prove to be less appropriate to market
conditions than other balanced mutual funds, and its portfolio managers'
attempts to manage downside risk may also reduce performance in a strong
market.
AARP Balanced Stock and Bond Fund 37
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund and two broad-based market indexes (which, unlike the fund,
do not have any fees or expenses). The performance of both the fund and
the indexes varies over time. All figures on this page assume reinvestment
of dividends and distributions. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
23.86 14.19 21.92 6.38 2.87
'95 '96 '97 '98 '99
Best Quarter: 2nd Quarter '97, 10.36%
Worst Quarter: 3rd Quarter '99, -7.43%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
Since
1 Year 5 Years Inception*
--------------------------------------------------------------------------
Fund 2.87 13.54 11.02
Index 1 -0.82 7.73 5.72
Index 2 21.04 28.56 23.23
Index 1: Lehman Brothers Aggregate Bond Index, an unmanaged measure of
Treasury securities, agency securities, corporate bonds and mortgage
securities, weighted by market value.
Index 2: Standard & Poor's 500 Composite Stock Price Index (S&P 500
Index), an unmanaged, capitalization-weighted index that includes 500
large-cap stocks.
* 2/1/1994
38 AARP Balanced Stock and Bond Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.47
Distribution (12b-1) Fees None
Other Expenses* 0.41
Total Annual Fund Operating Expenses 0.88
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes expenses
remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$90 $281 $488 $1,084
Portfolio Managers
Kathleen T. Millard, lead portfolio manager, joined the adviser in 1991
and began her investment career in 1983.
Robert S. Cessine, portfolio manager, joined the adviser in 1993 and began
his investment career in 1982.
Greg Adams, portfolio manager, joined the adviser in 1999 and began his
investment career in 1987.
AARP Balanced Stock and Bond Fund 39
<PAGE>
AARP Growth and
Income Fund
Goal
The fund seeks to provide long-term capital growth and income while
actively seeking to reduce downside risk as compared with other growth and
income mutual funds.
Main Investment Strategy
The fund pursues its goal by investing primarily in common stocks and
securities convertible into common stocks.
In managing its portfolio, the fund considers yield and other valuation
and growth factors, meaning that it focuses its investments on securities
of companies whose dividends and earnings prospects are believed to be
attractive relative to the average derived from its benchmark index, the
S&P 500 Index. Typically, companies that meet these criteria are large.
The fund may invest in dividend-paying and non-dividend paying stocks. The
fund may sell securities if their yield or growth prospects are expected
to be below the benchmark average. The fund invests primarily in U.S.
companies, but may also invest in the equity securities of foreign
companies.
Other Investments
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies, or securities), the managers don't intend to use them as
principal investments, and might not use them at all.
40 AARP Growth and Income Fund
<PAGE>
Risk Management Strategies
The fund manages risk by diversifying widely among industries and
companies. As a temporary defensive measure, the fund may invest up to
100% of assets in cash or cash equivalents. In such a case, the fund would
not be pursuing, and might not achieve, its goal.
Main Risks
The primary factor affecting this fund's performance is stock market
movements. The value of your investment will fluctuate over time, and you
could lose money.
If the strategy used by the fund or specific securities don't perform as
well as expected, the fund could underperform other growth and income
mutual funds or lose money. The portfolio managers' attempts to manage
downside risk may also reduce performance in a strong market.
AARP Growth and Income Fund 41
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
-2.06 26.46 9.22 15.68 3.06 31.82 21.61 31.02 6.14 7.37
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
Best Quarter: 2nd Quarter '97, 15.49%
Worst Quarter: 3rd Quarter '98, -13.75%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
Fund 7.37 19.07 14.46
Index 21.04 28.56 18.21
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index),
an unmanaged, capitalization-weighted index that includes 500 large-cap
stocks.
42 AARP Growth and Income Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Redemption Fee
Annual Fund Operating Expenses
Management Fee 0.47
Distribution (12b-1) Fees None
Other Expenses* 0.30
Total Annual Fund Operating Expenses 0.77
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes expenses
remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$79 $246 $428 $954
Portfolio Managers
Kathleen T. Millard, lead portfolio manager, joined the adviser in 1991
and began her investment career in 1983.
Greg Adams, portfolio manager, joined the adviser in 1999 and began his
investment career in 1987.
AARP Growth and Income Fund 43
<PAGE>
AARP U.S. Stock
Index Fund
Goal
The fund seeks to provide long-term capital growth and income but with
less risk of loss to its portfolio than other mutual funds that track the
S&P 500 Index, measured by the frequency and amount by which total return
fluctuates downward.
Main Investment Strategy
The fund pursues its goal by emphasizing common stocks with above-average
dividend yields, while maintaining investment characteristics otherwise
similar to the S&P 500 Index. Under normal market conditions, the fund
will invest at least 95% of its assets in common stocks in the S&P 500
Index.
The fund screens the companies in the Index to identify those that pay
above-average dividends on their securities. By giving more weight to
these companies in the portfolio, the fund expects volatility to be
somewhat less than that of the S&P 500 Index over time. The total return
will generally track the S&P 500 Index within 1%, before expenses, on an
annualized basis. (A tracking error of 0% would indicate returns identical
to the index.)
To enhance yield and liquidity, and to reduce transaction costs, the fund
will not exactly replicate the portfolio weights of the S&P 500 Index and
will typically hold between 400 and 470 of the 500 stocks included in the
Index.
44 AARP U.S. Stock Index Fund
<PAGE>
Other Investments
The fund may invest up to 20% of assets in futures contracts based on
stocks included in the S&P 500 Index in order to invest cash, maintain
liquidity, meet redemptions or minimize trading costs.
Main Risks
The primary factor affecting this fund's performance is stock market
movements, especially as reflected in the S&P 500 Index. The value of your
investment will fluctuate over time, and you could lose money.
The portfolio managers' strategy of emphasizing high-dividend companies in
the S&P 500 Index might not perform as expected, and the fund's
performance could be much lower than that of the Index.
AARP U.S. Stock Index Fund 45
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
28.34 22.01
'98 '99
Best Quarter: 4th Quarter '98, 20.64%
Worst Quarter: 3rd Quarter '98, -9.51%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------
Fund 22.01 25.81*
Index 21.04 25.81**
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index),
an unmanaged, capitalization-weighted index that includes 500 large-cap
U.S. stocks.
* Fund Inception: 2/1/1997
** Index comparison begins 1/31/1997
In both the chart and the table, total returns from the date of inception
through 1999 would have been lower if operating expenses hadn't been
reduced.
46 AARP U.S. Stock Index Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.28
Distribution (12b-1) Fees None
Other Expenses* 0.48
Total Annual Fund Operating Expenses 0.76
Expense Reimbursement 0.26
Net Expenses** 0.50
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
** By contract, total annual fund operating expenses are capped at 0.50%
through 1/31/2001.
Based on the costs above (including one year of capped expenses in each
period), this example is designed to help you compare this fund's expenses
to those of other funds. The example assumes expenses remain the same and
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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$51 $217 $397 $918
Portfolio Managers
Bankers Trust Company, subadviser, will handle day-to-day investment and
trading functions for the fund under the guidance of the portfolio
managers. The subadviser has managed stock index investments since 1977.
James M. Eysenbach, portfolio manager, joined the adviser in 1991 and
began his investment career in 1984.
AARP U.S. Stock Index Fund 47
<PAGE>
Growth Funds
AARP Capital Growth Fund
AARP Small Company Stock Fund
These funds seek long-term growth of principal by investing in portfolios
of stocks. Each fund has its own goal, investment strategy and risk
profile.
Funds that focus on stocks have historically offered the highest long-term
returns. Depending on their goals, stock mutual funds can provide exposure
to companies of all sizes in every industry and geographic region. You may
want to consider the volatility of stock markets in deciding whether to
use growth funds as the core of your personal portfolio.
At the direction of their trustees, these funds do not invest in
securities issued by tobacco-producing companies. Each fund's investment
goals may be changed without a vote of shareholders.
48
<PAGE>
Are Growth Funds Right for You?
A growth fund may be a good choice for you if:
o you want long-term growth of principal
o you are not looking for a source of regular income
o you can invest in the fund for at least five years
o you can handle potentially large ups and downs in investment
performance
o you are looking for a fund in which to invest the growth portion of
your overall portfolio
Growth Funds 49
<PAGE>
AARP Capital
Growth Fund
Goal
The fund seeks to provide long-term capital growth while actively seeking
to reduce downside risk as compared with other growth mutual funds.
Main Investment Strategy
The fund pursues its goal by investing primarily in the common stocks, and
securities convertible into common stocks, of established medium- to
large-sized U.S. companies with potential for long-term capital growth.
In managing its portfolio, the fund focuses on stock selection. During an
initial screening of companies with market capitalizations typically above
$3 billion, the fund looks for companies that have displayed above-average
earnings growth and the potential to increase profits going forward.
Companies also must have strong competitive positions; if they are not the
market leaders, they should be gaining market share. Finally, the fund
uses a sophisticated computer model to assess the potential return and
risk of stocks relative to their industries and to the market as a whole,
according to book value, earnings per share and expected earnings growth.
50 AARP Capital Growth Fund
<PAGE>
Other Investments
The fund may invest to a limited extent in preferred stocks and futures
contracts. Although the fund typically invests in U.S. companies, it may
also invest in the equity securities of foreign companies.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies, or securities), the managers don't intend to use them as
principal investments, and might not use them at all.
Risk Management Strategies
The fund manages risk by diversifying its portfolio investments widely
among market sectors and companies. It generally does not invest more than
3.5% of its assets in any single company. As a temporary defensive
measure, the fund may invest up to 100% of assets in cash or cash
equivalents. In such a case, the fund would not be pursuing, and might not
achieve, its goal.
Main Risks
The primary factor affecting this fund's performance is stock market
movements. If certain sectors or investments don't perform as the
portfolio managers expect, the fund could substantially underperform other
growth mutual funds or lose money. The portfolio managers' attempts to
manage downside risk may also reduce performance in a strong market.
AARP Capital Growth Fund 51
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
-15.78 40.53 4.72 15.98 -10.04 30.54 20.62 35.08 23.73 35.44
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
Best Quarter: 4th Quarter '98, 25.83%
Worst Quarter: 3rd Quarter '90, -21.27%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------
Fund 35.44 28.94 16.51
Index 21.04 28.56 18.21
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index),
an unmanaged, capitalization-weighted index that includes 500 large-cap
stocks.
50 AARP Capital Growth Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.60
Distribution (12b-1) Fees None
Other Expenses* 0.32
Total Annual Fund Operating Expenses 0.92
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes expenses
remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$94 $293 $509 $1,131
Portfolio Managers
William F. Gadsden, co-lead portfolio manager, joined the adviser in 1983
and began his investment career in 1981.
Bruce F. Beaty, co-lead portfolio manager, joined the adviser in 1991 and
began his investment career in 1980.
AARP Capital Growth Fund 53
<PAGE>
AARP Small Company
Stock Fund
Goal
The fund seeks to provide long-term capital growth while actively seeking
to reduce downside risk as compared with other small company stock funds.
Main Investment Strategy
The fund pursues its goal by investing at least 65% of total assets in
stocks of small U.S. companies with potential for above-average long-term
capital growth. Small companies are generally defined as those with stock
market capitalizations (total market value of outstanding shares)
typically below $2 billion.
In managing its portfolio, the fund uses a proprietary computer model to
identify attractively valued stocks of small companies -- those selling at
low prices relative to their earnings, assets or other measures of value.
By emphasizing undervalued small companies in the fund's portfolio, the
portfolio managers expect to take advantage of the growth opportunities
offered by these companies while tempering the volatility that is also
associated with these investments.
54 AARP Small Company Stock Fund
<PAGE>
Other Investments
To a limited extent, the fund may also invest in other types of
securities, including up to 20% of assets in U.S. government securities.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies, or securities), the managers don't intend to use them as
principal investments, and might not use them at all.
Risk Management Strategies
The fund manages risk by focusing on undervalued stocks and diversifying
its investments widely across individual companies. The fund generally
invests no more than 5% of its assets in the securities of any one company
and typically invests in over 150 securities. As a temporary defensive
measure, the fund may invest up to 100% of assets in cash or cash
equivalents. In such a case, the fund would not be pursuing, and might not
achieve, its goal.
Main Risks
The primary factor affecting this fund's performance is stock market
movements. Small companies can be especially sensitive to market shifts
and isolated business difficulties. This is because small companies often
serve niche markets and have limited product lines. They also generally
lack the cash reserves and access to capital that allow larger companies
to weather difficult financial times.
Small companies as a group, or individual small companies, may not perform
as well as expected. Securities of small companies are often thinly traded
and could be harder to value or sell at a fair price. If certain sectors
or investments don't perform as the portfolio managers expect, the fund
could underperform other small company stock mutual funds or lose money.
In addition, growth stocks may be out of favor for certain periods. The
portfolio managers' attempts to manage downside risk may also reduce
performance in a strong market.
AARP Small Company Stock Fund 55
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
-6.24 -3.53
'98 '99
Best Quarter: 2nd Quarter '99, 19.49%
Worst Quarter: 3rd Quarter '98, -17.20%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------
Fund -3.53 6.74*
Index 21.26 12.71**
Index: Russell 2000 Index, an unmanaged index of approximately 2,000 small
U.S. companies, weighted by market value.
* Fund Inception: 2/1/1997
** Index comparison begins 1/31/1997
In both the chart and the table, total returns from the date of inception
through 1998 would have been lower if operating expenses hadn't been
reduced.
56 AARP Small Company Stock Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.83
Distribution (12b-1) Fees None
Other Expenses* 0.87
Total Annual Fund Operating Expenses 1.70
Expense Reimbursement 0.00
Net Expenses** 1.70
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
** By contract, total annual fund operating expenses are capped at 1.75%
through 1/31/2001.
Based on the costs above (including one year of capped expenses in each
period), this example is designed to help you compare this fund's expenses
to those of other funds. The example assumes expenses remain the same and
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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$173 $536 $923 $2,009
Portfolio Managers
James M. Eysenbach, lead portfolio manager, joined the adviser in 1991 and
began his investment career in 1984.
Calvin S. Young, portfolio manager, joined the adviser in 1990 and began
his investment career in 1988.
AARP Small Company Stock Fund 57
<PAGE>
Global Funds
AARP Global Growth Fund
AARP International Stock Fund
These funds seek long-term growth of principal through investments in
securities markets around the world. Although the U.S. securities market
is the single largest in the world, the global securities market is three
times as large. Each fund has its own goal, investment strategy and risk
profile.
Global mutual funds offer easy access to countries and markets that can be
very difficult for investors to invest in on their own. Foreign markets
follow their own economic cycles, so investments in these markets can
serve to diversify your investment portfolio. However, foreign markets
have been more volatile than the U.S. market. Foreign investments carry
additional risks, including potentially unfavorable currency exchange
rates, political disturbances, and incomplete or inaccurate accounting
information on companies.
At the direction of their trustees, these funds do not invest in
securities issued by tobacco-producing companies. Each fund's investment
goals may be changed without a vote of shareholders.
58
<PAGE>
Are Global Funds Right for You?
A global fund may be a good choice for you if:
o you have a well-balanced portfolio of domestic investments and would
like to gain some exposure to foreign markets
o you are not looking for a source of regular income
o you can invest in the fund for at least five years
o you can handle potentially large ups and downs in investment
performance
Global Funds 59
<PAGE>
AARP Global
Growth Fund
Goal
The fund seeks to provide long-term capital growth while actively seeking
to reduce downside risk as compared with other global growth funds.
Main Investment Strategy
The fund pursues its goal by investing at least 65% of total assets in
stocks issued by established companies of any size in developed countries
around the world including the United States. The managers primarily
invest in companies that offer the potential for sustainable above-average
earnings growth.
In managing its portfolio, the fund looks for investment opportunities
created by the increasing integration of economies around the world. The
fund seeks industries and countries that appear likely to benefit from
promising technologies and changing geopolitical, currency or economic
relationships. In selecting individual stocks, the fund also studies
companies' past performance and financial statements to identify those
that appear to be attractively priced relative to their industries and
markets.
Other Investments
To a limited extent, the fund may invest in investment-grade debt
securities with credit ratings determined by one or more nationally
recognized rating services. The fund may also invest in unrated securities
that its portfolio managers believe to be of comparable quality. In
selecting individual bonds, the fund generally seeks out the highest
yields within favored countries and market sectors, and within the allowed
credit range.
60 AARP Global Growth Fund
<PAGE>
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies or securities), the managers don't intend to use them as
principal investments, and might not use them at all.
Risk Management Strategies
The fund manages risk by diversifying widely among regions, market
sectors, and individual companies. As a temporary defensive measure, the
fund may invest up to 100% of assets in U.S. cash or cash equivalents. In
such a case, the fund would not be pursuing, and might not achieve, its
goal.
Main Risks
The primary factor affecting this fund's performance is stock market
movements in the countries in which the fund invests. Foreign investments
carry added risks due to the possibility of inadequate or inaccurate
financial information about companies, potential political disturbances
and fluctuations in currency exchange rates. When the dollar value of a
foreign currency falls, so does the value of any investments the fund owns
that are denominated in that currency. This is separate from market risk,
and may add to market losses or reduce market gains.
In addition, if the portfolio managers' choice of countries, market
sectors or specific investments doesn't perform as expected, the fund
could substantially underperform other global growth mutual funds or lose
money.
Moreover, the fund's bond investments are also affected by interest rates.
When interest rates rise, the prices of bonds (and bond mutual funds)
typically fall in proportion to their duration.
This fund may trade securities more actively than many funds, which could
mean higher expenses (thus lowering return) and higher taxable
distributions.
AARP Global Growth Fund 61
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
14.62 13.03 22.13
'97 '98 '99
Best Quarter: 4th Quarter '99, 15.80%
Worst Quarter: 3rd Quarter '98, -12.59%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year Since Inception*
--------------------------------------------------------------------------
Fund 22.13 14.96
Index 24.93 19.43
Index: MSCI (Morgan Stanley Capital International) World Index, an
unmanaged index of global stock markets, including the U.S., weighted by
market value.
* 2/1/1996
In both the chart and the table, total returns from the date of inception
through 1997 would have been lower if operating expenses hadn't been
reduced.
62 AARP Global Growth Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.83
Distribution (12b-1) Fees None
Other Expenses* 0.82
Total Annual Fund Operating Expenses 1.65
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
Based on the costs above, this example is designed to help you compare
this fund's expenses to those of other funds. The example assumes expenses
remain the same and 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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$168 $520 $897 $1,955
Portfolio Managers
William E. Holzer, lead portfolio manager, joined the adviser in 1980 and
began his investment career in 1975.
Nicholas Bratt, portfolio manager, joined the adviser in 1976 and began
his investment career in 1974.
Diego Espinosa, portfolio manager, joined the adviser in 1996 and began
his investment career in 1991.
AARP Global Growth Fund 63
<PAGE>
AARP International
Stock Fund
Goal
The fund seeks to provide long-term capital growth while actively seeking
to reduce downside risk as compared with other international mutual funds.
The fund changed its name from the AARP International Growth and Income
Fund on June 30, 1999.
Main Investment Strategy
The fund pursues its goal by investing at least 65% of total assets in
common stocks of companies from at least three different developed
countries outside the United States. In managing its portfolio, the fund
uses a combination of three analytical disciplines:
Bottom-up research. The portfolio managers look for individual companies
that have sound balance sheets, attractive valuations, good business
prospects and strong positions in their core markets, among other factors.
Top-down analysis. The portfolio managers consider the economic outlooks
for various countries and geographical regions, looking for long-term
changes that could affect the fund's individual securities.
Analysis of global themes. The portfolio managers look for significant
changes in the business environment to identify and invest in companies in
industries that may benefit from these changes. The fund intends to keep
its holdings diversified across industries and geographical areas,
although, depending on the portfolio managers' outlook, it may increase or
decrease its exposure to a given industry or area. The fund will normally
sell a stock when it reaches a target price or if the portfolio managers
believe it no longer looks attractive, based on their overall assessment.
64 AARP International Stock Fund
<PAGE>
Other Investments
Most of the fund's investments will be in stocks, but up to 20% of total
assets may be invested in bonds with investment-grade credit ratings as
determined by one or more nationally recognized rating services.
Investment-grade debt securities are those in the rating agency's top four
categories of credit quality. The fund may also invest in unrated
securities that its portfolio managers believe to be of comparable
quality. Although the managers are permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities, currencies, or securities), the managers don't intend to use
them as principal investments, and might not use them at all.
Risk Management Strategies
The fund manages risk by diversifying investments widely among industries,
market sectors and companies. As a temporary defensive measure, the fund
may invest up to 100% of assets in cash or cash equivalents in U.S. or
Canadian currency. In such a case, the fund would not be pursuing, and
might not achieve, its goal.
Main Risks
The primary factor affecting this fund's performance is stock market
movements in the countries in which the fund is invested. Foreign
investments carry added risks due to the possibility of inadequate or
inaccurate financial information about companies, potential political
disturbances and fluctuations in currency exchange rates. In addition, the
strategy used by the fund or specific investments may not perform as well
as expected. If the portfolio managers' choice of countries, market
sectors or specific securities doesn't perform as well as expected, the
fund could underperform or lose money.
This fund may trade securities more actively than many funds, which could
mean higher expenses (thus lowering return) and higher taxable
distributions.
The fund's other investment strategies entail other risks:
o The portfolio managers' attempts to manage downside risk may also
reduce performance in a strong market.
o Foreign securities are often thinly traded and could be harder to
value or sell at a fair price generally, or in specific market
situations.
AARP International Stock Fund 65
<PAGE>
Past Performance
The bar chart shows how fund returns have varied from year to year, which
may give some idea of risk. The table shows average annual total returns
for the fund 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. Keep in mind that past performance is no
guarantee of future performance.
The fund's Board approved a change in the fund's goal and investment
strategy on June 30, 1999. Performance data prior to that time is not
reflective of the fund's current goal and strategy.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
11.38 35.67
'98 '99
Best Quarter: 4th Quarter '99, 28.98%
Worst Quarter: 3rd Quarter '98, -17.13%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------
Fund 35.67 19.60*
Index 26.96 17.66**
Index: MSCI (Morgan Stanley Capital International) EAFE Index, an
unmanaged index of global stock markets, including Europe, Australia and
the Far East, excluding the U.S., weighted by market value.
* Fund Inception: 2/1/1997
** Index comparison begins 1/31/1997
In both the chart and the table, total returns from the date of inception
through 1999 would have been lower if operating expenses hadn't been
reduced.
66 AARP International Stock Fund
<PAGE>
Fees and Expenses
The table below describes the expenses you could expect as an investor in
this fund. "Annual Fund Operating Expenses" are deducted from fund assets,
and therefore reduce the total return.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Shareholder Fees None
Annual Fund Operating Expenses
Management Fee 0.88
Distribution (12b-1) Fees None
Other Expenses* 1.52
Total Annual Fund Operating Expenses 2.40
Expense Reimbursement 0.65
Net Expenses** 1.75
* "Other Expenses" are restated to reflect changes in certain shareholder
servicing fees.
** By contract, total annual fund operating expenses are capped at 1.75%
through 1/31/2001.
Based on the costs above (including one year of capped expenses in each
period), this example is designed to help you compare this fund's expenses
to those of other funds. The example assumes expenses remain the same and
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.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$178 $686 $1,222 $2,687
Portfolio Managers
Irene T. Cheng, lead portfolio manager, joined the adviser in 1993 and
began her investment career in 1985.
Nicholas Bratt, portfolio manager, joined the adviser in 1976 and began
his investment career in 1974.
Carol L. Franklin, portfolio manager, joined the adviser in 1981 and began
her investment career in 1975.
Marc J. Slendebroek, portfolio manager, joined the adviser in 1994 and
began his investment career in 1989.
AARP International Stock Fund 67
<PAGE>
Managed Investment
Portfolios
AARP Diversified Income with
Growth Portfolio
AARP Diversified Growth Portfolio
These portfolios invest in a mix of other AARP Mutual Funds, except those
funds that seek to provide tax-free income. They are intended to provide
"one-stop shopping" for investors who seek professional asset allocation
in one investment. Each portfolio has its own goal, investment strategy
and risk profile. Each portfolio can serve as a complete investment
program or as a component of your overall portfolio.
The managed investment portfolios are designed to address the needs of
investors in the later stages of life. They emphasize stability and
moderate growth. It is important to understand that your optimal personal
asset allocation is likely to shift more toward income investments as you
age. You should periodically review your investment goals to be sure that
a managed investment portfolio fits into your overall investment
portfolio.
At the direction of their trustees, these funds do not invest in
securities issued by tobacco-producing companies. Each fund's investment
goals may be changed without a vote of shareholders.
68
<PAGE>
Are Managed Investment Portfolios Right for You?
A managed investment portfolio may be a good choice for you if:
o you would like to build your overall portfolio with only one or a
few investments
o you can invest for at least three years in the AARP Diversified
Income with Growth Portfolio, or for at least five years in the AARP
Diversified Growth Portfolio
o you can handle some ups and downs in investment performance
Managed Investment Portfolios 69
<PAGE>
AARP Diversified Income
with Growth Portfolio
Goal
The portfolio seeks current income with modest long-term appreciation.
Main Investment Strategy
The portfolio pursues its goal by investing in at least five underlying
AARP Mutual Funds, with an emphasis on the Income Funds. In managing its
allocation among the AARP Mutual Funds, the portfolio does not attempt to
time the market.
Under normal market conditions, the portfolio will generally have 70% of
total assets invested in underlying AARP Income Funds, AARP Money Funds
and, to a lesser extent, cash. The remainder of total assets will be
invested in underlying AARP Growth Funds, AARP Growth and Income Funds and
AARP Global Funds. While the allocation of investment in AARP Income
Funds, AARP Money Funds and cash in the aggregate will remain relatively
constant, the allocation of investment in each underlying AARP Mutual Fund
may vary over time.
70 AARP Diversified Income with Growth Portfolio
<PAGE>
Risk Management Strategies
The portfolio manages risk by diversifying widely among the AARP Mutual
Funds. Each underlying AARP Mutual Fund is also managed to limit downside
risk in comparison with similar funds.
As a temporary defensive measure, the portfolio may invest up to 100% of
assets in cash or cash equivalents. In such a case, the portfolio would
not be pursuing, and might not achieve, its goal.
Main Risks
The portfolio's performance is most significantly affected by the
performance of the underlying funds, particularly the AARP Income Funds
and the AARP Money Funds. In general, income mutual funds respond to the
same economic forces as bonds. A rise in interest rates, therefore, is the
most likely to cause bonds, income mutual funds and portfolios that invest
in income mutual funds to lose money. Bond issuers may choose to prepay
their bonds in times of falling interest rates. Moreover, it is also
possible that bonds held by the underlying AARP Mutual Funds could be
downgraded in credit rating or go into default.
To the extent that the portfolio invests in underlying equity funds, the
most significant risk is stock market movements. The portfolio's asset
allocation could prove to be ineffective relative to other multi-fund
income portfolios, and the portfolio could lose money.
AARP Diversified Income with Growth Portfolio 71
<PAGE>
Past Performance
The bar chart shows how portfolio returns have varied from year to year,
which may give some idea of risk. The table shows average annual total
returns for the portfolio and two broad-based market indexes (which,
unlike the portfolio, do not have any fees or expenses). The performance
of both the portfolio and the indexes varies over time. All figures on
this page assume reinvestment of dividends and distributions. Keep in mind
that past performance is no guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
7.66 5.04
'98 '99
Best Quarter: 4th Quarter '99, 4.54%
Worst Quarter: 3rd Quarter '99, -1.80%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------
Fund 5.04 8.12*
Index 1 -0.82 5.79**
Index 2 21.04 25.81**
Index 1: Lehman Brothers Aggregate Bond Index, an unmanaged measure of
Treasury securities, agency securities, corporate bonds and mortgage
securities, weighted by market value.
Index 2: Standard & Poor's 500 Composite Stock Price Index (S&P 500
Index), an unmanaged, capitalization- weighted index that includes 500
large-cap U.S. stocks.
* Fund Inception: 2/1/1997
** Index comparisons begin 1/31/1997
In both the chart and the table, total returns from the date of inception
through 1999 would have been lower if some underlying funds' operating
expenses hadn't been reduced.
72 AARP Diversified Income with Growth Portfolio
<PAGE>
Fees and Expenses
The portfolio is expected to incur no operating expenses. However,
shareholders of the portfolio will indirectly bear the portfolio's pro
rata share of the operating expenses incurred by the underlying AARP
Mutual Funds in which the portfolio invests. A range is provided below
rather than a single number because the portfolio's share of expenses
changes depending on its asset allocation among the underlying AARP Mutual
Funds.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Range of Avg. Weighted
Expense Ratio as of 9/30/1999 0.65% to 1.40%
Based on the costs above, the following example is designed to
show an approximate estimate of this portfolio's expenses compared
to those of other funds. The example assumes a $10,000 investment,
5% annual returns, expenses calculated at the midpoint of the
current expense range, reinvestment of all dividends and
distributions and that you sold your shares at the end of each
period. This is only an example; your actual expenses will be
different.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$105 $326 $566 $1,254
Portfolio Managers
Shahram Tajbakhsh, lead portfolio manager, joined the adviser in 1996 and
began his investment career in 1991.
Salvatore J. Bruno, portfolio manager, joined the adviser in 1991 and
began his investment career in 1990.
Josephine W. K. Chu, portfolio manager, joined the adviser in 1997 and
began her investment career at that time.
AARP Diversified Income with Growth Portfolio 73
<PAGE>
AARP Diversified
Growth Portfolio
Goal
The portfolio seeks to provide long-term growth of capital.
Main Investment Strategy
The portfolio pursues its goal by investing in at least five underlying
AARP Mutual Funds, with an emphasis on growth-oriented funds. In managing
its allocation among the AARP Mutual Funds, the portfolio does not attempt
to time the market.
Under normal market conditions, the portfolio will generally have 70% of
total assets invested in underlying equity AARP Mutual Funds, including
AARP Growth Funds, AARP Growth and Income Funds and AARP Global Funds. The
remainder of total assets will be invested in underlying AARP Income
Funds, AARP Money Funds or cash. While the allocation of investment in
underlying equity AARP Mutual Funds in the aggregate will remain
relatively constant, the allocation of investment in each underlying AARP
Mutual Fund may vary over time.
74 AARP Diversified Growth Portfolio
<PAGE>
Risk Management Strategies
The portfolio manages risk by diversifying widely among AARP Mutual Funds.
Each underlying AARP Mutual Fund is also managed to limit downside risk in
comparison with similar funds.
As a temporary defensive measure, the portfolio may invest up to 100% of
assets in cash or cash equivalents. In such a case, the portfolio would
not be pursuing, and might not achieve, its goal.
Main Risks
The portfolio's performance is most significantly affected by the
performance of the underlying funds, particularly the AARP Growth Funds,
AARP Growth and Income Funds and AARP Global Funds. In general, growth
mutual funds respond to the same economic forces as stocks. A market
downturn, therefore, is the most likely to cause stocks, growth mutual
funds and portfolios that invest in growth mutual funds to lose money.
To the extent that the portfolio invests in underlying fixed-income funds,
the most significant risk is that a rise in interest rates could lower the
prices of bonds, income mutual funds and portfolios that invest in income
mutual funds. Bond issuers may choose to prepay their bonds in times of
falling interest rates. It is also possible that bonds held by the
underlying AARP Mutual Funds could be downgraded in credit rating or go
into default.
The portfolio's asset allocation could prove to be ineffective relative to
other multi-fund growth portfolios, and the portfolio could lose money.
AARP Diversified Growth Portfolio 75
<PAGE>
Past Performance
The bar chart shows how portfolio returns have varied from year to year,
which may give some idea of risk. The table shows average annual total
returns for the portfolio and two broad-based market indexes (which,
unlike the portfolio, do not have any fees or expenses). The performance
of both the portfolio and the indexes varies over time. All figures on
this page assume reinvestment of dividends and distributions. Keep in mind
that past performance is no guarantee of future performance.
--------------------------------------------------------------------------
ANNUAL TOTAL RETURNS (%) as of 12/31 each year
--------------------------------------------------------------------------
9.71 12.56
'98 '99
Best Quarter: 4th Quarter '99, 10.53%
Worst Quarter: 3rd Quarter '98, -8.03%
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
--------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------
Fund 12.56 13.38*
Index 1 -0.82 5.79**
Index 2 21.04 25.81**
Index 1: Lehman Brothers Aggregate Bond Index, an unmanaged measure of
Treasury securities, agency securities, corporate bonds and mortgage
securities, weighted by market value.
Index 2: Standard & Poor's 500 Composite Stock Price Index (S&P 500
Index), an unmanaged, capitalization-weighted index that includes 500
large-cap U.S. stocks.
* Fund Inception: 2/1/1997
** Index comparisons begin 1/31/1997
In both the chart and the table, total returns from the date of inception
through 1999 would have been lower if some underlying funds' operating
expenses hadn't been reduced.
76 AARP Diversified Growth Portfolio
<PAGE>
Fees and Expenses
The portfolio is expected to incur no operating expenses. However,
shareholders of the portfolio will indirectly bear the portfolio's pro
rata share of the operating expenses incurred by the underlying AARP
Mutual Funds in which the portfolio invests. A range is provided below
rather than a single number because the portfolio's share of expenses
changes depending on its asset allocation among the underlying AARP Mutual
Funds.
--------------------------------------------------------------------------
FEE TABLE (%)
--------------------------------------------------------------------------
Range of Avg. Weighted
Expense Ratio as of 9/30/1999 0.65% to 2.03%
Based on the costs above, the following example is designed to show an
approximate estimate of this portfolio's expenses compared to those of
other funds. The example assumes a $10,000 investment, 5% annual returns,
expenses calculated at the midpoint of the current expense range,
reinvestment of all dividends and distributions and that you sold your
shares at the end of each period. This is only an example; your actual
expenses will be different.
--------------------------------------------------------------------------
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$136 $425 $734 $1,613
Portfolio Managers
Shahram Tajbakhsh, lead portfolio manager, joined the adviser in 1996 and
began his investment career in 1991.
Salvatore J. Bruno, portfolio manager, joined the adviser in 1991 and
began his investment career in 1990.
Josephine W. K. Chu, portfolio manager, joined the adviser in 1997 and
began her investment career at that time.
AARP Diversified Growth Portfolio 77
<PAGE>
Your Account
Opening an AARP Mutual Fund Account
Making Exchanges and Redemptions
Tax Considerations and Distributions
How to Reach Us
The AARP Investment Program's Educational
Commitment
As a participant in the AARP Investment Program, you have many choices for
opening and managing your account. This section contains charts that
provide the basic directions for buying, exchanging and selling shares.
Supplemental details about transaction policies follow the charts.
While the AARP Investment Program is designed specifically for AARP
members, the AARP Mutual Funds are open to all investors age 18 or older.
78
<PAGE>
Opening an AARP Mutual Fund Account
In keeping with our goal of helping people start or expand their personal
portfolios easily, the AARP Investment Program offers among the lowest minimum
investment requirements of any mutual fund family.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIREMENTS
- --------------------------------------------------------------------------------
Minimum Initial Investment
- --------------------------------------------------------------------------------
Individual Retirement Accounts(IRAs)+ $250
Gift to Minors Account
(UGMA/UTMAs)+ $250
Non-Retirement Accounts+
AARP GNMA and U.S. Treasury Fund $500
AARP Balanced Stock and Bond Fund $500
AARP Growth and Income Fund $500
All other funds* $2,000
AARP Premium Money Fund $10,000
+ Lower minimums do not apply to AARP Premium Money Fund.
* For these funds, you may open an account with as little as $500, if you
establish an Automatic Investment Plan with a monthly investment of at
least $100 and continue this Automatic Investment Plan at least until your
account reaches $2,000.
- --------------------------------------------------------------------------------
WAYS TO OPEN OR ADD TO YOUR ACCOUNT
- --------------------------------------------------------------------------------
Open an Account Add to Your Account
- --------------------------------------------------------------------------------
Mail Send completed Send a personalized
enrollment form and investment slip or
AARP Investment Program check payable to "AARP short note that
from Scudder Investment Program." includes:
P.O. Box 2540 o fund name
Boston, MA 02208-2540 For all enrollment o account number
forms, call o check payable to
800-253-2277. "AARP Investment
Program."
Automatic Investment Plan Fill in the information Once you specify a
(AIP) required on your dollar amount (minimum
enrollment form and $50), investments are
include a voided check. automatic.
Your bank must be a Call 800-253-2277 for
member of the Automated an enrollment form for
Clearing House (ACH) this service.
system.
Opening an AARP Mutual Fund Account 79
<PAGE>
- --------------------------------------------------------------------------------
WAYS TO OPEN OR ADD TO YOUR ACCOUNT
- --------------------------------------------------------------------------------
Open an Account Add to Your Account
- --------------------------------------------------------------------------------
Wire Send completed Call your bank for a
enrollment form and control number.
Note: AARP IRA and AARP then call an AARP
Keogh Plan accounts cannot Mutual Fund
be opened by wire. representative at
800-253-2277 to get
your account number.
Instruct your bank to
wire funds to:
State Street Bank and
Trust Company
Boston, MA 02101
ABA: 011000028
AC-99035420
AARP fund
Your name and acct.#
Phone -- Once you have signed up
for telephone services,
call 800-253-2277 to
purchase by transfer
from your bank.
Your bank must be a
member of the Automated
Clearing House (ACH)
system.
Web Site -- Once you have
registered on the Web
Site (aarp.scudder.com),
you may purchase shares
online by transfers
from your bank account.
Payroll Deduction or Select either of these Once you specify a
Direct Deposit options on your dollar amount (minimum
enrollment form and $50), investments are
For payroll deduction, you submit it. You will automatic.
will need to make sure receive further
your employer can instructions by mail.
accommodate this service.
80 Opening an AARP Mutual Fund Account
<PAGE>
How Share Prices Are Calculated
The adviser determines the net asset value (NAV) per share of each AARP Mutual
Fund as of the close of regular trading on the New York Stock Exchange, normally
4 p.m. eastern time, on each trading day. The money funds also calculate net
asset values at 12 noon eastern time, on each trading day. NAV is calculated by
dividing the value of total fund assets, less all liabilities, by the total
number of shares outstanding. Market prices are generally used to determine the
value of the fund's assets. Short-term securities purchased with 60 days or less
until maturity are valued at amortized cost. If market prices are not readily
available or if a price is not considered market indicative, a security may be
valued by another method that the adviser believes accurately reflects fair
value. Where a security's price is not considered market indicative, its
valuation may differ from an available market quotation. In valuing securities,
the money market funds use the amortized cost method.
Purchase orders received before the regular close of business of the New York
Stock Exchange will be executed at the NAV calculated at that day's close.
Because foreign securities markets have different business days than the AARP
Mutual Funds, the value of foreign securities in a fund's portfolio could change
on a day when you are not able to buy or sell fund shares.
Purchases by Personal Check
Checks or money orders should be in U.S. dollars and payable to "AARP Investment
Program." We do not accept checks made out to you and endorsed over to us,
otherwise known as third-party checks.
Checkwriting Privileges
Free checkwriting privileges are available to shareholders in any of the Money
Funds. You must wait seven business days before writing a check against any fund
shares that were purchased by personal check. Minimum check amounts are $1,000
for the AARP Premium Money Fund and $100 for the other money funds. You cannot
close out your account by writing checks. The funds reserve the right to impose
a fee or terminate this service upon notice to shareholders.
Wire Transactions
The AARP Investment Program does not charge any fee for wire transfers from your
bank to the AARP Mutual Funds. A fee of $5.00 will be charged for each wire sent
to your bank. Be aware that your bank may also charge a fee to send or receive
wires, particularly for international transfers.
Opening an AARP Mutual Fund Account 81
<PAGE>
Making Exchanges and Redemptions
As with purchase orders, redemption requests received before the close of
business of the New York Stock Exchange will be executed at the NAV calculated
at that day's close.
Exchanges between AARP Mutual Funds are an option for shareholders who bought
their fund shares directly from the AARP Investment Program and for many other
investors as well. Exchanges are a shareholder privilege, not a right: we may
reject or limit any exchange order, particularly when there appears to be a
pattern of "market timing" or other frequent purchases and sales. We may also
reject or limit purchase orders, for these or other reasons.
Remember that exchanges (transfers from one AARP Mutual Fund to another) have
the same tax consequences as redemptions.
- --------------------------------------------------------------------------------
WAYS TO EXCHANGE OR REDEEM YOUR SHARES
- --------------------------------------------------------------------------------
To Exchange Shares
Between Investment
Program Mutual Funds To Redeem Shares
- --------------------------------------------------------------------------------
Phone Call a mutual fund If you want the
representative at proceeds sent to your
800-253-2277. registered address,
call the Easy-Access
You can also use the line at 800-631-4636. A
automated Easy-Access check will be mailed to
line by calling you on the following
800-631-4636. business day.
You must call
800-253-2277 for
instructions to have
the check sent anywhere
else.
- --------------------------------------------------------------------------------
82 Making Exchanges and Redemptions
<PAGE>
To Exchange Shares
Between Investment
Program Mutual Funds To Redeem Shares
- --------------------------------------------------------------------------------
Mail Your instructions Your instructions
should include: should include:
AARP Investment Program
from Scudder o your account number o your account number
P.O. Box 2540 o names of the funds o names of the funds
Boston, MA 02208-2540 and number of shares and number of shares
or dollar amount you or dollar amount you
AARP Keogh Plan shares can want to exchange want to redeem
only be redeemed by mail.
A signature guarantee
is required whenever
you:
o redeem more than
$100,000
o want the check
payable to someone
else
o want to send
proceeds to a
different address
o have changed your
account address
within the last 15
days
- --------------------------------------------------------------------------------
Fax Fax same instructions Fax same instructions
as you would by mail to as you would by mail to
800-821-6234. 800-821-6234.
- --------------------------------------------------------------------------------
Web Site Once you have --
registered on the Web
Site (aarp.scudder.com),
you may exchange shares
between Investment
Program funds online.
Automatic Withdrawal Plan -- Once you specify a
dollar amount (minimum
Requires $10,000 minimum $50) and a day,
fund balance redemptions will be
mailed or wired
automatically each
month.
- --------------------------------------------------------------------------------
Making Exchanges and Redemptions 83
<PAGE>
To Exchange Shares
Between Investment
Program Mutual Funds To Redeem Shares
- --------------------------------------------------------------------------------
Direct Distributions -- If you want dividends
and capital gains sent
to your bank account,
call 800-253-2277.
- --------------------------------------------------------------------------------
Systematic Retirement -- You define the dollar
Withdrawal Plan amount and interval
(monthly, quarterly,
Applies to AARP IRA and annually) for automatic
AARP Keogh Plans distributions from your
IRA or Keogh Plan
account.
- --------------------------------------------------------------------------------
Redeeming Shares Purchased by Check
If you open an account by check and put in a request to redeem shares within
seven business days, your request will be processed immediately, but the
proceeds will be held until seven business days after your initial purchase.
Signature Guarantees
A signature guarantee is simply a certification of your signature; it is a
valuable safeguard against fraud. You can get a signature guarantee from most
brokers, banks, savings institutions and credit unions. A notary public cannot
provide a signature guarantee.
Other Policies
The AARP Mutual Funds reserve certain rights in administering this investment
program.
o Initial investment minimums may be waived or changed at a fund's
discretion.
o A fund may suspend redemptions in certain emergencies.
o If your account balance falls below the minimum due to redemptions (as
opposed to market movements), the fund may give you 60 days' notice to
bring the balance back up. If you do not do this, the fund may close out
the account and mail you a check for the proceeds.
84 Making Exchanges and Redemptions
<PAGE>
o Except for the Money Funds and Income Funds, a fund may redeem in kind.
That is, it may honor redemption requests with readily marketable fund
securities instead of cash. In most cases, a 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 fund's net asset value, whichever is less. There may be
transaction costs associated with converting these securities to cash.
o A fund may reject purchase orders for any reason.
Tax Considerations and Distributions
Whenever you redeem or exchange shares, you are likely to generate a capital
gain, or loss, which will be short- or long-term depending on how long you have
held the shares. Each fund pays dividends or distributions, which you can choose
to receive in the form of cash or to reinvest in any of the AARP Mutual Funds.
Your tax liability is the same either way.
Type of Distribution Federal Tax Status
- --------------------------------------------------------------------------------
Dividends from Net Investment Income Ordinary Income
Short-Term Capital Gains Ordinary Income
Long-Term Capital Gains Capital Gain
Tax-Free Dividends Tax-Free
The tax-free funds in this prospectus
intend to avoid the alternative minimum
tax. Dividends may, however, be subject
to state or local income taxes.
Distributions from the Money Funds and Income Funds are paid monthly and are
expected to be taxable primarily as ordinary income. Distributions from the
other AARP Mutual Funds are paid quarterly or annually and are expected to be
taxable primarily as capital gains. Distribution dates are calculated from each
fund's fiscal year, usually September 30.
You may be able to claim a tax credit or deduction for your share of any foreign
taxes the global funds pay.
The funds issue detailed annual tax information statements for each investor,
recording all distributions and redemptions for the preceding year. Any investor
who does not supply a valid Social Security or taxpayer identification number to
the funds may be subject to federal backup withholding tax. AARP IRA, AARP
SEP-IRA and AARP Keogh Plan accounts are exempt from withholding regulations.
Tax Considerations and Distributions 85
<PAGE>
Be aware that if you invest in a fund shortly before an expected taxable
dividend or capital gain distribution, you may end up getting part of your
investment back in the form of taxable income.
Corporations may be able to take a dividends-received deduction for a portion of
the income dividends they receive from funds other than the money funds and the
income funds.
Fund distributions may also be subject to state, local and foreign taxes. You
should consult your tax adviser about your particular tax situation.
Retirement Plans
The funds offer regular Individual Retirement Accounts (IRAs), Roth IRAs,
Simplified Employee Pension IRAs (SEP-IRAs), and Keogh Plan accounts. Call an
AARP Mutual Fund representative at 800-253-2277 for an information kit,
including all the necessary forms.
86 Tax Considerations and Distributions
<PAGE>
How to Reach Us
EASY-ACCESS LINE
Call 1-800-631-4636 24 hours a day, year-round
This automated number provides current information on the funds and your
account. If you have signed up for telephone services, you can also use this
number to exchange and redeem AARP Mutual Fund shares.
WEB SITE
aarp.scudder.com
You can review your portfolio and make online transactions, including purchases
and exchanges between Investment Program Mutual Funds, once you have registered
on the site. You can also customize the site according to your preference. The
Learning Center includes online versions of educational publications and past
issues of Financial Focus and Investment Insight, the Program's newsletters. You
may also contact us through the site's e-mail capability.
AARP INVESTMENT PROGRAM REPRESENTATIVES
Call 1-800-253-2277 8AM-8PM M-F, eastern time
Call this number to speak with a trained representative who can answer your
investing questions and assist you with transaction-related services. You may
also use this number to request a variety of investment education guides and
prospectuses.
CONFIDENTIAL FAX LINE
1-800-821-6234 24 hours a day, year-round
Signed exchange and redemption requests received after 4 p.m. eastern time on a
business day or over a weekend or holiday will be executed the following
business day.
TDD LINE
1-800-634-9454 9AM-5PM M-F, eastern time
Dial this number with a TDD machine to communicate with registered AARP Mutual
Fund representatives specially trained to handle services for hearing-impaired
investors.
How to Reach Us 87
<PAGE>
The AARP Investment Program's
Educational Commitment
In addition to its investment goal, each fund in the AARP Investment Program has
the secondary goal of educating shareholders on investment topics affecting
their lives. Educational services available to shareholders include the
following:
PUBLICATIONS
With the new Financial Library, available on the Web site or by calling us, the
AARP Investment Program offers a wide collection of educational guides on
investing subjects of interest to people over 50. These are all topics
shareholders have asked about and that can help shareholders prepare for life's
financial eventualities. Broad topic areas include:
o Planning for retirement
o Planning your legacy
o Investing and the markets
o Women and investing
o Taxes and mutual funds
o Preparing financial plans
The AARP Investment Program also provides shareholders with a monthly
newsletter, Financial Focus, which provides information on wise investing,
Program services and fund performance updates, as well as a quarterly
newsletter, Investment Insight, which provides perspectives on global and
domestic markets and economic trends.
88 The AARP Investment Program's Educational Commitment
<PAGE>
SERVICES
AARP Lump Sum Service Retirement specialists can help you make decisions about
your lump sum distribution from an employer's 401(k) or pension plan. An
information kit is provided. Call 1-800-253-2277.
AARP Legacy Service This service helps you organize important financial
documents, making it easier to share your investment information and goals with
your spouse or heirs and to plan for the orderly transfer of assets in the event
of a death. We also offer transfer ownership assistance to heirs for your AARP
accounts. Information kits are provided. Call 1-800-253-2277.
AARP Goal Setting and Asset Allocation Service A guidebook and self-scoring
worksheet are available to help you reach your goals by appropriately allocating
your assets across types of investments. Call 1-800-253-2277 to speak to a
specially trained representative.
Account Statements and Reports You will receive prompt confirmation statements
for all of your transactions. Your consolidated monthly statement details your
current account status and records all transactions. (AARP IRA and Keogh Plan
investors receive consolidated statements quarterly.)
You will also receive a mid-year report, an annual report, and a current
prospectus each year.
The AARP Investment Program's Educational Commitment 89
<PAGE>
Fund Details
Investment Adviser
The investment adviser for all of the AARP Mutual Funds is Scudder Kemper
Investments, Inc., 345 Park Avenue, New York, NY. Scudder Kemper has more
than 80 years of mutual fund and investment management experience.
The Role of AARP
AARP selected the adviser to develop and manage this investment program in
1984. In keeping with the organization's mission, AARP's goal is to
encourage more of its members to plan for retirement and beyond. The AARP
family of mutual funds is specially designed to address the needs of
persons age 50 and older. While AARP takes no part in any of the
investment decisions made by the adviser, it does offer a wealth of
experience and information about the requirements of its members. AARP
subsidiary staff monitor service quality and Program communications in
keeping with the rigorous standards that are applied to the delivery of
all of its member services. AARP is represented on the AARP Mutual Funds'
board.
Adviser Compensation
The adviser manages the AARP Mutual Funds' business activities and is
ultimately responsible for all investment decisions, subject to the
policies of each fund's trustees and to each fund's respective objectives
and policies. In return for these services, the mutual funds in the AARP
Investment Program pay the adviser an annual fee, which is calculated from
a base fee rate that applies to the Investment Program as a whole and
individual fund fee rates that vary from fund to fund.
90 Investment Adviser
<PAGE>
The base fee rate is a percentage of the combined net assets of the Investment
Program and decreases with the size of the program. The fee for the first $2
billion is always calculated at 0.35%, and additional assets are assessed fees
at successively lower rates as shown in the following table.
- --------------------------------------------------------------------------------
BASE FEE RATE
- --------------------------------------------------------------------------------
Combined Net Assets of
Investment Program Annual Base Fee Rate
- --------------------------------------------------------------------------------
First $2 billion 0.35%
$2-4 billion 0.33%
$4-6 billion 0.30%
$6-8 billion 0.28%
$8-11 billion 0.26%
$11-14 billion 0.25%
Over $14 billion 0.24%
Example
If the combined net assets of the Investment Program were $5 billion, the base
fee would be calculated as:
($2 billion x 0.0035) = $7.0 million
+($2 billion x 0.0035) = $6.6 million
+($2 billion x 0.0035) = $3.0 million
-------------------------------------
$16.6 million
Most individual funds also pay an annual fee based on their respective average
daily NAVs as shown in the following table. Also shown in the table are the
actual advisory fees paid by each fund for the 12 months ended with its most
recent fiscal year end, as a percentage of each fund's average daily NAVs:
Investment Adviser 91
<PAGE>
- --------------------------------------------------------------------------------
INDIVIDUAL FUND FEE
- --------------------------------------------------------------------------------
Individual Total
Fund Advisory
AARP Fund Fee Rate Fees Paid
- --------------------------------------------------------------------------------
Money Market Funds
AARP High Quality Money Fund 0.10% 0.38%
AARP High Quality Tax Free
Money Fund 0.10% 0.38%
AARP Premium Money
Fund 0.10% 0.00%
- --------------------------------------------------------------------------------
Income Funds
AARP High Quality Short Term
Bond Fund 0.19% 0.47%
AARP GNMA and U.S.
Treasury Fund 0.12% 0.40%
AARP Insured Tax Free General
Bond Fund 0.19% 0.47%
AARP Bond Fund for
Income 0.28% 0.08%
- --------------------------------------------------------------------------------
Growth and Income Funds
AARP Balanced Stock and
Bond Fund 0.19% 0.47%
AARP Growth and Income
Fund 0.19% 0.47%
AARP U.S. Stock Index
Fund None(1) None(1)
- --------------------------------------------------------------------------------
Growth Funds
AARP Capital Growth Fund 0.32% 0.60%
AARP Small Company
Stock Fund 0.55% 0.83%
Global Funds
AARP Global Growth Fund 0.55% 0.83%
AARP International Stock
Fund 0.60% 0.23%
- --------------------------------------------------------------------------------
92 Investment Adviser
<PAGE>
- --------------------------------------------------------------------------------
INDIVIDUAL FUND FEE
- --------------------------------------------------------------------------------
Individual Total
Fund Advisory
AARP Fund Fee Rate Fees Paid
- --------------------------------------------------------------------------------
Managed Investment Portfolios
AARP Diversified Income with
Growth Portfolio None None
AARP Diversified Growth
Portfolio None None
(1) The fee for the AARP U.S. Stock Index Fund is paid to the sub-adviser and
calculated quarterly as a percentage of the fund's total assets. The rate
decreases with successive increases in total assets (see example below).
The minimum annual fee is set at $75,000.
First $100 Million 0.07%
$100-$200 Million 0.03%
Over $200 Million 0.01%
For the 12 months through the most recent fiscal year end, the actual
amount paid was 0.02% of average daily net assets.
The adviser pays a portion of the management fee to AARP Financial Services
Corporation (AFSC) in return for advice and other services relating to AARP Fund
investment by AARP members.
The fee paid to AFSC is calculated on a daily basis as a percentage of the
combined net assets of the Investment Program and decreases with the size of the
program. The fee rate is 0.07% for the first $6 billion, 0.06% for the next $10
billion and 0.05% thereafter. (See example on page 135 for calculation method.)
Euro conversion
Funds which 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
Adviser is working to address euro-related issues as they occur and understands
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.
Investment Adviser 93
<PAGE>
Financial Highlights
The financial highlights table for each fund is intended 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 fund share. The total return figures represent
the percentage that an investor in the fund would have earned (or lost),
assuming all dividends and distributions were reinvested. This information has
been audited by PricewaterhouseCoopers LLP, whose report, along with each fund's
financial statements, is included in the annual report (see "Shareholder
reports" on the back cover.)
AARP High Quality Money Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------------
Net investment income .043 .048 .046 .045 .049
Distributions from net
investment income (.043) (.048) (.046) (.045) (.049)
Net asset value, end
of period $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------------
Total Return (%) 4.38 4.86 4.72 4.62 4.99
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 427 581 471 412 384
Ratio of operating expenses
to average daily net
assets (%) .87 .87 .91 .96 .98
Ratio of net investment
income to average daily net
assets (%) 4.29 4.76 4.63 4.54 4.89
94 Financial Highlights AARP High Quality Money Fund
<PAGE>
AARP High Quality Tax Free Money Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
---------------------------------------------------
Net investment income .023 .028 .028 .028 .029
Distributions from net
investment income (.023) (.028) (.028) (.028) (.029)
Net asset value, end
of period $1.000 $1.000 $1.000 $1.000 $1.000
---------------------------------------------------
Total Return (%) 2.37 2.82 2.80 2.80 2.99
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 87 98 103 111 120
Ratio of operating
expenses, net, to average
daily net assets (%) .85 .83 .85 .85 .87
Ratio of net investment
income to average daily net
assets (%) 2.34 2.78 2.76 2.77 2.94
Financial Highlights AARP High Quality Tax Free Money Fund 95
<PAGE>
AARP Premium Money Fund
For the Period
February 1, 1999 (d) to
September 30,
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
Net asset value, beginning of period $1.000
----------------------------
Net investment income .031
Distributions from net investment income (.031)
Net asset value, end of period $1.000
----------------------------
Total Return (%) (a) 3.09(b)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999
- --------------------------------------------------------------------------------
Net assets, end of period ($ millions) 166
Ratio of operating expenses net to average daily
net assets (%) .50(c)
Ratio of operating expenses, before expense
reductions, to average daily net assets (%) .90(c)
Ratio of net investment income to average daily
net assets (%) 4.75(c)
(a) Total returns would have been lower had certain expenses not been reduced.
(b) Not annualized
(c) Annualized
(d) Commencement of operations
96 Financial Highlights AARP Premium Money Fund
<PAGE>
AARP High Quality Short Term Bond Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net asset value, beginning
of period $16.43 $16.13 $15.82 $16.01 $15.05
Income from investment
operations:
Net investment income .89 .94 .93 .92 .94
Net realized and
unrealized gain (loss) on
investments (.70) .30 .31 (.19) .95
--------------------------------------------------
Total from investment
operations .19 1.24 1.24 .73 1.89
Less distributions from:
Net investment income (.89) (.94) (.93) (.92) (.93)
Net asset value, end
of period $15.73 $16.43 $16.13 $15.82 $16.01
--------------------------------------------------
Total Return (%) 1.21 7.90 8.15 4.59 12.98
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 407 448 455 512 533
Ratio of operating expenses
to average daily net assets (%) .87 .90 .93 .91 .95
Ratio of net investment
income to average daily net
assets (%) 5.56 5.77 5.84 5.76 6.13
Portfolio turnover rate (%) 78.97 137.60 83.26 169.96 201.07
Financial Highlights AARP High Quality Short Term Bond Fund 97
<PAGE>
AARP GNMA and U.S. Treasury Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net asset value,
beginning of period $15.40 $15.16 $14.91 $15.19 $14.73
Income from investment
operations:
Net investment income .94 .99 .98 .99 1.01
Net realized and
unrealized gain (loss)
on investments (.79) .24 .25 (.28) .46
----------------------------------------------------
Total from investment
operations .15 1.23 1.23 .71 1.47
Less distributions from:
Net investment income (.94) (.99) (.98) (.99) (.98)
Tax return of capital -- -- -- -- (.03)
----------------------------------------------------
Total distributions (.94) (.99) (.98) (.99) (1.01)
----------------------------------------------------
Net asset value, end
of period $14.61 $15.40 $15.16 $14.91 $15.19
----------------------------------------------------
Total Return (%) 0.99 8.40 8.49 4.79 10.31
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 4,216 4,593 4,584 4,904 5,252
Ratio of operating
expenses to average daily
net assets (%) .65 .61 .65 .64 .67
Ratio of net investment
income to average daily
net assets (%) 6.25 6.52 6.51 6.55 6.77
Portfolio turnover rate (%) 245.22(a) 160.40 86.76 83.44 70.35
(a) The portfolio turnover rate including mortgage dollar roll transactions
was 257.84% for the period ended September 30, 1999.
98 Financial Highlights AARP GNMA and U.S. Treasury Fund
<PAGE>
AARP Insured Tax Free General Bond Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net asset value, beginning
of period $18.85 $18.42 $17.90 $17.74 $16.93
Income from investment
operations:
Net investment income .85 .88 .88 .87 .87
Net realized and
unrealized gain (loss) on
investments (1.07) .48 .61 .16 .81
--------------------------------------------------
Total from investment
operations (.22) 1.36 1.49 1.03 1.68
Less distributions from:
Net investment income (.85) (.88) (.88) (.87) (.87)
Net realized gains on
investments (.07) (.05) (.09) -- --
--------------------------------------------------
Total distributions (.92) (.93) (.97) (.87) (.87)
--------------------------------------------------
Net asset value, end
of period $17.71 $18.85 $18.42 $17.90 $17.74
--------------------------------------------------
Total Return (%) (1.21) 7.57 8.57 5.88 10.21
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 1,592 1,732 1,712 1,755 1,807
Ratio of operating expenses
to average daily net
assets (%) .67 .62 .66 .66 .69
Ratio of net investment
income to average daily net
assets (%) 4.65 4.73 4.87 4.83 5.06
Portfolio turnover rate (%) 7.89 6.21 7.61 18.69 17.45
Financial Highlights AARP Insured Tax Free General Bond Fund 99
<PAGE>
AARP Bond Fund for Income
For the Period
February 1,
Years Ended 1997 (c) to
September 30, September 30,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net asset value, beginning of period $15.41 $15.20 $15.00
Income from investment
operations:
Net investment income 1.00 1.02 .69
Net realized and unrealized gain
(loss) on investments (1.06) .23 .20
------------------------------------------
Total from investment operations (.06) 1.25 .89
Less distributions from:
Net investment income (1.00) (1.02) (.69)
Net realized gains on investments (.17) (.02) --
------------------------------------------
Total distributions (1.17) (1.04) (.69)
------------------------------------------
Net asset value, end of period $14.18 $15.41 $15.20
------------------------------------------
Total Return (%) (d) (.46) 8.47 6.06(a)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 209 180 58
Ratio of operating expenses, net, to
average daily net assets (%) .42 .19 --(b)
Ratio of operating expenses, before
expense reductions, to average daily
net assets (%) .90 1.04 1.53(b)
Ratio of net investment income to
average daily net assets (%) 6.77 6.66 7.03(b)
Portfolio turnover rate (%) 63.90 130.56 13.69(b)
(a) Not annualized
(b) Annualized
(c) Commencement of operations.
(d) Total return would have been lower had certain expenses not been reduced.
100 Financial Highlights AARP Bond Fund for Income
<PAGE>
AARP Balanced Stock and Bond Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999(a) 1998(a) 1997(a) 1996 1995
- --------------------------------------------------------------------------------
Net asset value, beginning
of period $19.96 $21.40 $17.63 $16.40 $14.64
Income from investment
operations:
Net investment income .67 .75 .72 .66 .61
Net realized and
unrealized gain (loss)
on investments .51 (.46) 3.98 1.44 1.79
--------------------------------------------------
Total from investment
operations 1.18 .29 4.70 2.10 2.40
Less distributions from:
Net investment income (.70) (.73) (.72) (.66) (.60)
Net realized gains on
investments (1.13) (1.00) (.21) (.21) (.04)
--------------------------------------------------
Total distributions (1.83) (1.73) (.93) (.87) (.64)
--------------------------------------------------
Net asset value, end
of period $19.31 $19.96 $21.40 $17.63 $16.40
--------------------------------------------------
Total Return (%) 5.84 1.26 27.34 13.08 16.80
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 682 740 638 403 247
Ratio of operating expenses
to average daily net assets (%) .88 .84 .91 .88 1.01
Ratio of net investment
income to average daily net
assets (%) 3.28 3.50 3.71 4.09 4.12
Portfolio turnover rate (%) 47.64 56.69 26.79 35.22 63.77
(a) Based on monthly average shares outstanding during the period.
Financial Highlights AARP Balanced Stock and Bond Fund 101
<PAGE>
AARP Growth and Income Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999(a) 1998(a) 1997(a) 1996 1995
- --------------------------------------------------------------------------------
Net asset value, beginning of
period $49.76 $58.22 $43.94 $38.36 $34.13
Income from investment
operations:
Net investment income 1.02 1.25 1.19 1.17 1.11
Net realized and
unrealized gain (loss) on
investments 4.91 (3.45) 16.00 6.40 5.44
-------------------------------------------------
Total from investment
operations 5.93 (2.20) 17.19 7.57 6.55
Less distributions from:
Net investment income (1.12) (1.19) (1.19) (1.15) (1.09)
Net realized gains on
investments (5.55) (5.07) (1.72) (.84) (1.23)
-------------------------------------------------
Total distributions (6.67) (6.26) (2.91) (1.99) (2.32)
-------------------------------------------------
Net asset value, end of period $49.02 $49.76 $58.22 $43.94 $38.36
-------------------------------------------------
Total Return (%) 12.10 (4.22) 40.70 20.20 20.43
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 6,107 6,452 6,606 4,219 3,007
Ratio of operating expenses
to average daily net
assets (%) .76 .67 .71 .69 .72
Ratio of net investment
income to average daily net
assets (%) 1.98 2.22 2.38 2.94 3.28
Portfolio turnover rate (%) 30.41 40.19 33.40 25.02 31.26
(a) Based on monthly average shares outstanding during the period.
102 Financial Highlights AARP Growth and Income Fund
<PAGE>
AARP U.S. Stock Index Fund
For the Period
February 1,
Years Ended 1997 (b) to
September 30, September 30,
- --------------------------------------------------------------------------------
1999(a) 1998(a) 1997(a)
- --------------------------------------------------------------------------------
Net asset value, beginning of period $19.26 $17.99 $15.00
Income from investment operations:
Net investment income .32 .32 .20
Net realized and unrealized gain
(loss) on investments 5.09 1.37 2.97
------------------------------------------
Total from investment operations 5.41 1.69 3.17
Less distributions from:
Net investment income (.28) (.29) (.18)
Net realized gain on investments -- (.13) --
------------------------------------------
Total distributions (.28) (.42) (.18)
------------------------------------------
Net asset value, end of period $24.39 $19.26 $17.99
------------------------------------------
Total Return (%) (c) 28.02 9.39 21.22(d)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 577 124 38
Ratio of operating expenses, net, to
average daily net assets (%) .50 .50 .50(e)
Ratio of operating expenses, before
expense reductions, to average daily
net assets (%) .76 1.13 2.38(e)
Ratio of net investment income to
average daily net assets (%) 1.31 1.58 1.94(e)
Portfolio turnover rate (%) 3.56 1.11 14.52(e)
(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
Financial Highlights AARP U.S. Stock Index Fund 103
<PAGE>
AARP Capital Growth Fund
Years Ended September 30,
- --------------------------------------------------------------------------------
1999(a) 1998(a) 1997(a) 1996 1995
- --------------------------------------------------------------------------------
Net asset value,
beginning of period $51.24 $57.84 $43.47 $38.36 $31.74
Income from investment
operations:
Net investment income .04 .28 .34 .42 .36
Net realized and
unrealized gain (loss) on
investments 18.19 (2.26) 18.43 5.59 6.91
--------------------------------------------------
Total from investment
operations 18.23 (1.98) 18.77 6.01 7.27
Less distributions from:
Net investment income (.24) (.31) (.41) (.39) (.01)
Net realized gains on
investments (6.55) (4.31) (3.99) (.51) (.64)
--------------------------------------------------
Total distributions (6.79) (4.62) (4.40) (.90) (.65)
--------------------------------------------------
Net asset value, end
of period $62.68 $51.24 $57.84 $43.47 $38.36
--------------------------------------------------
Total Return (%) 36.83 (3.39) 46.72 15.97 23.47
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 1,735 1,247 1,228 826 692
Ratio of operating expenses
to average daily net assets (%) .91 .87 .92 .90 .95
Ratio of net investment
income to average daily net
assets (%) .07 .50 .70 1.05 1.00
Portfolio turnover rate (%) 68.10 53.18 39.04 64.84 98.44
(a) Based on monthly average shares outstanding during the period.
104 Financial Highlights AARP Capital Growth Fund
<PAGE>
AARP Small Company Stock Fund
For the Period
February 1,
Years Ended 1997 (b) to
September 30, September 30,
- --------------------------------------------------------------------------------
1999(a) 1998(a) 1997(a)
- --------------------------------------------------------------------------------
Net asset value, beginning of period $16.93 $20.02 $15.00
Income from investment operations:
Net investment income .02 .01 .04
Net realized and unrealized gain
(loss) on investments .96 (2.98) 4.98
-------------------------------------------
Total from investment operations .98 (2.97) 5.02
Less distributions from:
Net investment income (.02) (.04) --
Net realized gains on investments -- (.08) --
-------------------------------------------
Total distributions (.02) (.12) --
-------------------------------------------
Net asset value, end of period $17.89 $16.93 $20.02
-------------------------------------------
Total Return (%) 5.70 (14.91)(c) 33.53(c)(d)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 66 97 50
Ratio of operating expenses, net,
to average daily net assets (%) 1.70 1.75 1.75(e)
Ratio of operating expenses, before
expense reductions, to average
daily net assets (%) 1.70 1.80 2.79(e)
Ratio of net investment income to
average daily net assets (%) .13 .07 .40(e)
Portfolio turnover rate (%) 17.42 12.21 5.01(e)
(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
Financial Highlights AARP Small Company Stock Fund 105
<PAGE>
AARP Global Growth Fund
For the Period
February 1,
Years Ended 1997 (a) to
September 30, September 30,
- --------------------------------------------------------------------------------
1999 1998 1997 1996
- --------------------------------------------------------------------------------
Net asset value, beginning
of period $18.12 $19.24 $15.49 $15.00
Income from investment
operations:
Net investment income .09 .19 .09 .06
Net realized and
unrealized gain (loss) on
investments 3.16 (.62) 3.72 .43
--------------------------------------------------
Total from investment
operations 3.25 (.43) 3.81 .49
Less distributions from:
Net investment income (.21) (.16) (.06) --
Net realized gain on
investments (.92) (.53) -- --
--------------------------------------------------
Total distributions (1.13) (.69) (.06) --
--------------------------------------------------
Net asset value, end
of period $20.24 $18.12 $19.24 $15.49
--------------------------------------------------
Total Return (%) 18.36 (2.19) 24.67(b) 3.27(b)(c)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 145 145 148 78
Ratio of operating expenses,
net, to average daily net
assets (%) 1.65 1.65 1.75 1.75(d)
Ratio of operating expenses,
before expense reductions,
to average daily net assets (%) 1.65 1.65 1.82 2.31(d)
Ratio of net investment
income to average daily net
assets (%) .44 .99 .55 1.03(d)
Portfolio turnover rate (%) 54.76 59.15 31.34 12.56(d)
(a) Commencement of operations.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized
(d) Annualized
106 Financial Highlights AARP Global Growth Fund
<PAGE>
AARP International Stock Fund
For the Period
February 1,
Years Ended 1997 (a) to
September 30, September 30,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net asset value, beginning of period $16.55 $17.36 $15.00
Income from investment operations:
Net investment income .13 .28 .23
Net realized and unrealized gain
(loss) on investments 2.59 (.83) 2.13
------------------------------------------
Total from investment operations 2.72 (.55) 2.36
Less distributions from:
Net investment income (.20) (.11) --
Net realized gains on investments -- (.15) --
------------------------------------------
Total distributions (.20) (.26) --
------------------------------------------
Net asset value, end of period $19.07 $16.55 $17.36
------------------------------------------
Total Return (%) (b) 16.52 (3.16) 15.73(c)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 35 41 20
Ratio of operating expenses, net, to
average daily net assets (%) 1.75 1.75 1.75(d)
Ratio of operating expenses, before
expense reductions, to average daily
net assets (%) 2.40 2.41 4.28(d)
Ratio of net investment income to
average daily net assets (%) 0.75 1.30 2.35(d)
Portfolio turnover rate (%) 214.14 75.28 50.73(d)
(a) Commencement of operations.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized
(d) Annualized
Financial Highlights AARP International Stock Fund 107
<PAGE>
AARP Diversified Income with Growth Portfolio
For the Period
February 1,
Years Ended 1997 (a) to
September 30, September 30,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net asset value, beginning of period $16.00 $15.96 $15.00
Income from investment operations:
Net investment income .80 .82 .43
Net realized and unrealized gain
(loss) on investments (.12) .03 .96
-------------------------------------------
Total from investment operations .68 .85 1.39
Less distributions from:
Net investment income (.79) (.76) (.43)
Net realized gains on investments (.25) (.05) --
-------------------------------------------
Total distributions (1.04) (.81) (.43)
-------------------------------------------
Net asset value, end of period $15.64 $16.00 $15.96
-------------------------------------------
Total Return (%) (d) 4.21 5.38 9.35(b)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 99 98 43
Ratio of operating expenses to
average daily net assets (%) (e) -- -- --
Ratio of net investment income to
average daily net assets (%) 4.95 5.05 5.13(c)
Portfolio turnover rate (%) 22.53 5.12 5.57(c)
(a) Commencement of operations.
(b) Not Annualized
(c) Annualized
(d) If the Adviser had not maintained some Underlying Funds' expenses, the
total return would have been lower.
(e) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the periods presented, the Portfolio did
bear its share of the operating, administrative and advisory expenses of
the Underlying AARP Funds.
108 Financial Highlights AARP Diversified Income with Growth Portfolio
<PAGE>
AARP Diversified Growth Portfolio
For the Period
February 1,
Years Ended 1997 (a) to
September 30, September 30,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net asset value, beginning of period $17.19 $17.40 $15.00
Income from investment operations:
Net investment income .55 .58 .34
Net realized and unrealized gain
(loss) on investments 1.34 (.37) 2.06
-------------------------------------------
Total from investment operations 1.89 .21 2.40
Less distributions from:
Net investment income (.50) (.32) --
Net realized gain on investments (.31) (.10) --
-------------------------------------------
Total distributions (.81) (.42) --
-------------------------------------------
Net asset value, end of period $18.27 $17.19 $17.40
-------------------------------------------
Total Return (%) (d) 11.08 1.22 16.00(b)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA 1999 1998 1997
- --------------------------------------------------------------------------------
Net assets, end of period
($ millions) 133 130 62
Ratio of operating expenses to
average daily net assets (%) (e) -- -- --
Ratio of net investment income to
average daily net assets (%) 3.00 3.21 3.52(c)
Portfolio turnover rate (%) 31.86 5.55 7.67(c)
(a) Commencement of operations.
(b) Not Annualized
(c) Annualized
(d) If the Adviser had not maintained some Underlying Funds' expenses, the
total return would have been lower.
(e) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the periods presented, the Portfolio did
bear its share of the operating, administrative and advisory expenses of
the Underlying AARP Funds.
Financial Highlights AARP Diversified Growth Portfolio 109
<PAGE>
Where to Get More Information
Annual and Mid-Year Reports
These include commentary from portfolio managers on the market conditions
and investment strategies that significantly affected each fund's
performance, detailed performance data and a complete inventory of each
fund's securities. A report from the funds' auditor is included with the
Annual Report.
Statement of Additional Information (SAI)
The SAI contains more detailed disclosure on features, investments and
policies of the funds. A current SAI has been filed with the U.S.
Securities and Exchange Commission (SEC) and is incorporated by reference
into this document (meaning that it's legally part of this prospectus).
You can make inquiries and obtain the above documents free of charge
(including a large-print version of this prospectus) by contacting:
AARP Investment Program from Scudder
P.O. Box 2540
Boston, MA 02208-2540
800-253-2277
aarp.scudder.com
These documents (no large-print versions) are also available from the SEC:
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-6009
800-SEC-0330
http://www.sec.gov
Note: The SEC requires a duplicating fee for paper copies.
SEC File Numbers
811-3650 AARP Cash Investment Funds
811-4048 AARP Growth Trust
811-4049 AARP Income Trust
811-4050 AARP Tax Free Income Trust
811-07933 AARP Managed Investment Portfolios Trust
P-020 [RECYCLE LOGO] Printed on recycled paper
<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
AARP Cash Investment Funds:
AARP High Quality Money Fund
AARP Premium Money Fund
AARP Income Trust:
AARP High Quality Short Term Bond Fund
AARP GNMA and U.S. Treasury Fund
AARP Bond Fund For Income
AARP Tax Free Income Trust:
AARP High Quality Tax Free Money Fund
AARP Insured Tax Free General Bond Fund
AARP Growth Trust:
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund
AARP Small Company Stock Fund
AARP Capital Growth Fund
AARP Global Growth Fund
AARP International Stock Fund
AARP Managed Investment Portfolios Trust:
AARP Diversified Income with Growth Portfolio
AARP Diversified Growth Portfolio
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the combined Prospectus for all sixteen of the above
funds, dated February 1, 2000, as amended from time to time, copies of which may
be obtained without charge by writing to the AARP INVESTMENT PROGRAM FROM
SCUDDER, P.O. Box 2540, Boston, Massachusetts 02208-2540 or by calling
1-800-253-2277.
The Annual Report to Shareholders of each AARP Mutual Fund, dated September 30,
1999 is incorporated by reference and is hereby deemed to be part of this
Statement of Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
AARP INVESTMENT PROGRAM FROM SCUDDER.....................................................................1
Summary of Advantages and Benefits..............................................................2
THE AARP FUNDS' INVESTMENT OBJECTIVES AND POLICIES.......................................................3
AARP Money Funds................................................................................3
AARP Income Funds...............................................................................8
AARP Growth and Income Funds...................................................................15
AARP Growth Funds..............................................................................18
AARP Global Funds..............................................................................19
AARP Managed Investment Portfolios.............................................................21
Special Investment Policies of the AARP Funds..................................................22
General Investment Policies of the AARP Funds..................................................37
Investment Restrictions........................................................................38
PURCHASES...............................................................................................40
General Information............................................................................40
Checks.........................................................................................40
Wire Transfer of Federal Funds.................................................................40
Share Price....................................................................................40
Share Certificates.............................................................................41
Direct Deposit Program.........................................................................41
Other Information..............................................................................41
REDEMPTIONS.............................................................................................41
General Information............................................................................42
Redemption by Telephone........................................................................42
Redemption by Mail or Fax......................................................................43
Redemption by Checkwriting.....................................................................43
Redemption-in-Kind.............................................................................44
Other Information..............................................................................44
EXCHANGES...............................................................................................44
TRANSACT BY PHONE.......................................................................................45
Purchasing Shares by Transact by Phone.........................................................45
Redeeming Shares by Transact by Phone..........................................................46
FEATURES AND SERVICES OFFERED BY THE AARP MUTUAL FUNDS..................................................46
Automatic Dividend Reinvestment................................................................46
Distributions Direct...........................................................................46
Reports to Shareholders........................................................................46
Consolidated Statements........................................................................47
RETIREMENT PLANS........................................................................................47
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")..................................47
AARP Keogh Plan................................................................................48
Roth Individual Retirement Account (Roth IRA)..................................................49
OTHER PLANS.............................................................................................49
Automatic Investment...........................................................................49
Automatic Withdrawal Plan......................................................................50
Direct Payment of Regular Fixed Bills..........................................................50
DIVIDENDS AND YIELD.....................................................................................50
Performance Information: Computation of Yields and Total Return................................52
TRUST ORGANIZATION......................................................................................56
MANAGEMENT OF THE FUNDS.................................................................................57
Personal Investments by Employees of Scudder...................................................64
TRUSTEES AND OFFICERS...................................................................................64
<PAGE>
TABLE OF CONTENTS (continued)
Page
REMUNERATION............................................................................................68
DISTRIBUTOR.............................................................................................70
TAXES ...............................................................................................71
BROKERAGE AND PORTFOLIO TURNOVER........................................................................76
Brokerage Commissions..........................................................................76
Portfolio Turnover.............................................................................78
NET ASSET VALUE.........................................................................................78
AARP Money Funds...............................................................................78
AARP Non-Money Market Funds....................................................................79
ADDITIONAL INFORMATION..................................................................................80
Experts........................................................................................80
Shareholder Indemnification....................................................................80
Ratings of Corporate Bonds.....................................................................80
Ratings of Commercial Paper....................................................................80
Ratings of Municipal Bonds.....................................................................81
Other Information..............................................................................82
Tax-Exempt Income vs. Taxable Income...........................................................84
FINANCIAL STATEMENTS....................................................................................85
</TABLE>
ii
<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Investment Program from Scudder (Program) was developed by the
American Association of Retired Persons (AARP) to provide an array of managed
investment options for its members. Today's financial markets present an
enormous, ever-changing selection of investments suited for investors with
varying needs. AARP, a non-profit organization dedicated to improving the
quality of life, independence and dignity of older people, has undertaken to
help its members by designing an investment program which attempts to satisfy
the investment and retirement planning needs of most of its members, whether
they are experienced investors or savers who have never invested at all. As with
any program with the "AARP" name, the Program includes special benefits as
described in the combined prospectus for the five trusts -- AARP Cash Investment
Funds, AARP Income Trust, AARP Tax Free Income Trust, AARP Growth Trust, and
AARP Managed Investment Portfolios Trust (Trusts), dated February 1, 2000
(Prospectus). AARP endorses this program which was developed with the assistance
of Scudder Kemper Investments, Inc. (Fund Manager or Scudder), a firm with over
75 years of investment counseling and management experience. Scudder was
selected after an extensive search among qualified candidates, and provides the
Program with continuous and conservative professional investment management.
(See "MANAGEMENT OF THE FUNDS.")
Each of the Trusts is an open-end, management investment company
authorized to issue its shares of beneficial interest in separate series
(Funds). Sixteen funds are currently offered by the five Trusts. The differing
investment objectives of the 16 Funds in the Program provide AARP members with a
variety of sensible investment alternatives, and by matching their own
objectives with those of the different AARP Funds, AARP members may design an
investment program to meet their personal needs. Not all of your money is the
same. There is short-term money, for example money needed for your regular
budgeting and for emergencies, and there is money which can be invested for the
longer term. It is generally thought that three months of income/expenses should
be set aside in a savings account or money market fund to cover short-term
needs. The Program is designed to offer alternatives to keeping all of your
money in short-term fixed price investments like money market funds, insured
short-term savings accounts and insured six-month certificates of deposit. The
AARP Money Funds provide a taxable and a tax free alternative for short-term
monies and the AARP Income Funds, AARP Growth and Income Funds, AARP Growth
Funds and the AARP Global Funds provide a range of choices for longer term
investment dollars and the AARP Managed Investment Portfolios provide
diversification of investment by investing in a select mix of AARP Funds.
Scudder Kemper Investments, Inc., 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 United States. Scudder was established as a partnership in 1919 and
pioneered the practice of providing investment counsel to individual clients on
a fee basis. In 1928, Scudder introduced the first no-load mutual fund to the
public. In 1953, the Fund Manager introduced Scudder International Fund, Inc.,
the first mutual fund available in the United States that invests
internationally in the 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 Scudder and Zurich Kemper Investments, Inc., a Zurich subsidiary,
became part of Scudder. Scudder'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 (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.
Master/Feeder Fund Structure
The Board of Trustees of each Fund has the discretion to retain the
current distribution arrangement for each Fund while investing in a master fund
in a master/feeder fund structure as described below.
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A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds while preserving separate identities or distribution channels at
the feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Summary of Advantages and Benefits
o Experienced Professional Management: The Fund Manager provides
investment advice to the Funds.
o AARP's Commitment: the Program was designed with AARP's active
participation to provide strong, ongoing representation of the members'
interests and to help ensure a high level of service.
o Wide Selection of Investment Objectives: you can emphasize money market
returns and liquidity, income, tax free income, growth, or any
combination of the above.
o Diversification: you may benefit from investing in one or more large
portfolios of carefully selected securities.
o $2,000 Minimum Starting Investment for 12 of the Funds ($500 Minimum
Starting Investment for AARP Balanced Stock and Bond Fund, AARP Growth
and Income Fund and AARP GNMA and U.S. Treasury Fund and $10,000
Minimum Starting Investment for AARP Premium Money Fund): you may make
additional investments in any amount at any time.
o No Sales Commissions: the AARP Funds are no-load funds, so you pay no
sales charges to purchase, transfer or redeem shares, nor do you pay
Rule 12b-1 (i.e., distribution) fees.
o Investment Flexibility and Exchange: you may exchange among the 16 AARP
Funds in the Program at any time, without charge.
o Dividends: the AARP Money Funds, the AARP Income Funds and the AARP
Insured Tax Free Income Fund all pay dividends monthly; the AARP
Balanced Stock and Bond Fund, the AARP Growth and Income Fund and the
AARP Diversified Income with Growth Portfolio are expected to pay
dividends quarterly; and the AARP U.S. Stock Index Fund, the AARP
Global Growth Fund, the AARP Capital Growth Fund, the AARP
International Stock Fund, the AARP Small Company Stock Fund and the
AARP Diversified Growth Portfolio pay dividends, if any, annually.
o Automatic Dividend Reinvestment: you may receive dividends by check or
arrange to have them automatically reinvested.
o Readily Available Account, Price, Yield and Total Return Information:
the yield for the AARP Money Funds is quoted weekly and the net asset
value of each other Fund is quoted daily in the financial pages of
leading newspapers. You may also dial our automated Easy-Access Line,
toll-free, 1-800-631-4636 for recorded account information, share
price, yield and total return information, 7 days a week.
o Convenience and Efficiency: simplified investment procedures save you
time and help your money work harder for you.
o Liquidity: on any business day (subject to a 7 day waiting period for
investment checks to clear), you may request redemption of your shares
at the next determined net asset value, and, in the case of the AARP
Money Funds, you may elect free Checkwriting and write checks for $100
or more on your account in the AARP High Quality Money Fund or AARP
High Quality Tax Free Money Fund or $1,000 or more on your account in
the AARP Premium Money Fund to make payments to any person or business.
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o Direct Deposit Program: you may have your Social Security or other
checks received from the U.S. Government or any other regular income
checks, such as pension, dividend, interest, and even payroll checks
automatically deposited directly to your account.
o Automatic Withdrawal Plan: with a minimum qualifying balance of $10,000
in one AARP Fund, you may arrange to receive monthly, quarterly or
periodic checks from your account for any designated amount of $50 or
more.
o Direct Payment of Regular Fixed Bills: with a minimum qualifying
balance of $10,000 in one AARP Fund, you may arrange to have your
regular bills that are of fixed amounts, such as rent, mortgage, or
other obligations of $50 or more sent directly from your account at the
end of the month.
o Personal Service and Information: professionally trained service
representatives are available to help you whenever you have questions
through our toll-free number, 1-800-253-2277.
o Consolidated Statements: in addition to receiving a confirmation
statement of each transaction in your account, you receive, without
extra charge, a convenient monthly consolidated statement. (Retirement
Plan statements are mailed quarterly.) This statement contains the
market value of all your holdings in the AARP Funds and a complete
listing of your transactions for the statement period.
o Shareholder Handbook: the Shareholder Handbook was created to help
answer many of the questions you may have about investing in the
Program.
o IRA Shareholder Handbook: the IRA Shareholder Handbook was created to
help answer many of the questions you may have about investing in the
no-fee AARP IRA.
o A Glossary of Investment Terms: the Glossary of Investment Terms
defines commonly used financial and investment terms.
o Newsletter: every month, shareholders receive our newsletter, Financial
Focus (retirement plan shareholders receive a special edition of
Financial Focus on a quarterly basis) which is designed to help keep
you up-to-date on economic and investment developments, and any new
financial services and features of the Program.
This Statement of Additional Information supplements the Prospectus,
and provides more detailed information about the Trusts and the Funds.
THE AARP FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which a fund may engage or a
financial instrument which a fund may purchase are meant to describe the
spectrum of investments that the Fund Manager, in its discretion, might, but is
not required to, use in managing a fund's assets. The Fund Manager may, in its
discretion, at any time, employ such practice, technique or instrument for one
or more funds 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 a fund, but, to the extent
employed, could, from time to time, have a material impact on a fund's
performance.
AARP Money Funds
The AARP Funds offer a choice of two taxable and one tax free money
fund for small savers, big savers and people looking for a way to invest. People
who earn a relatively low interest rate in an insured bank savings account, who
have to make withdrawals or deposits in person or whose money isn't easily
accessible may find that the AARP Money Funds can help.
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AARP High Quality Money Fund. The Fund is designed to provide current
income. In doing so, the Fund seeks to maintain stability and safety of
principal and a constant net asset value of $1.00 per share while offering
liquidity. There may be circumstances under which this goal cannot be achieved.
The Fund also has an educational objective to help shareholders, especially
individuals planning for and living in retirement, make informed investment
decisions. The AARP High Quality Money Fund is a separate series of the AARP
Cash Investment Funds. The Fund invests in high quality securities with
remaining maturities of 397 calendar days or less. The dollar-weighted average
maturity of its investments is 90 days or less. The investment policies and
restrictions of the Fund are described as follows:
To provide safety and liquidity, the investments of the AARP High
Quality Money Fund are limited to those that at the time of purchase are rated,
or judged by the Fund Manager to be the equivalent of those rated, within the
two highest credit ratings ("high quality instruments") by one or more rating
agencies such as: Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P") or Fitch Investors Service ("Fitch"). In addition, the Fund
Manager seeks through its own credit analysis to limit investments to
high-quality instruments presenting minimal credit risks. If a security ceases
to be rated or is downgraded below the second highest quality rating indicated
above, the Fund would promptly dispose of the security, unless the Trustees
determine that continuing to hold the security is in the best interests of the
Fund. Generally, the Fund will invest in securities rated in the highest quality
rating by at least two of these rating agencies.
Securities eligible for investment by the Fund include "first tier
securities" and "second tier securities." "First tier securities" are those
securities which are generally rated (or issued by an issuer with comparable
securities rated) in the highest category by at least two nationally-recognized
rating agencies (or by one nationally-recognized rating agency, if no other
rating agency has issued a rating with respect to that security). Securities
generally rated (or issued by an issuer with comparable securities rated) in the
top two rating categories by at least two nationally-recognized rating agencies
(or one, if only one nationally-recognized rating agency has rated the security)
which do not qualify as first tier securities are known as "second tier
securities." To ensure diversity of the Fund's investments, as a matter of
non-fundamental policy the Fund will not invest more than 5% of its total assets
in the securities of a single issuer, other than the U.S. Government. The Fund
may, however, invest more than 5% of its total assets in the first tier
securities of a single issuer for a period of up to three business days after
purchase, although the Fund may not make more than one such investment at any
time. The Fund may not invest more than 5% of its total assets in securities
which were second tier securities when acquired by the Fund. Further, the Fund
may not invest more than the greater of (i) 1% of its total assets, or (ii) one
million dollars, in the securities of a single issuer which were second tier
securities when acquired by the Fund.
The Fund purchases high quality short-term securities consisting of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of supranational organizations such as the
International Bank for Reconstruction and Development (the "World Bank");
obligations of domestic banks and their foreign branches, including bankers'
acceptances, certificates of deposit, deposit notes and time deposits;
obligations of savings and loan institutions; instruments whose credit has been
enhanced by: banks (letters of credit), insurance companies (surety bonds), or
other corporate entities (corporate guarantees); corporate obligations,
including commercial paper, notes, bonds, loans and loan participations;
securities with variable or floating interest rates; asset-backed securities,
including certificates, participations and notes; municipal securities including
notes, bonds and participation interests, either taxable or tax-free, as
described in more detail for the AARP High Quality Tax Free Money Fund;
securities with put features; and repurchase agreements. The Fund may hold cash,
which does not earn interest, to facilitate stabilizing its net asset value per
share and for liquidity purposes.
Commercial paper at the time of purchase will be rated, or judged by
the Fund Manager under the supervision of the Trustees, to be the equivalent of
securities rated A-1 or higher by S&P, Prime-1 or higher by Moody's, or F-1 or
higher by Fitch. Investments in other corporate obligations, such as bonds or
notes, will be limited to securities rated, or judged by the Fund Manager to be
the equivalent of securities rated, AA or higher by S&P or Fitch or Aa or higher
by Moody's. Obligations that are the subject of repurchase agreements will be
limited to those types described above. Shares of the Fund are not insured or
guaranteed by the U.S. Government.
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The Fund may invest in certificates of deposit and bankers' acceptances
of large domestic banks (i.e., banks which at the time of their most recent
annual financial statements show total assets in excess of $1 billion) and their
foreign branches and of smaller banks as described below. These as well as all
other investments of the Fund must be U.S. dollar denominated. The Fund will not
invest in certificates of deposit or bankers' acceptances of foreign banks
without additional consideration by and the approval of the Trustees of the AARP
Cash Investment Funds. Although the Fund recognizes that the size of a bank is
important, this fact alone is not necessarily indicative of its
creditworthiness.
Investment in certificates of deposit and bankers' acceptances issued
by foreign branches of domestic banks involves investment risks that are
different in some respects from those associated with investment in obligations
issued by domestic banks. Such investment risks include the possible imposition
of withholding taxes on interest income, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of principal
and interest on the obligations of the foreign branches of domestic banks, or
other adverse political or economic developments. In addition, it might be more
difficult to obtain and enforce a judgment against a foreign branch of a
domestic bank.
The Fund may also invest in certificates of deposit issued by banks
which had, at the time of their most recent annual financial statements, total
assets of less than $1 billion, provided that (i) the principal amounts of such
certificates of deposit are insured by an agency of the U.S. Government, (ii) at
no time will the Fund hold more than $100,000 principal amount of certificates
of deposit of any one such bank, and (iii) at the time of acquisition, no more
than 10% of the Fund's net assets (taken at current value) are invested in
certificates of deposit and bankers' acceptances of banks having total assets
not in excess of $1 billion.
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System whose creditworthiness has been determined by the Fund
Manager to be equal to that of issuers of commercial paper rated within the two
highest grades by a nationally recognized rating agency. The Fund may also
invest in securities purchased on a "forward delivery" or "when-issued" basis.
For more information on these and other investments of the Fund, see the
"Special Investment Policies of the AARP Funds" section beginning on page 22.
For purposes of determining the percentage of the Fund's total assets
invested in securities of issuers having their principal business activities in
a particular industry, asset-backed securities will be classified separately,
based on the nature of the underlying assets, according to the following
categories: captive auto, diversified, retail and consumer loans, captive
equipment and business, business trade receivables, nuclear fuel, and capital
and mortgage lending.
AARP High Quality Tax Free Money Fund. The Fund is designed to provide
current income free from federal income taxes. In doing so, the Fund seeks to
maintain stability and safety of principal and a constant net asset value of
$1.00 per share while offering liquidity. There may be circumstances under which
this goal cannot be achieved. The Fund also has an educational objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions. The AARP High Quality Tax Free Money Fund is a
separate series of AARP Tax Free Income Trust. From investments in high quality
municipal securities, the Fund is designed to provide current income free from
federal income taxes. The Fund invests in high-quality municipal securities with
remaining maturities of 397 calendar days or less from the date the purchase is
expected to be settled by the Fund, with a dollar-weighted average maturity of
90 days or less.
The Fund will invest in municipal securities which are rated at the
time of purchase within the two highest quality ratings of rating agencies such
as: Fitch -- AAA and AA, F1 and F2; Moody's -- Aaa and Aa, or within Moody's
short-term municipal obligations top ratings of MIG 1 and MIG 2 and P1; or S&P
- -- AAA/AA and SP1+/SP1, A1+ and A1 -- all in such proportions as the Fund
Manager will determine. Securities must be so rated by at least two agencies or
by at least one, if only one has rated the security. Generally, the Fund will
invest in municipal securities rated in the highest quality rating by at least
two nationally recognized rating agencies. In some cases, short-term municipal
obligations are rated using the same categories as are used for corporate
obligations. In addition, unrated municipal securities will be considered as
being within the foregoing quality ratings if other equal or junior municipal
securities of the same issuer are rated and their ratings are within the
foregoing ratings of Fitch, Moody's or S&P. The Fund may also invest in
municipal securities that are unrated if, in the opinion of the Fund Manager,
such securities possess creditworthiness comparable to those rated securities in
which the Fund may invest. For a description of ratings, please see "Additional
Information." Shares of this Fund are not insured or guaranteed by the U.S.
Government.
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Subsequent to its purchase by the AARP High Quality Tax Free Money
Fund, an issue of municipal securities may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. The Fund will
dispose of any such security unless the Board of Trustees of the Fund determines
that such disposal would not be in the best interests of the Fund.
As a fundamental policy, under normal circumstances, at least 80% of
the net assets of the Fund will be invested in securities exempt from federal
income tax. Although the Fund normally intends to ensure that all income to
shareholders will be exempt from federal income tax, there can be no assurance
that this goal will be achieved or that income to shareholders which is
federally tax exempt will be exempt from state and local taxes.
From time to time on a temporary basis or for defensive purposes, the
Fund may, subject to its investment restrictions, hold cash and invest in
taxable investments consisting of: (i) other obligations issued by or on behalf
of municipal or corporate issuers; (ii) U.S. Treasury notes, bills and bonds;
(iii) obligations of agencies and instrumentalities of the U.S. Government; (iv)
money market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances; and (v)
repurchase agreements (agreements under which the seller agrees at the time of
sale to repurchase the security at an agreed time and price) with respect to any
of the obligations which the Fund is permitted to purchase. The Fund will not
invest in instruments issued by banks or savings and loan associations unless at
the time of investment such issuers have total assets in excess of $1 billion
(as of the date of their most recently published financial statements).
Commercial paper investments will be limited to commercial paper rated A1+ and
A1 by S&P, Prime-1 by Moody's or F-1 by Fitch. The Fund may hold cash or invest
temporarily in taxable investments due, for example, to market conditions or
pending investment of proceeds of subscriptions for shares of the Fund or
proceeds from the sale of portfolio securities or in anticipation of
redemptions. However, the Fund expects to invest such proceeds in municipal
securities as soon as practicable. Interest income from temporary investments
held by the Fund may be taxable to shareholders as ordinary income.
Maintenance of Constant Net Asset Value Per Share. The Trustees of AARP
High Quality Money Fund, the AARP Premium Money Fund, and the AARP High Quality
Tax Free Money Fund have determined that it is in the best interests of the
Funds and their shareholders to maintain the net asset value of the Funds'
shares at a constant $1.00 per share. In order to facilitate the maintenance of
a constant $1.00 net asset value per share, the Funds operate in accordance with
Rule 2a-7 of the Investment Company Act of 1940. In accordance with the Rule,
the assets of the Funds consist entirely of cash, cash items, and high quality
U.S. dollar-denominated investments which have minimal credit risks and which
have a remaining maturity date of not more than 397 days from date of purchase.
The average dollar-weighted maturity of each Fund is varied according to money
market conditions, but may not exceed 90 days. The maturity of a portfolio
security is the period remaining until the date stated in the security for
payment of principal or such earlier date as it is called for redemption, except
that a shorter period is used for Variable and Floating Rate Instruments, as
defined in the Rule, in accordance with and subject to the conditions contained
in the Rule.
The Trustees have established procedures reasonably designed to
stabilize the price per share of the AARP High Quality Money Fund, the AARP
Premium Money Fund, and the AARP High Quality Tax Free Money Fund at $1.00, as
computed for the purposes of sales, repurchases and redemptions, taking into
account current market conditions and each Fund's investment objectives. Such
procedures, which the Trustees review annually, include specific requirements
designed to assure that issuers of the Funds' securities continue to meet high
standards of creditworthiness. The procedures also establish certain
requirements concerning the quality, maturity and diversification of the Fund's
investments. Finally, the procedures require the determination, at such
intervals as the Trustees deem appropriate and reasonable, of the extent, if
any, to which a Fund's net asset value calculated by using available market
quotations deviates from $1.00 per share. Market quotations and market
equivalents used in making such determinations may be obtained from an
independent pricing service approved by the Trustees. Such determinations will
be reviewed periodically by the Trustees.
If at any time it is determined that a deviation exists which may
result in material dilution or other unfair results to investors or existing
shareholders of a Fund, certain corrective actions may be taken, including
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding part or all of
dividends or payment of distributions from capital or capital gains; redeeming
shares in kind; or establishing a net asset value per share by using available
market quotations or equivalents. In addition, in order to stabilize the net
asset value per share at $1.00 the Trustees have the authority (i) to reduce the
number of outstanding shares of a Fund on
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a pro rata basis, and (ii) to offset each shareholder's pro rata portion of the
deviation between the net asset value per share and $1.00 from the shareholder's
accrued dividend account or from future dividends. The Funds may hold cash for
the purpose of stabilizing their net asset value per share. Holdings of cash, on
which no return is earned, would tend to lower the yield on the shares of the
Funds.
The Fund may also invest in tax-exempt custodial receipts, municipal
lease obligations and participation interests, stand-by commitments, third party
puts, and securities purchased on a "forward delivery" or "when-issued" basis.
For more information on these and other investments of the Fund, see the
"Special Investment Policies of the AARP Funds" section beginning on page 22.
The net income of the Funds is declared as dividends to shareholders
daily and distributed monthly in shares of the Funds unless payment is requested
in cash.
AARP Premium Money Fund. The Fund is designed to provide current
income. In doing so, the Fund seeks to maintain stability and safety of
principal and a constant net asset value of $1.00 per share while offering
liquidity. There may be circumstances under which this goal cannot be achieved.
The Fund also has an educational objective to help shareholders make informed
investment decisions for the later stages of life. The Fund is designed to offer
monthly income, while maintaining stability and liquidity of principal, on
balances of $10,000 or more. In addition, it provides a convenient way to access
your money through free checkwriting. The minimum per check is $1,000 to
discourage frequent transactions and to help keep fund expenses low thereby
increasing the potential income. The Fund will typically provide a higher level
of income than the AARP High Quality Money Fund, which has lower investment and
checkwriting minimums. The Fund invests in high-quality, short-term securities.
These securities will have remaining maturities of 397 calendar days or less.
The average dollar-weighted maturity of the Fund's investments is 90 days or
less. The investment policies and restrictions of the Fund are described as
follows:
To provide safety and liquidity, the investments of the AARP Premium
Money Fund are limited to those that at the time of purchase are rated, or, if
unrated, judged by the Fund Manager to be the equivalent of those rated, within
the two highest credit ratings ("high quality instruments") by one or more
nationally recognized rating agencies such as Moody's, S&P, or Fitch. In
addition, the Fund Manager seeks through its own credit analysis to limit
investments to high-quality instruments presenting minimal credit risks. If a
security ceases to be rated or is downgraded below the second highest quality
rating indicated above, the Fund will promptly dispose of the security, unless
the Trustees determine that continuing to hold such security is in the best
interests of the Fund. Generally, the Fund will invest in securities rated in
the highest quality rating by at least two rating agencies.
Securities eligible for investment by the Fund include "first tier
securities" and "second tier securities." "First tier securities" are those
securities which are generally rated (or issued by an issuer with comparable
securities rated) in the highest category by at least two nationally recognized
rating agencies (or by one nationally-recognized rating agency, if no other
nationally recognized rating agency has issued a rating with respect to that
security). Securities generally rated (or issued by an issuer with comparable
securities rated) in the top two categories by at least two
nationally-recognized rating agencies (or one, if only one nationally-recognized
rating agency has rated the security) which do not qualify as first tier
securities are known as "second tier securities." To ensure diversity of the
Fund's investments, as a matter of non-fundamental policy the Fund will not
invest more than 5% of its total assets in the securities of a single issuer,
other than the U.S. Government. The Fund may, however, invest more than 5% of
its total assets in the first tier securities of a single issuer for a period of
up to three business days after purchase, although the Fund may not make more
than one such investment at any time. The Fund may not invest more than 5% of
its total assets in securities that were second tier securities when acquired by
the Fund. Further, the Fund may not invest more than the greater of (i) 1% of
its total assets, or (ii) one million dollars, in the securities of a single
issuer, which were second tier securities when acquired by the Fund.
The Fund purchases high quality short-term securities consisting of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of supranational organizations such as the
International Bank for Reconstruction and Development (the World Bank);
obligations of domestic banks and their foreign branches, including bankers'
acceptances, certificates of deposit, deposit notes and time deposits;
obligations of savings and loan institutions; instruments whose credit has been
enhanced by: banks (letters of credit), insurance companies (surety bonds), or
other corporate entities (corporate guarantees); corporate obligations,
including commercial paper, notes, bonds, loans and loan participations;
securities with variable or floating interest rates; asset-backed securities,
including
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certificates, participations and notes; municipal securities including notes,
bonds and participation interests, either taxable or tax-free, as described in
more detail for the AARP High Quality Tax Free Money Fund; securities with put
features; and repurchase agreements.
Commercial paper at the time of purchase will be rated, or judged by
the Fund Manager under the supervision of the Trustees, to be the equivalent of
securities rated A-1 or higher by S&P, Prime-1 or higher by Moody's, or F-1 or
higher by Fitch. Investments in other corporate obligations, such as bonds or
notes, will be limited to securities rated, or judged by the Fund Manager to be
the equivalent of securities rated, AA or higher by S&P or Fitch or Aa or higher
by Moody's. Obligations that are the subject of repurchase agreements will be
limited to those of the type described above. Shares of the Fund are not insured
or guaranteed by the U.S. Government.
The Fund may invest in certificates of deposit and bankers' acceptances
of large domestic banks (i.e., banks which had, at the time of their most recent
annual financial statements, total assets in excess of $1 billion) and their
foreign branches and of smaller banks as described below. These as well as all
other investments of the Fund must be U.S. dollar denominated. The Fund will not
invest in certificates of deposit or bankers' acceptances of foreign banks
without additional consideration by and the approval of the Trustees of the AARP
Cash Investment Funds. Although the Fund recognizes that the size of a bank is
important, this fact alone is not necessarily indicative of its
creditworthiness.
Investment in certificates of deposit and bankers' acceptances issued
by foreign branches of domestic banks involves investment risks that are
different in some respects from those associated with investment in obligations
issued by domestic banks. Such investment risks include the possible imposition
of withholding taxes on interest income, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of principal
and interest on the obligations of the foreign branches of domestic banks, or
other adverse political or economic developments. In addition, it might be more
difficult to obtain and enforce a judgment against a foreign branch of a
domestic bank.
The Fund may also invest in certificates of deposit issued by banks
which had, at the time of their most recent annual financial statements, total
assets of less than $1 billion, provided that (i) the principal amounts of such
certificates of deposit are insured by an agency of the U.S. Government, (ii) at
no time will the Fund hold more than $100,000 principal amount of certificates
of deposit of any one such bank, and (iii) at the time of acquisition, no more
than 10% of the Fund's net assets (taken at current value) are invested in
certificates of deposit and bankers' acceptances of banks having total assets
not in excess of $1 billion.
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System whose creditworthiness has been determined by the Fund
Manager to be equal to that of issuers of commercial paper rated within the two
highest grades by a nationally recognized rating agency. The Fund may also
invest in securities purchased on a "forward delivery" or "when-issued" basis.
For more information on these and other investments of the Fund, see the
"Special Investment Policies of the AARP Funds" section beginning on page 22.
The Fund has certain non-fundamental policies designed to maintain
diversification. These policies may be changed without shareholder approval. The
amount of total assets of the Fund that may be invested in the securities of a
single issuer is limited in accordance with federal law.
For purposes of determining the percentage of the Fund's total assets
invested in securities of issuers having their principal business activities in
a particular industry, asset-backed securities will be classified separately,
based on the nature of the underlying assets, according to the following
categories: captive auto, diversified, retail and consumer loans, captive
equipment and business, business trade receivables, nuclear fuel, and capital
and mortgage lending.
AARP Income Funds
AARP High Quality Short Term Bond Fund. The Fund is designed to produce
a high level of current income while actively seeking to reduce downside risk to
the Fund's portfolio than other short-term bond mutual funds, measured by the
frequency and amount by which total return fluctuates downward. The Fund pursues
this investment objective by investing primarily in high-quality, short-term
U.S. Government, corporate and
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other fixed-income securities. The Fund also has an educational objective to
help shareholders, especially individuals planning for and living in retirement,
make informed investment decisions. Consistent with investments primarily in
high quality securities, the Fund seeks to provide a high level of income and to
keep the value of its shares more stable than that of a long-term bond. By
including short- and medium-term bonds in its portfolio, the Fund seeks to offer
less share price volatility than long-term bonds or many long-term bond mutual
funds, although the Fund's yield may be lower. Due to the greater market price
risk of its securities, the Fund may have a more variable share price than the
AARP GNMA and U.S. Treasury Fund. It is also possible that the Fund may provide
a higher level of income than the AARP GNMA and U.S. Treasury Fund.
Under normal circumstances the Fund will invest substantially all, and
no less than 65%, of its assets in high quality U.S. Government, corporate and
other fixed-income securities. The Fund may purchase any investments eligible
for the AARP GNMA and U.S. Treasury Fund and corporate notes and bonds, as well
as obligations of federal agencies that are not backed by the full faith and
credit of the U.S. Government, such as obligations of Federal Home Loan Bank,
Farm Credit Banks and the Federal Home Loan Mortgage Corporation. In addition,
the Fund may purchase obligations of international agencies such as the
International Bank for Reconstruction and Development, the Inter-American
Development Bank and the Asian Development Bank. Other eligible investments
include U.S. dollar-denominated foreign debt securities (such as U.S. dollar
denominated debt securities issued by the Dominion of Canada and its provinces),
foreign government bonds denominated in foreign currencies, trust preferred
securities, mortgage-backed and other asset-backed securities, and money market
instruments such as commercial paper, bankers' acceptances and certificates of
deposit issued by domestic and foreign branches of U.S. banks.
Except for the limitations in the Fund's investment restrictions and
the percentage limitations on investments on securities denominated in foreign
currencies set forth in the prospectus, there is no limit as to the proportions
of the Fund which may be invested in any of the eligible investments. However,
it is a policy of the Fund that its non-governmental investments will be spread
among a variety of companies and will not be concentrated in any industry. (See
"Investment Restrictions")
Portfolio Quality. The policies of AARP High Quality Short Term Bond
Fund are designed to provide a portfolio that combines primarily high quality
securities with investments that attempt to reduce its market price risk. No
purchase will be made if, as a result of the purchase, less than 65% of the
Fund's net assets would be invested in debt obligations, including money market
instruments, that (i) are issued or guaranteed by the U.S. Government, (ii) are
rated at the time of purchase within the three highest grades assigned by any of
the nationally-recognized rating agencies including Moody's or S&P, or (iii) if
not rated, are judged at the time of purchase by the Fund Manager, subject to
the Trustees' review, to be of a quality comparable to those in the three
highest ratings described in (ii) above. All of the debt obligations in which
the Fund invests will, at the time of purchase, be rated investment-grade or
higher by Moody's (Aaa, Aa, A, and Baa) or S&P (AAA, AA, A, and BBB) or, if not
rated, will be judged to be of comparable quality by the Fund Manager. At least
65% of the Fund's assets must be in securities rated in the three highest rating
categories by Moody's or S&P. The Fund may invest up to 20% of its assets in
bonds rated Baa by Moody's or rated BBB by S&P. Securities rated Baa by Moody's
or BBB by S&P are neither highly protected nor poorly secured. These securities
normally pay higher yields and are regarded as having adequate capacity to repay
principal and pay interest but involve potentially greater price variability
than higher-quality securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. The Fund does
not purchase securities rated below investment-grade, commonly known as "junk"
bonds. (See "ADDITIONAL INFORMATION--Ratings of Corporate Bonds.")
Variations of Maturity. In an attempt to capitalize on the differences
in total return from securities of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Fund
Manager's expectations of changes in interest rates.
Foreign Securities. The Fund may invest, without limit, in U.S.
dollar-denominated foreign debt securities (including U.S. dollar-denominated
debt securities issued by the Dominion of Canada and its provinces and other
debt securities which meet the Fund's criteria applicable to its domestic
investments), and in certificates of deposit issued by foreign branches of U.S.
banks, to any extent deemed appropriate by the Fund Manager. The Fund may invest
up to 20% of total assets in foreign debt securities denominated in currencies
other than the U.S. dollar, but no more than 5% of the Fund's total assets will
be represented by a given foreign currency.
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As a temporary defensive measure, the Fund may temporarily invest up to
100% of its assets in cash or cash equivalents.
The Fund may also invest in dollar roll transactions, repurchase
agreements, real estate investment trusts, mortgage-backed and mortgage
pass-though securities, collaterallized mortgage obligations, securities
purchased on a "forward delivery" or "when-issued" basis, futures contracts,
options on futures contracts, covered call options, convertible securities, and
foreign currency exchange contracts. For more information on these and other
investments of the Fund, see the "Special Investment Policies of the AARP Funds"
section beginning on page 22.
AARP GNMA and U.S. Treasury Fund. The Fund is designed to produce a
high level of current income but with less risk of loss to the Fund's portfolio
than other GNMA mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing in high-quality Government National Mortgage Association (GNMA)
securities and U.S. Treasury bills, notes and bonds issued or backed by the full
faith and credit of the U.S. Government. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions. AARP GNMA and U.S. Treasury
Fund is designed for investors who are seeking high current income from high
quality securities and who wish to receive a degree of protection from bond
market price risk. The Fund's investment objective is to produce a high level of
current income and to keep the price of its shares more stable than that of a
long-term bond mutual fund. The Fund pursues this objective by investing
principally in U.S. Government-guaranteed GNMA securities and U.S. Treasury
obligations. The Fund has been designed with the conservative, safety-conscious
investor in mind. Of the three funds in the AARP Income Trust, the AARP GNMA and
U.S. Treasury Fund is the most conservative choice. Although past performance is
no guarantee of future performance, historically, this Fund offers higher yields
than such short-term investments as insured savings accounts, insured six month
certificates of deposit, and fixed-price money market funds.
The Fund invests in U.S. Treasury bills, notes and bonds; other
securities issued or backed by the full faith and credit of the U.S. Government,
including, but not limited to, Government National Mortgage Association ("GNMA")
mortgage-backed securities, Merchant Marine Bonds guaranteed by the Maritime
Administration and obligations of the Export-Import Bank; financial futures
contracts with respect to such securities; options on either such securities or
such financial futures contracts; and bank repurchase agreements. At least 65%
of the Fund's net assets will be directly invested in U.S. Treasury obligations
and GNMAs. The Fund may also utilize hedging techniques involving limited use of
financial futures contracts and the purchase and writing (selling) of put and
call options on such contracts. Under certain market conditions, these
strategies may reduce current income. At any time, the Fund may have a
substantial portion of its assets in securities of a particular type or
maturity. The Fund may also write covered call options on portfolio securities
and purchase "when-issued" securities.
GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed
securities representing part ownership of a pool of mortgage loans. These loans,
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). A "pool" or group of
such mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, a Government
corporation within the U.S. Department of Housing and Urban Development, the
timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government. This is not, however, a guarantee
related to the Fund's yield or the value of your investment principal.
As mortgage-backed securities, GNMAs differ from bonds in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. GNMAs are called "pass-through" securities
because both interest and principal payments including prepayments are passed
through to the holder of the security (in this case, the Fund).
The payment of principal on the underlying mortgages may exceed the
minimum required by the schedule of payments for the mortgages. Such prepayments
are made at the option of the mortgagors for a wide variety of reasons
reflecting their individual circumstances and may involve capital losses if the
mortgages were purchased at a premium. For example, mortgagors may speed up the
rate at which they prepay their mortgages when interest rates decline
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sufficiently to encourage refinancing. The Fund, when such prepayments are
passed through to it, may be able to reinvest them only at a lower rate of
interest. The Fund Manager, in determining the attractiveness of GNMAs relative
to alternative fixed-income securities, and in choosing specific GNMA issues,
will have made assumptions as to the likely speed of prepayment. Actual
experience may vary from this assumption resulting in a higher or lower
investment return than anticipated. When interest rates rise, mortgage
prepayment rates tend to decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares.
Some investors may view the Fund as an alternative to a bank
certificate of deposit. 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, securities purchased on a "forward
delivery" or "when-issued" basis, and covered call options. For more information
on these and other investments of the Fund, see the "Special Investment Policies
of the AARP Funds" section beginning on page 22.
For temporary defensive purposes, the fund may temporarily invest up to
100% of assets in cash or cash equivalents.
AARP Insured Tax Free General Bond Fund. The Fund is designed to
produce a high level of current income that is free from federal income taxes
but with less risk of loss to its portfolio than other insured tax-free bond
mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing
primarily in high-quality, federally tax-exempt municipal securities that are
insured by nationally recognized private insurers to protect against default by
the municipality. The Fund also has an educational objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions. The AARP Insured Tax Free General Bond Fund is a
separate series of AARP Tax Free Income Trust. Securities comprising at least
65% of the total assets held by the Fund are fully insured as to the principal
amount and interest by nationally recognized private insurers. While longer-term
securities such as those in which the Fund may invest have in recent years had
higher yields, they also experience greater price fluctuation than shorter-term
securities. By including short- and medium-term bonds in its portfolio, the Fund
seeks to offer less share price volatility than long-term municipal bonds or
many long-term municipal bond mutual funds, although the Fund's yield may be
lower. Because the Fund may trade the securities in the portfolio, the Fund is
also free to attempt to take advantage of opportunities in the market to achieve
higher current income. This opportunity is not available to unit investment
trusts, which hold fixed portfolios of municipal securities.
Under normal circumstances, at least 80% of the Fund's net assets are
invested in federally tax-exempt securities. For this purpose, private activity
bonds, the interest on which is treated as a preference item for purposes of
calculating alternative minimum tax liability, will not be treated as tax-exempt
securities. The Fund does not intend to purchase private activity bonds.
(See "TAXES".)
There can be no assurance that the objectives of the Fund will be
achieved or that all income to shareholders which is exempt from federal income
taxes will be exempt from state or local taxes. Shareholders may also be subject
to tax on long-term and short-term capital gains. (See "TAXES".)
In addition, the market prices of municipal securities, like those of
taxable debt securities, go up and down when interest rates change. Thus, the
net asset value per share can be expected to fluctuate and shareholders may
receive more or less than their purchase price for shares they redeem. In
addition to investments in municipal obligations, as described below, the Fund
may invest in short-term taxable U.S. Government securities and repurchase
agreements backed by U.S. Government securities. The Fund also may invest in
demand notes and tax-exempt commercial paper, financial futures contracts, and
may invest in and write (sell) options related to such futures contracts. These
investments are not insured or guaranteed or backed by the U.S. Government.
Except for futures and options, which are not rated, the Fund will only purchase
securities rated within the top three ratings by Moody's and S&P, or, if
unrated, of equivalent quality as determined by the Fund Manager, or repurchase
agreements on such securities. To qualify as "within the top three ratings," a
security must have such a rating due to the credit of the issuer or due to
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specific insurance on the security, whether acquired at issuance or by the Fund
at the time of purchase. A security would not so qualify if its rating was
solely the result of coverage under the Fund's portfolio insurance.
Securities in which the Fund may invest may include: (i) a security
that carries at the time of issuance, whether because of the credit of the
issuer or because it is insured at issuance by an insurance company, a rating
within the top three ratings; and (ii) a security not rated within the top three
ratings at the time of issuance but insured to maturity by the Fund at the time
of purchase if, upon issuance of such insurance, the Fund Manager is able to
determine that the security is now the equivalent of a security rated within the
top three ratings by a nationally recognized rating agency.
When, in the opinion of the Fund Manager, defensive considerations or
an unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term investments such
as U.S. Treasury notes, bills and bonds and repurchase agreements collateralized
by U.S. Government securities, the interest income from which may be subject to
federal income tax. Notwithstanding the foregoing, the Fund may invest more than
20% of its net assets in such taxable U.S. Treasury securities and repurchase
agreements for temporary defensive purposes.
Insurance. Insurance on at least 65% of the Fund's total assets will be
obtained from nationally recognized private insurers, including the following:
Financial Guaranty Insurance Company ("FGIC") is owned by FGIC Corporation,
which in turn is owned by General Electric Credit Corporation; AMBAC Indemnity
Corporation; Financial Security Assurance, Inc. ("FSA"); and Municipal Bond
Investors Assurance Corporation, a wholly-owned subsidiary of MBIA Incorporated,
the principal shareholders of which are: The Aetna Life & Casualty Company,
Fireman's Fund Insurance Company, subsidiaries of the CIGNA Corporation and
affiliates of the Continental Insurance Company.
The Fund currently has portfolio insurance provided by FGIC pursuant to
which it may insure securities mutually agreed to between the Fund and FGIC so
long as the security remains in the Fund's portfolio. Pursuant to an irrevocable
commitment, FGIC also provides the Fund with the option to obtain insurance for
any security covered by the FGIC portfolio insurance, which insurance can
continue if the security were to be sold by the Fund. The Fund also may procure
portfolio insurance from other insurers.
At least 65% of the Fund's assets are fully insured by private insurers
as to payment of principal and interest to the Fund, when due. If uninsured
securities or securities not directly or indirectly backed or guaranteed by the
U.S. Government are purchased and expected to be held for 60 days or more,
insurance will be obtained within 30 days to ensure that 65% of the Fund's
assets are insured by the issuer or arranged for by the Fund. If at least 65% of
the Fund's assets are not insured securities, the Fund will obtain insurance for
a portion of its U.S. Government guaranteed or backed securities so that the 65%
standard is achieved.
The Fund requires that insurance with respect to its securities provide
for the unconditional payment of scheduled principal and interest when due. In
the event of a default by the issuer in the payment of principal or interest,
the insurer will, within 30 days of notice of such default, provide to its agent
or the Trustee funds needed to make any such payments. Such agent or Trustee
will bear the responsibility of seeing that such funds are used to make such
payments to the appropriate parties. Such insurance will not guarantee the
market value of a security. Insurance on the Fund's securities will in some
cases continue in the event the securities are sold by the Fund, while in other
cases it may not.
To the extent the Fund's insured municipal securities do not equal 65%
of its total assets, the Fund will obtain insurance on such amount of its U.S.
Government guaranteed or backed securities as is necessary to have 65% of the
Fund's total assets insured at all times. This type of insurance will terminate
when the security is sold and will involve an added cost to the Fund while not
increasing the quality rating of the security.
Insurance on individual securities, whether obtained by the issuer or
the Fund, is non-cancelable and runs for the life of the security. Securities
covered under the Fund's portfolio insurance are insured only so long as they
are held by the Fund, though the Fund has the option to procure individual
secondary market insurance which would continue to cover any such security after
its sale by the Fund. Such guaranteed renewable insurance continues so long as
premiums are paid by the Fund and, in the judgment of the Fund Manager, coverage
should be continued. Non-payment of premiums on the portfolio insurance will,
under certain circumstances result in the cancellation of such insurance and
will also permit FGIC to take action against the Fund to recover premiums due
it. In the case of securities which are
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insured by a nationally recognized private insurer, default by the issuer is not
expected to affect the market value of the security relative to other insured
securities of the same maturity value and coupon and covered by the same
insurer. In the case of a security covered by the Fund's portfolio insurance,
the market value of such a security in the event of a default in the payment of
principal or interest by the issuer might be less unless the Fund elected to
purchase secondary market insurance for the security. The Fund Manager intends
to either procure secondary market insurance by a nationally recognized private
insurer for, or retain in the Fund's portfolio, securities which are insured by
the Fund under portfolio insurance and which are in default or pose a
significant risk of default in the payment of principal or interest. Any such
securities retained by the Fund would be held until the default has been cured
or the principal and interest have been paid by the issuer or the insurer.
Premiums for insurance may be payable in advance or may be paid
periodically over the term of the security by the party then owning the
security, and the costs will be reflected in the price of the security. The cost
of insurance for longer-term securities, expressed in terms of income on the
security, is likely to reduce such income by from 10 to 60 basis points. Thus, a
security yielding 10% might have a net insured yield of 9.9% to 9.4%. The impact
of the cost of the Fund's portfolio insurance on the Fund's net yield is
somewhat less. The cost of insurance for shorter-term securities, which are
generally lower-yielding, is expected to be less. It should be noted that
insurance raises the rating of a municipal security. Lower rated securities
generally pay a higher rate of interest than higher rated securities. Thus,
while there is no assurance that this will always be the case, the Fund may
purchase lower rated securities which, when insured, will bear a higher rating,
and may pay a higher net rate of interest than other equivalently rated
securities which are not insured.
Nationally recognized private insurers have certain eligibility
standards as to the municipal securities they will insure. Such standards may be
more or less strict than standards which would be applied for purchase of a
security for the Fund. To the extent nationally recognized private insurers
apply stricter standards, the Fund will be restricted by such standards in the
purchase and retention of municipal securities.
The Internal Revenue Service has issued revenue rulings indicating that
(i) the fact that municipal obligations are insured will not affect their
tax-exempt status and (ii) insurance proceeds representing maturing interest on
defaulted municipal obligations paid to certain municipal bond funds will be
excludable from federal gross income under Section 103(a) of the Internal
Revenue Code. While operation of the Fund and the terms of the insurance
policies on the Fund's securities may differ somewhat from those addressed by
the revenue rulings, the Fund does not anticipate that any differences will be
material or change the result with respect to the Fund.
Insurers of the Fund's municipal securities are subject to regulation
by the department of insurance in each state in which they are qualified to do
business. Such regulation, however, is no guarantee that an insurer will be able
to perform on its contract of insurance in the event a claim should be made
thereunder at some time in the future. The Fund Manager reviews the financial
condition of each insurer of their securities at least annually, and in the
event of any material development, with respect to its continuing ability to
meet its commitments to any contract of bond or portfolio insurance.
Management Strategies. In pursuit of its investment objectives, the
Fund purchases securities that it believes are attractive and provide
competitive values in terms of quality, and the relationship of current price to
market value. However, recognizing the dynamics of municipal securities prices
in response to changes in general economic conditions, fiscal and monetary
policies, interest levels and market forces such as supply and demand for
various bond issues, the Fund Manager manages the Fund continuously, attempting
to achieve a high level of tax-free income. The primary strategies employed in
the management of the Fund are:
Variations of Maturity. In an attempt to capitalize on the differences
in total return from municipal securities of differing maturities, maturities
may be varied according to the structure and level of interest rates, and the
Fund Manager's expectations of changes therein.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal securities of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
temporary disparities in normal yield relationships may afford opportunities to
invest in more attractive market sectors or specific issues by trading
securities currently held by the Fund.
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Market Trading Opportunities. In addition to the above, the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than 3 months) if the Fund Manager believes that such transactions,
net of costs, would further the attainment of that Fund's objectives. The needs
of different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Fund will be able to take advantage of
them. The Fund will limit its voluntary short-term trading to the extent
necessary to qualify as a "regulated investment company" under Subchapter M of
the Internal Revenue Code.
Special Considerations: Income Level and Credit Risk. To the extent the
Fund holds insured municipal obligations, the income earned on its shares will
tend to be less than for an uninsured portfolio of the same securities. The Fund
will amortize as income, over the life of the respective security issues, any
original issue discount on debt obligations (even where these are acquired in
the after-market), and market discount on short-term U.S. Government securities.
The Fund will elect to amortize the premium paid on acquisition of any premium
coupon obligations. Since such discounts and premiums will be recognized in the
Fund's accounts over the life of the respective security issues and included in
the regular monthly income distributions to shareholders, they will not give
rise to taxable capital gains or losses. However, a capital gain or taxable
ordinary income may be realized upon the sale or maturity and payment of certain
obligations purchased at a market discount.
The Fund may also invest in tax-exempt custodial receipts, municipal lease
obligations and participation interests, stand-by commitments, third party puts,
and repurchase agreements. For more information on these and other investments
of the Fund, see the "Special Investment Policies of the AARP Funds" section
beginning on page 22.
AARP Bond Fund for Income. The Fund is designed to produce a high level
of current income but with less risk of loss to its portfolio than other
long-term bond mutual funds, measured by the frequency and amount by which total
return fluctuates downward. The Fund pursues this investment objective by
investing primarily in short-term, medium-term, and long-term investment-grade
debt securities. The Fund also has an educational objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions.
In pursuit of its investment objectives, under normal market
conditions, the Fund invests at least 65% of its total assets in
investment-grade debt securities. Investment-grade securities are rated Aaa, Aa,
A, or Baa by Moody's, or AAA, AA, A, or BBB by S&P, or, if unrated, are of
equivalent quality as determined by the Fund Manager. The Fund may invest up to
35% of its total assets in securities rated Ba or B by Moody's, or BB or B by
S&P. These two grades of securities are considered to be below investment grade.
Below investment-grade securities are considered predominantly speculative with
respect to their capacity to pay interest and repay principal. They generally
involve a greater risk of default and have more price volatility than securities
in higher rating categories.
The Fund may invest in U.S. Treasury and U.S. agency securities,
corporate bonds and notes, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies or
investment-grade foreign institutions, and money market instruments such as
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks. The Fund may invest up to 20% of
total assets in foreign debt securities denominated in currencies other than the
U.S. dollar, but no more than 5% of the fund's total assets may be represented
by a given foreign currency.The Fund may also purchase "when-issued" securities
and invest in repurchase agreements.
For temporary defensive purposes, the Fund may invest without limit in
money market and short-term instruments or invest all or a substantial portion
of its assets in high quality domestic debt securities when the Fund Manager
deems such a position advisable in light of economic or market conditions.
Risks. The Fund can invest a limited portion of assets in below
investment-grade securities, sometimes referred to as "junk" bonds. Investing in
high yielding, lower-quality bonds involves various types of risks including the
risk that issuers of bonds held in the portfolio will not make timely payment of
either interest or principal or may default entirely. This risk of default can
increase with changes in the financial condition of a company or with changes in
the U.S. economy, such as a recession. Compared to investing in higher quality
securities, investing in high yielding, lower-
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quality bonds may be rewarded for the additional risk of the high yielding,
lower-quality bonds through higher interest payments and the opportunity for
greater capital appreciation.
The Fund may also invest in dollar roll transactions, real estate
investment trusts, collaterallized mortgage obligations, zero coupon securities,
high yield/high risk securities, futures contracts, options on futures
contracts, covered call options, convertible securities, and foreign currency
exchange contracts. For more information on these and other investments of the
Fund, see the "Special Investment Policies of the AARP Funds" section beginning
on page 22.
AARP Growth and Income Funds
AARP Balanced Stock and Bond Fund. The Fund is designed to provide
long-term capital growth and income but with less risk of loss to its portfolio
than other balanced mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing primarily in a diversified mix of stocks with above-average dividend
yields, high-quality bonds, and cash reserves. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
The Fund is intended to provide--through a single investment--access to
a wide variety of income-oriented stocks and investment-grade bond investments.
Common stocks and other equity investments provide long-term growth potential to
help offset the effect of inflation on an investor's purchasing power. Bonds and
other fixed-income investments provide current income and may, over time, help
reduce fluctuations in the Fund's share price.
In seeking a balance of growth and income, as well as long-term
preservation of capital, the Fund invests in a diversified portfolio of equity
and fixed-income securities. At least 30% of the Fund's assets will be in
fixed-income securities, with the remainder of its net assets in common stocks
and securities convertible into common stocks. For temporary defensive purposes,
the Fund may invest without limit in cash and in other money market and
short-term instruments when the Fund Manager deems such a position advisable in
light of economic or market conditions.
The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Fund
Manager weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Fund Manager analyzes, on a global basis,
the level and direction of interest rates, capital flows, inflation
expectations, anticipated growth of corporate profits, monetary and fiscal
policies around the world, and other related factors.
The Fund is designed as a conservative long-term investment. The Fund
does not take extreme investment positions as part of an effort to "time the
market." Shifts between stocks and fixed-income investments are expected to
occur in generally small increments within the guidelines adopted in the
Prospectus and this Statement of Additional Information.
While the Fund emphasizes U.S. equity and debt securities, it may
invest without limit in foreign securities, including depositary receipts. The
Fund's foreign holdings will meet the criteria applicable to its domestic
investments. Foreign securities are intended to increase diversification, thus
reducing risk, while providing the opportunity for higher returns.
The Fund may also invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs typically trade like a share of common stock and provide
investment results that generally correspond to the price and yield performance
of the component common stocks of the S&P 500 Composite Stock Index (S&P 500
Index"). There can be no assurance that this can be accomplished as it may not
be possible for the trust to replicate and maintain exactly the composition and
relative weightings of the component securities of the S&P 500 Index. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks other than those associated with an investment in a broadly based
portfolio of common stocks in that the selection of the stocks included in the
trust may affect trading in SPDRs, as compared with trading in a broadly based
portfolio of common stocks.
In addition, the Fund may invest in securities on a when-issued or
forward delivery basis and may write (sell) covered call options on the equity
securities it holds to enhance investment return and may purchase and sell
options on
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stock indices for hedging purposes. Subject to applicable regulatory guidelines
and solely to protect against adverse effects of changes in interest rates, the
Fund may make limited use of financial futures contracts.
Equity investments. The Fund can invest up to 70% of its net assets in
equity securities including dividend and non-dividend paying stocks. The Fund's
equity investments consist of common stocks, preferred stocks and securities
convertible into common stocks, of companies that, in the Fund Manager's
judgment, will offer the opportunity for capital growth and growth of earnings
while providing dividends. The Fund pursues these objectives by investing
primarily in common stocks and securities convertible into common stocks. The
Fund may invest in equity securities which do not pay current dividends but
which, in the Fund Manager's judgment, offer prospects for growth of capital and
future income. Over time, a stock which produces continued earnings growth tends
to produce higher dividends and stock values.
The Fund invests in a variety of industries and companies. Changes in
the Fund's portfolio securities are made on the basis of investment
considerations and not for trading purposes.
Fixed-income investments. To enhance income and stability, the Fund
will have at least 30% of its net assets invested in fixed-income securities.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and preferred and convertible preferred securities. It may also purchase
U.S. Government securities and obligations of federal agencies and
instrumentalities that are not backed by the full faith and credit of the U.S.
Government, such as obligations of the Federal Home Loan Banks, Farm Credit
Banks, and the Federal Home Loan Mortgage Corporation. The Fund may also invest
in obligations of international agencies, foreign debt securities (both U.S. and
non-U.S. dollar denominated), trust preferred securities, mortgage-backed and
other asset-backed securities, municipal obligations, zero coupon securities,
and restricted securities issued in private placements.
For liquidity and defensive purposes, the Fund may invest in money
market securities such as commercial paper, bankers' acceptances, and
certificates of deposit issued by domestic and foreign branches of U.S. banks.
The Fund may also enter into repurchase agreements with respect to U.S.
Government securities.
All of the Fund's debt securities will be investment grade, that is,
rated Baa or above by Moody's or BBB or above by S&P. Moreover, at least 75% of
these securities will be high grade, that is, rated within the three highest
quality ratings of Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or, if
unrated, judged to be of equivalent quality as determined by the Fund Manager at
the time of purchase. Securities must also meet credit standards applied by the
Fund Manager. Moreover, the Fund does not purchase debt securities rated below
Baa by Moody's or BBB by S&P. Should the rating of a portfolio security be
downgraded the Fund Manager will determine whether it is in the best interest of
the Fund to retain or dispose of the security.
The Fund may also invest in real estate investment trusts,
collaterallized mortgage obligations, securities purchased on a "forward
delivery" or "when-issued" basis, and foreign currency exchange contracts. For
more information on these and other investments of the Fund, see the "Special
Investment Policies of the AARP Funds" section beginning on page 22.
For temporary defensive purposes, the Fund may temporarily invest up to
100% of assets in cash or cash equivalents.
AARP Growth and Income Fund. The Fund is designed to provide long-term
capital growth and income but with less risk of loss to its portfolio than other
growth and income mutual funds, measured by the frequency and amount by which
total return fluctuates downward. The Fund pursues this investment objective by
investing primarily in common stocks whose dividend yields and earnings
prospects are believed to be attractive relative to the average derived from its
benchmark index, the S&P 500 Index. The Fund may also invest in fixed-income
securities convertible into common stocks. Additionally, the Fund has an
educational objective to help shareholders, especially individuals planning for
and living in retirement, make informed investment decisions.
The Fund invests primarily in common stocks and securities convertible
into common stocks. It also may invest in rights to purchase common stocks of
companies offering the prospect for capital growth and growth of earnings while
paying current dividends. The Fund may also invest in preferred stocks
consistent with the Fund's objective. Over
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time, continued growth of earnings tends to produce higher dividends and to
enhance capital value. In addition, since 1945, the overall performance of
common stocks has exceeded the rate of inflation.
The Fund may also invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs typically trade like a share of common stock and provide
investment results that generally correspond to the price and yield performance
of the component common stocks of the S&P 500 Index. There can be no assurance
that this can be accomplished as it may not be possible for the trust to
replicate and maintain exactly the composition and relative weightings of the
S&P 500 Index securities. SPDRs are subject to the risks of an investment in a
broadly based portfolio of common stocks, including the risk that the general
level of stock prices may decline, thereby adversely affecting the value of such
investment. SPDRs are also subject to risks other than those associated with an
investment in a broadly based portfolio of common stocks in that the selection
of the stocks included in the trust may affect trading in SPDRs, as compared
with trading in a broadly based portfolio of common stocks.
For temporary defensive purposes, the Fund may temporarily invest up to
100% of assets in cash or cash equivalents. During these periods, the Fund may
also purchase high-quality money market securities (such as U.S. Treasury bills,
commercial paper, certificates of deposit and bankers' acceptances) and
repurchase agreements when the Fund Manager deems such a position advisable in
light of economic or market conditions.
The Fund may also invest in real estate investment trusts, mortgage-backed and
mortgage pass-through securities, futures contracts, covered call options,
options on stock indicies, foreign securities, and foreign currency exchange
contracts. For more information on these and other investments of the Fund, see
the "Special Investment Policies of the AARP Funds" section beginning on page
22.
AARP U.S. Stock Index Fund. The Fund is designed to provide long-term
capital growth but with less risk of loss to its portfolio than other mutual
funds that track the S&P 500 Index, measured by the frequency and amount by
which total return fluctuates downward. The Fund pursues this investment
objective by emphasizing common stocks with above-average dividend yields, while
maintaining investment characteristics otherwise similar to the S&P 500 Index.
The Fund also has an educational objective to help shareholders, especially
individuals planning for and living in retirement, make informed investment
decisions.
The Fund attempts to remain fully invested in common stocks of
companies included in the S&P 500 Index. Under normal circumstances, the Fund
will invest at least 95% of its assets in common stocks, futures contracts and
options, comprising the S&P 500 Index. The Fund, using a proprietary computer
model, selects common stocks of S&P 500 companies that are expected to, on
average, pay higher dividends than S&P 500 companies in the aggregate. In
managing the Fund this way, the Fund Manager expects performance will be
somewhat less volatile than that of the S&P 500 Index over time, and the total
return will generally track the S&P 500 Index within 1% on an annualized basis.
A tracking error of 0% would indicate perfect correlation to the Index. After
the Fund's start-up phase, the Fund's portfolio will typically consist of the
common stocks of between 400 to 470 of the S&P 500 companies. The Fund expects
to come close to the capitalization weights of the S&P 500 Index. Nonetheless,
to enhance the yield and liquidity characteristics of the Fund and reduce
transaction costs, the Fund will not exactly replicate the portfolio weights of
the S&P 500 Index and will not hold all 500 stocks within that Index. The
investment approach is "passive" in that after the dividend screening described
above, there is no additional financial analysis regarding the securities held
in the Fund. Under normal circumstances, the Fund may invest up to 5% of its
assets in certain short-term fixed income securities including high quality
money market securities such as U.S. Treasury bills, repurchase agreements,
commercial paper, certificates of deposit issued by domestic and foreign
branches of U.S. banks and bankers' acceptances, although cash or cash
equivalents are normally expected to represent less than 1% of the Fund's
assets. The Fund may invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading costs. The Fund may also
invest in Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs typically trade
like a share of common stock and provide investment results that generally
correspond to the price and yield performance of the component common stocks of
the S&P 500 Index. There can be no assurance that this can be accomplished as it
may not be possible for the trust to replicate and maintain exactly the
composition and relative weightings of the component securities of the S&P 500
Index. SPDRs are subject to the risks of an investment in a broadly based
portfolio of common stocks, including the risk that the general level of stock
prices may decline, thereby adversely affecting the value of such investment.
SPDRs are also subject to risks other than those associated with an investment
in a broadly based portfolio of common stocks in that the selection of the
stocks included in the trust may affect trading in SPDRs, as compared with
trading in a broadly
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based portfolio of common stocks. The Fund will not invest in cash reserves,
futures contracts or options as part of a temporary defensive strategy, such as
lowering the Fund's investment in common stocks to protect against potential
stock market declines. Thus the Fund will not take specific steps to minimize
losses that reflect a decline in the S&P 500 Index. In the event that the Fund
does not track within an annualized 1% total return of the S&P 500 Index for an
extended period, the Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's
Corporation.
The Fund may also invest in real estate investment trusts, covered call options,
options on stock indicies, convertible securities, foreign securities, and
foreign currency exchange contracts. For more information on these and other
investments of the Fund, see the "Special Investment Policies of the AARP Funds"
section beginning on page 22.
AARP Growth Funds
AARP Capital Growth Fund. The Fund is designed to provide long-term
capital growth but with less risk of loss to its portfolio than other growth
mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing
primarily in a diversified mix of common stocks and fixed-income securities
convertible into common stocks of established medium- and large-sized companies.
The Fund also has an educational objective to help shareholders, especially
individuals planning for and living in retirement, make informed investment
decisions. Through a broadly diversified portfolio consisting primarily of high
quality, medium- to large-sized companies with strong competitive positions in
their industries and reasonable stock market valuation the Fund seeks to offer
less share price volatility than many growth funds. It may also invest in rights
to purchase common stocks, the growth prospects of which are greater than most
stocks but which may also have above-average market risk. The Fund may also
invest in preferred stocks consistent with the Fund's objective.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry. The Fund generally does not invest
more than 3.5% of its assets in any single company.
The Fund may invest up to 100% of its assets in high-quality money
market instruments (including U.S. Treasury bills, commercial paper,
certificates of deposit, and bankers' acceptances), repurchase agreements and
other debt securities for temporary defensive purposes when the Fund Manager
deems such a position advisable in light of economic or market conditions.
The Fund may also invest in real estate investment trusts, futures
contracts, covered call options, options on stock indicies, foreign securities,
and foreign currency exchange contracts. For more information on these and other
investments of the Fund, see the "Special Investment Policies of the AARP Funds"
section beginning on page 22.
AARP Small Company Stock Fund. The Fund is designed to provide
long-term capital growth but with less risk of loss to its portfolio compared to
other small company stock mutual funds, measured by the frequency and magnitude
with which total return fluctuates downward. The Fund pursues this investment
objective by investing primarily in a broadly diversified portfolio of common
stocks of small U.S. companies. The Fund also has an educational objective to
help shareholders, especially individuals planning for and living in retirement,
make informed investment decisions.
Under normal circumstances, the Fund may invest up to 5% of its assets
in certain short-term fixed income securities including high-quality money
market securities such as U.S. Treasury bills, repurchase agreements, commercial
paper, certificates of deposit issued by domestic and foreign branches of U.S.
banks and bankers' acceptances, although cash or cash equivalents are normally
expected to represent less than 1% of the Fund's assets. The Fund may invest up
to 20% of its assets in stock futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to minimize trading costs.
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The Fund may also invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs typically trade like a share of common stock and provide
investment results that generally correspond to the price and yield performance
of the component common stocks of the S&P 500 Composite Stock Index ("S&P 500
Index"). There can be no assurance that this can be accomplished as it may not
be possible for the trust to replicate and maintain exactly the composition and
relative weightings of the component securities of the S&P 500 Index. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks other than those associated with an investment in a broadly based
portfolio of common stocks in that the selection of the stocks included in the
trust may affect trading in SPDRs, as compared with trading in a broadly based
portfolio of common stocks.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
In pursuing its objective of long-term capital growth, the Fund
normally remains substantially invested in the common stocks of small U.S.
companies. Using a quantitative investment approach developed by the Fund
Manager, the Fund focuses on equity securities of companies with market
capitalization below $2 billion and that the Fund Manager believes are
undervalued relative to the stocks in Russell 2000 Index(R). The Russell 2000
Index(R) is a widely used measure of small stock performance. The Fund will sell
securities of companies that have grown in market capitalization above this
level as necessary to keep the Fund focused on small companies.
The Fund takes a diversified approach to investing. It generally
invests no more than 2% of its assets in the securities of any one company and
typically invests in over 150 securities, representing a variety of U.S.
industries.
While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (either convertible
or non-convertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes as a temporary investment to accommodate cash
flows. The Fund may also invest in real estate investment trusts, covered call
options, foreign securities, and foreign currency exchange contracts. For more
information on these and other investments of the Fund, see the "Special
Investment Policies of the AARP Funds" section beginning on page 22.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
AARP Global Funds
AARP Global Growth Fund. The Fund is designed to provide long-term
capital growth but with less risk of loss to its portfolio than other global
growth mutual funds, measured by the frequency and amount by which total return
fluctuates downward. The Fund pursues this investment objective by investing
primarily in common stocks of established companies in a wide variety of
developed countries, including the U.S. The Fund also has an educational
objective to help shareholders, especially individuals planning for and living
in retirement, make informed investment decisions.
The Fund Manager believes that there is substantial opportunity for
long-term capital growth from a professionally managed portfolio of securities
selected from the U.S. and foreign equity markets. Global investing takes
advantage of the investment opportunities created by the growing integration of
economies around the world. The world has become highly integrated in economic,
industrial and financial terms. Companies increasingly operate globally as they
purchase raw materials, produce and sell their products, and raise capital. As a
result, international trends such as movements in currency and trading
relationships are becoming more important to many industries than purely
domestic influences. To understand a company's business, it is frequently more
important to understand how it is linked to the world economy than whether or
not it is, for example, a U.S., French or Swiss company. Just as a company takes
a global perspective in deciding where to operate, so too may an investor
benefit from looking globally in deciding which
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industries are growing, which producers are efficient and which companies'
shares are undervalued. The Fund affords the investor access to opportunities
wherever they arise, without being constrained by the location of a company's
headquarters or the trading market for its shares.
The Fund invests in the securities of companies that the Fund Manager
believes will benefit from global economic trends, promising technologies or
products and specific country opportunities resulting from changing
geopolitical, currency, or economic relationships. The Fund will normally invest
at least 65% of its total assets in securities of at least three different
countries, which may include the U.S. Typically, it is expected that the Fund
will invest in a wide variety of sectors, regions and countries, including the
securities of both foreign and U.S. companies. The Fund may be invested 100% in
the securities of non-U.S. companies, and for temporary defensive purposes may
be invested 100% in U.S. issues, although under normal circumstances it is
expected that both foreign and U.S. investments will be represented in the
Fund's portfolio. It is expected that investments will include companies of
varying size as measured by assets, sales, or capitalization.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions. The Fund may also invest in real estate
investment trusts, zero coupon securities, futures contracts, options on futures
contracts, covered call options, options on stock indicies, convertible
securities, and foreign currency exchange contracts. For more information on
these and other investments of the Fund, see the "Special Investment Policies of
the AARP Funds" section beginning on page 22.
AARP International Stock Fund (formerly known as the AARP International
Growth and Income Fund). The Fund is designed to provide long-term capital
growth while actively seeking to reduce risk as compared with other
international mutual funds measured by the frequency and amount by which total
return fluctuates downward. The Fund pursues this investment objective by
investing primarily in a diversified portfolio of the common stocks of companies
from developed countries outside the United States. The Fund may also invest in
fixed-income securities which are convertible into the common stocks of foreign
companies. Additionally, the Fund also has an educational objective to help
shareholders, especially individuals planning for and living in retirement, make
informed investment decisions. The Fund seeks to offer long-term capital growth
from a diversified portfolio of foreign equity securities, and to keep the value
of its shares more stable than other international equity funds.
The Fund generally invests in equity securities listed on foreign
exchanges within developed foreign markets. The Fund does not invest in emerging
markets, but instead focuses its investments on the developed foreign countries
included in the Morgan Stanley Capital International World ex-US Index. The Fund
will normally invest at least 65% of its total assets in securities of at least
three different countries.
When the Fund Manager believes that it is appropriate, the Fund may
invest up to 20% of its total assets in investment-grade foreign debt
securities. Such debt securities include debt securities of foreign governments,
supranational organizations and private issuers, including bonds denominated in
the European Currency Unit (ECU). Debt investments will be selected on yield,
credit quality, and the outlooks for currency and interest rates trends in
different parts of the globe, taking into account the ability to hedge a degree
of currency or local bond price risk. The Fund may purchase "investment-grade"
bonds, which are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB
by S&P or, if unrated, judged by the Fund Manager to be of equivalent quality.
Securities rated Baa by Moody's or BBB by S&P are neither highly protected nor
poorly secured. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as Canadian or U.S. Government obligations or currencies, corporate debt
instruments, and securities of companies incorporated in and having their
principal activities in Canada or the U.S. when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund may make limited use of financial futures contracts and
related options and may also invest in foreign currency exchange contracts. The
Fund may write (sell) covered call options to enhance investment return, and may
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purchase and sell options on stock indices for hedging purposes. The Fund may
also invest in real estate investment trusts. For more information on these and
other investments of the Fund, see the "Special Investment Policies of the AARP
Funds" section beginning on page 22.
AARP Managed Investment Portfolios
The AARP Managed Investment Portfolios are two professionally managed,
diversified portfolios of the AARP Managed Investment Portfolios Trust. In
pursuit of its investment objective, each Portfolio invests in a select mix of
the AARP Mutual Funds ("Underlying AARP Funds"). Each portfolio is designed to
serve as a complete investment program or as a core part of a larger portfolio,
with a goal to seek competitive returns but with less risk of loss to the Fund's
portfolio than a comparable mix of stock and bond funds, measured by the amount
and frequency by which total return fluctuates downward.
AARP Diversified Income with Growth Portfolio. The Portfolio seeks
current income with modest long-term appreciation. This investment objective is
pursued by investing the Portfolio's assets in at least five underlying AARP
Mutual Funds with an emphasis on the Income Funds. In managing its allocation
among the AARP Mutual Funds, the portfolio does not attempt to time the market.
Each AARP Fund is managed to reduce the risk of loss to its portfolio compared
to similar mutual funds.
AARP Diversified Growth Portfolio. The Portfolio seeks to provide
long-term growth of capital. This investment objective is pursued by investing
in at least five underlying AARP Mutual Funds, with an emphasis on
growth-orientated funds. In managing its allocation among the AARP Mutual Funds,
the portfolio does not attempt to time the market.
Each Portfolio may invest in any of the AARP Funds, except for those
designed to provide income that is free from federal income tax.
Under normal market conditions, each of the AARP Investment Portfolios
will invest within the investment ranges as described below:
o The Diversified Income with Growth Portfolio will generally have 70%
of its total assets invested in underlying AARP Income Funds, AARP
Money Funds, and to a lesser extent, cash. The remaining 30% of its
total assets will be invested in underlying AARP Growth Funds, AARP
Growth and Income Funds, and AARP Global Funds. While the allocation
of investment in AARP Income Funds, AARP Money Funds, and cash in the
aggregate will remain relatively constant, the allocation of
investment in each underlying AARP Mutual Fund may vary over time.
o The Diversified Growth Portfolio will generally have 70% of its total
assets invested in underlying equity AARP Mutual Funds, including AARP
Growth Funds, AARP Growth and Income Funds, and AARP Global Funds. The
remaining 30% of its total assets will be invested in underlying AARP
Income Funds, AARP Money Funds, or cash. While the allocation of
investment in underlying equity AARP Mutual Funds in the aggregate
will remain relatively constant, the allocation of investment in each
underlying AARP Mutual Fund may vary over time.
If, as a result of appreciation or depreciation, the percentage of each
Portfolio's assets invested in the above categories exceeds or is less than the
applicable allocation, the Fund Manager will consider, in its discretion,
whether to reallocate the assets of each Portfolio to comply with the stated
allocation.
Each Portfolio will purchase or sell shares of Underlying AARP Funds
to: (i) accommodate purchases and sales of each Portfolio's shares, (ii) change
the percentages of each Portfolio's assets invested in each of the underlying
AARP mutual funds in response to changing market conditions, and (iii) maintain
or modify the allocation of each Portfolio's assets in accordance with the
investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including AARP money market funds, repurchase agreements,
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
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For information about the investment objectives of each of the
Underlying AARP Funds, please refer to the description of each Underlying AARP
Fund contained in the sections preceding this section.
Special Investment Policies of the AARP Funds
Dollar Roll Transactions. Dollar roll transactions consist of the sale by a 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 Funds
receive a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a different purchase and repurchase price fixed and a cash
settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Funds agree to buy a security on a future date.
The Funds will not use 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. Each Fund will also maintain asset coverage of at least 300% for
all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of
the Funds because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Funds.
For example, while the Funds receive a fee as consideration for agreeing to
repurchase the security, the Funds forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Funds, thereby effectively
charging the Funds interest on their borrowing. Further, although the Funds can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of each Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Funds' right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Funds are able to purchase them.
Similarly, the Funds may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Funds, the security that the Funds
are required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Funds' use of the cash
that they receive from a dollar roll will provide a return that exceeds
borrowing costs.
The Trustees of AARP Income Trust have adopted guidelines to ensure
that those securities received are substantially identical to those sold. To
reduce the risk of default, the Funds will engage in such transactions only with
counterparties selected pursuant to such guidelines.
U.S. Government Securities. U.S. Treasury securities, backed by the
full faith and credit of the U.S. Government, include a variety of securities
which differ in their interest rates, maturities and times of issuance. Treasury
bills have original maturities of one year or less. Treasury notes have original
maturities of one to ten years and Treasury bonds generally have original
maturities of greater than ten years.
U.S. Government agencies and instrumentalities which issue or guarantee
securities include, for example, the Export-Import Bank of the United States,
the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the
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 AARP Funds may
purchase may be fixed or variable. Interest rates on variable rate obligations
are adjusted at regular intervals, at least annually, according to a formula
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reflecting then current specified standard rates, such as 91-day U.S. Treasury
bill rates. These adjustments tend to reduce fluctuations in the market value of
the securities.
Municipal Obligations. Municipal obligations are issued by or on behalf
of states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia to
obtain funds for various public purposes. The interest on these obligations is
generally exempt from federal income tax in the hands of most investors. The two
principal classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term capital needs and
generally have maturities of one year or less. Municipal notes include: Tax
Anticipation Notes; Revenue Anticipation Notes; Bond Anticipation Notes; and
Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenue such as income, sales, use and business taxes. Bond
Anticipation Notes are sold to provide interim financing and Construction Loan
Notes are sold to provide construction financing. These notes are generally
issued in anticipation of long-term financing in the market. In most cases,
these monies provide for the repayment of the notes. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the FHA under Fannie Mae or GNMA. There are, of course, a number of
other types of notes issued for different purposes and secured differently than
those described above.
Municipal bonds, which meet longer-term capital needs and generally
have maturities of more than one year when issued, have two principal
classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully-insured, rent-subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt reserve fund.
Lease rental bonds issued by a state or local authority for capital projects are
secured by annual lease rental payments from the state or locality to the
authority sufficient to cover debt service on the authority's obligations.
Some issues of municipal bonds are payable from United States Treasury
bonds and notes held in escrow by a Trustee, frequently a commercial bank. The
interest and principal on these U.S. Government securities are sufficient to pay
all interest and principal requirements of the municipal securities when due.
Some escrowed Treasury securities are used to retire municipal bonds at their
earliest call date, while others are used to retire municipal bonds at their
maturity.
Private activity bonds, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the municipal authority derived from payments
by an industrial or other non-governmental user.
Securities purchased for either Fund may include variable/floating rate
instruments, variable mode instruments, put bonds, and other obligations which
have a specified maturity date but also are payable before maturity after notice
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by the holder ("demand obligations"). Demand obligations are considered for the
AARP Funds' purposes to mature at the demand date.
There are, in addition, a variety of hybrid and special types of
municipal obligations as well as numerous differences in the security of
municipal obligations both within and between the two principal classifications
(i.e., notes and bonds) discussed above.
An entire issue of municipal securities may be purchased by one or a
small number of institutional investors such as the AARP Funds. Thus, such an
issue may not be said to be publicly offered. Unlike the equity securities of
operating companies or mutual funds which must be registered under the
Securities Act of 1933 prior to offer and sale unless an exemption from such
registration is available, municipal securities, whether publicly or privately
offered municipal securities, may nevertheless be readily marketable. A
secondary market exists for municipal securities which have publicly offered as
well as securities which have not been publicly offered initially but which may
nevertheless be readily marketable. Municipal securities purchased for a Fund
are subject to the limitations on holdings of securities which are not readily
marketable based on whether it may be sold in a reasonable time consistent with
the customs of the municipal markets (usually seven days) at a price (or
interest rate) which accurately reflects its recorded value. The AARP Funds
believe that the quality standards applicable to their investments enhance
marketability. In addition, stand-by commitments, participation interests and
demand obligations also enhance marketability.
For the purpose of the AARP Funds' investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Fund Manager on the basis of the characteristics
of the obligation as described above, the most significant of which is the
source of funds for the payment of principal and interest on such obligations.
Trust Preferred Securities. Trust Preferred Securities are hybrid
instruments issued by a special purpose trust (the "Special Trust"), the entire
equity interest of which is owned by a single issuer. The proceeds of the
issuance to the Funds of Trust Preferred Securities are typically used to
purchase a junior subordinated debenture, and distributions from the Special
Trust are funded by the payments of principal and interest on the subordinated
debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount obligations for the remainder of their term.
As a result, holders of Trust Preferred Securities, such as the Funds, would be
required to accrue daily for federal income tax purposes, their share of the
stated interest and the de minimis original issue discount on the debentures
(regardless of whether the Funds receive any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Funds, to sell their holdings.
Tax-exempt custodial receipts. Tax-exempt custodial receipts (the
"Receipts") evidence ownership in an underlying bond that is deposited with a
custodian for safekeeping. Holders of the Receipts receive all payments of
principal and interest when paid on the bonds. Receipts can be purchased in an
offering or from a financial counterparty (typically an investment bank). To the
extent that any Receipt is illiquid, it is subject to the Fund's limit on
illiquid securities.
Municipal Lease Obligations and Participation Interests. Participation
interests represent undivided interests in municipal leases, installment
purchase contracts, conditional sales contracts or other instruments. These are
typically issued by a Trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or contracts.
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A Fund may purchase from banks participation interests in all or part
of specific holdings of municipal obligations, provided the participation
interest is fully insured. Each participation is backed by an irrevocable letter
of credit or guarantee of the selling bank that the Fund Manager has determined
meets the prescribed quality standards of the Fund. Therefore either the credit
of the issuer of the municipal obligation or the selling bank, or both, will
meet the quality standards of the particular Fund. Each Fund has the right to
sell the participation back to the bank after seven days' notice for the full
principal amount of the Fund's interest in the municipal obligation plus accrued
interest, but only (i) as required to provide liquidity to the Fund, (ii) to
maintain a high quality investment portfolio or (iii) upon a default under the
terms of the municipal obligation. The selling bank will receive a fee from the
Fund in connection with the arrangement. Neither Fund will purchase
participation interests unless it receives an opinion of counsel or a ruling of
the Internal Revenue Service satisfactory to the Trustees that interest earned
by that Fund on municipal obligations on which it holds participation interests
is exempt from federal income tax.
A municipal lease obligation may take the form of a lease, installment
purchase contract or conditional sales contract which is issued by a state or
local government and authorities to acquire land, equipment and facilities.
Income from such obligations is generally exempt from state and local taxes in
the state of issuance. Municipal lease obligations frequently involve special
risks not normally associated with general obligations or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title in the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in a delay in recovery or the failure to
fully recover a Fund's original investment.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Fund Manager to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Fund Manager will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Fund Manager will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
A Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Fund Manager,
the interest from such participations is exempt from regular federal income tax
and state income tax for each state specific fund.
Stand-by Commitments. Pursuant to an exemptive order from the SEC, the
AARP High Quality Tax Free Money Fund and the AARP Insured Tax Free General Bond
Fund may acquire "stand-by commitments," which will enable the Fund to improve
its portfolio liquidity by making available same-day settlements on sales of its
securities. A stand-by commitment is a right acquired by a Fund, when it
purchases a municipal obligation from a broker, dealer or other financial
institution ("seller"), to sell up to the same principal amount of such
securities back to the seller, at the Fund's option, at a specified price.
Stand-by commitments are also known as "puts." Each Fund's investment policies
permit the acquisition of stand-by commitments solely to facilitate portfolio
liquidity and not to protect against changes in the market price of the Fund's
portfolio securities. The exercise by a Fund of a stand-by commitment is subject
to the ability of the other party to fulfill its contractual commitment.
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Stand-by commitments acquired by a Fund will have the following
features: (1) they will be in writing and will be physically held by the Fund's
custodian; (2) a Fund's right to exercise them will be unconditional and
unqualified; (3) they will be entered into only with sellers which in the Fund
Manager's opinion present a minimal risk of default; (4) although stand-by
commitments will not be transferable, municipal obligations purchased subject to
such commitments may be sold to a third party at any time, even though the
commitment is outstanding; and (5) their exercise price will be (i) the Fund's
acquisition cost (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized original
issue discount during the period the Fund owned the securities, plus (ii) all
interest accrued on the securities since the last interest payment date.
Each Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding stand-by commitments will not
exceed 1/2 of 1% of the value of its total assets calculated immediately after
any stand-by commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Trustees
will determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a stand-by commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
There is no assurance that stand-by commitments will be available to a
Fund or does either Fund assume that such commitments would continue to be
available under all market conditions.
Third Party Puts. Certain funds may purchase long-term fixed rate bonds
that have been coupled with an option granted by a third party financial
institution allowing a Fund at specified intervals (not exceeding 397 calendar
days in the case of AARP High Quality Money Fund, AARP High Quality Tax Free
Money Fund or AARP Premium Money Fund) to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented by
custodial receipts or Trust certificates and may be combined with other features
such as interest rate swaps. The Fund receives a short-term rate of interest
(which is periodically reset), and the interest rate differential between that
rate and the fixed rate on the bond is retained by the financial institution.
The financial institution granting the option does not provide credit
enhancement, and in the event that there is a default in the payment of
principal or interest, or downgrading of a bond to below investment grade, or a
loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond and the weighted average maturity of the Fund's portfolio would be
adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-By
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the
Internal Revenue Service will agree with such position in any particular case.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the treatment of tender fees and swap payments, in
relation to various regulated investment company tax provisions is unclear.
However, the Fund Manager intends to manage the Funds' portfolios in a manner
designed to minimize any adverse impact from these investments.
Repurchase Agreements. Each of the AARP Funds may enter into repurchase
agreements with any member bank of the Federal Reserve System and any
broker-dealers which are recognized as a reporting government securities dealer,
whose creditworthiness has been determined by the Fund Manager to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by any of the nationally-recognized rating agencies including Moody's
and S&P. A repurchase agreement, which provides a means for a Fund to earn
income on monies for periods as short as overnight, is an arrangement under
which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and
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repurchase prices may be the same, with interest at a stated rate due to the
Fund at the time of repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation itself. For purposes of the
Investment Company Act of 1940, as amended, ("1940 Act") a repurchase agreement
is deemed to be a loan to the seller of the Obligation and is therefore covered
by each Fund's investment restriction applicable to loans. Each repurchase
agreement entered into by a Fund requires that if the market value of the
Obligation becomes less than the repurchase price (including interest), a Fund
will direct the seller of the Obligation, on a daily basis to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. In the event that a Fund is
unsuccessful in seeking to enforce the contractual obligation to deliver
additional securities, and the seller defaults on its obligation to repurchase,
the Fund bears the risk of any drop in market value of the Obligation(s). In the
event that bankruptcy or insolvency proceedings were commenced with respect to a
bank or broker-dealer before its repurchase of the Obligation, a Fund may
encounter delay and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. In the case
of repurchase agreements, it is not clear whether a court would consider a
repurchase agreement as being owned by the particular Fund or as being
collateral for a loan by the Fund. If a court were to characterize the
transaction as a loan and the Fund had not perfected a security interest in the
Obligation, the Fund could be required to return the Obligation to the bank's
estate and be treated as an unsecured creditor. As an unsecured creditor, the
Fund would be at the risk of losing some or all of the principal and income
involved in that transaction. The Fund Manager seeks to minimize the risk of
loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case the seller of the Obligations.
Securities subject to a repurchase agreement are held in a segregated
account, and the amount of such securities is adjusted so as to provide a market
value at least equal to the repurchase price on a daily basis.
Real Estate Investment Trusts. Real estate investment trusts ("REITs")
are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. Investment in REITs may subject the Fund to risks associated with
the direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended and to maintain exemption from the 1940 Act. By investing in
REITs indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs. In addition, REITs depend generally on their ability to
generate cash flow to make distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities.
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.
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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 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 government agency)
mortgages from a list of approved seller/servicers which include state and
federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by 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 Fund Manager determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
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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 Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with the AARP High Quality Short Term Bond Fund's, the
AARP Bond Fund for Income's, and the AARP Balanced Stock and Bond Fund's
investment objectives and policies, the Funds may invest in these and other
types of asset-backed securities that may be developed in the future. In
general, the collateral supporting these securities is of shorter maturity than
mortgage loans and is less likely to experience substantial prepayments with
interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust ("Trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision
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of advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses results from payment of the insurance obligations on
at least a portion of the assets in the pool. This protection may be provided
through guarantees, policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
The Funds may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act of 1933 (the "1933 Act") may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Funds to dispose of any then existing holdings of such
securities.
Zero Coupon Securities. 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 Funds, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Funds understand that the staff of the SEC no longer considers
such privately stripped obligations to be U.S. Government securities, as defined
in the Investment Company Act of 1940; therefore, the Funds intend to adhere to
this staff position and will not treat such privately stripped obligations to be
U.S. Government securities for the purpose of determining if the Funds are
"diversified" under the 1940 Act.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
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When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "TAXES" herein).
High Yield/High Risk Securities. AARP Bond Fund for Income may invest a
limited amount of assets in debt securities which are rated below
investment-grade, rated lower than Baa by Moody's or lower than BBB by S&P
(hereinafter referred to as "lower rated securities") or which are unrated, but
deemed equivalent to those rated below investment-grade by the Fund Manager
(commonly referred to as "junk bonds"). The lower the ratings of such debt
securities, the greater their risks. These debt instruments generally offer a
higher current yield than that available from higher grade issues, but typically
involve greater risk. The yields on high yield/high risk bonds will fluctuate
over time. In general, prices of all bonds rise when interest rates fall and
fall when interest rates rise. While less sensitive to changing interest rates
than investment-grade debt, lower-rated securities are especially subject to
adverse changes in general economic conditions and to changes in the financial
condition of their issuers. During periods of economic downturn or rising
interest rates, issuers of these instruments may experience financial stress
that could adversely affect their ability to make payments of principal and
interest and increase the possibility of default.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of these
securities especially in a market characterized by only a small amount of
trading and with relatively few participants. These factors can also limit the
Fund's ability to obtain accurate market quotations for these securities, making
it more difficult to determine the Fund's NAV.
In cases where market quotations are not available, lower rated
securities are valued using guidelines established by the Fund's Board of
Trustees. Perceived credit quality in this market can change suddenly and
unexpectedly, and may not fully reflect the actual risk posed by a particular
lower rated or unrated security.
Loans of Portfolio Securities. 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 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 each 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 AARP Funds have no current intention
of lending their portfolio securities, except to the extent that entry into
repurchase agreements and the purchase of debt instruments or interests in
indebtedness in accordance with a 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 each Fund to be fully invested to the
extent practicable, subject to the policies stated above. While securities
purchased on a forward delivery or when-issued basis may be sold prior to the
settlement date, each of the above Funds intends to purchase such securities
with the purpose of actually acquiring them for its portfolio unless a sale
appears desirable for investment reasons. At the time the commitment to purchase
a debt security on a forward delivery or when-issued basis is made, the
transaction will be recorded and the value of the security will be reflected in
determining its net asset value. The market value of the when-issued or forward
delivery securities may be more or less than the purchase price payable
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at settlement date. The Funds do not believe that their net asset value or
income will be adversely affected by their purchase of debt securities on a
when-issued or forward delivery basis. Each Fund will establish with its
custodian a segregated account in which it will maintain cash, U.S. Government
securities and other 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.
Futures Contracts. Financial futures contracts may be either based on
indices of particular groups or varieties of securities ("Index Futures
Contracts") or be for the purchase or sale of debt obligations ("Debt Futures
Contracts"). Such futures contracts are traded on exchanges licensed and
regulated by the Commodity Futures Trading Commission. Each Fund enters into
futures contracts to gain a degree of protection against anticipated changes in
interest rates that would otherwise have an adverse effect upon the economic
interests of the Fund. However, the costs of and possible losses from futures
transactions reduce the Funds' yield from interest on its holdings of debt
securities. Income from futures transactions constitutes taxable gain under the
Internal Revenue Code of 1986, as amended.
For each Fund, the custodian places cash, U.S. government securities
and other liquid assets into a segregated account in an amount equal to the
value of the total assets committed to the consummation of futures positions. If
the value of the securities placed in the segregated account declines,
additional cash or securities are required to be placed in the account on a
daily basis so that the value of the account equals the amount of a Fund's
commitments with respect to such contracts. Alternatively, a Fund may cover such
positions by purchasing offsetting positions, or covering such positions partly
with cash, U.S. government securities and other liquid assets, and partly with
offsetting positions.
An Index Futures Contract is a contract to buy or sell units of a
particular index of securities at a specified future date at a price agreed upon
when the contract is made. Index Futures Contracts typically specify that no
delivery of the actual securities making up the index takes place. Instead, upon
termination of the contract, final settlement is made in cash based on the
difference between the contract price and the actual price on the termination
date of the units of the index.
A Debt Futures Contract is a binding contractual commitment which, if
not offset and held to maturity, requires a Fund to make or accept delivery,
during a particular month, of obligations having a standardized face value and
rate of return. By purchasing a Debt Futures Contract, a Fund legally obligates
itself to accept delivery of the underlying security and to pay the agreed
price; by selling a Debt Futures Contract it legally obligates itself to make
delivery of the security against payment of the agreed price. However, positions
taken in the futures markets are not normally held to maturity. Instead they are
liquidated through offsetting transactions which may result in a profit or loss.
While Debt Futures Contract positions taken by a Fund are usually liquidated in
this manner, a Fund may instead make or take delivery of the underlying
securities whenever it appears economically advantageous.
A clearing corporation, associated with the exchange on which futures
contracts are traded, assumes responsibility for close-outs of such contracts
and guarantees that the sale or purchase, if still open, is performed on the
settlement date.
By entering into futures contracts, a Fund seeks to establish more
certainly than would otherwise be possible the effective rate of return on its
portfolio securities. A Fund may, for example, take a "short" position in the
futures markets by selling a Debt Futures Contract for the future delivery of
securities held by the Fund in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of such securities. Or it
might sell an Index Futures Contract based on a group of securities whose price
trends show a significant correlation with those of securities held by the Fund.
When hedging of this character is successful, any depreciation in the value of
portfolio securities is substantially offset by appreciation in the value of the
futures position. On other occasions a Fund may take a "long" position by
purchasing futures contracts. This is done when the Fund is not fully invested
or expects to receive substantial proceeds from the sale of portfolio securities
or of Fund shares, and anticipates the future purchase of particular securities
but expects the rate of return then available in the securities markets to be
less favorable than rates that are currently available in the futures markets.
The Funds expect that, in the normal course, securities will be purchased upon
termination of the long futures position, but under unusual market conditions, a
long futures position may be terminated without a corresponding purchase of
securities.
Debt Futures Contracts, however, currently involve only taxable
obligations and do not encompass municipal securities. The value of Debt Futures
Contracts on taxable securities, as well as Index Futures Contracts, may not
vary
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in direct proportion with the value of a Fund's securities, limiting the ability
of the Fund to hedge effectively against interest rate risk.
Presently the only available index futures contract in which the AARP
Insured Tax Free General Bond Fund might invest is the Bond Buyer Municipal Bond
Index. The Fund may sell a contract based on this index in anticipation of an
increase in interest rates, to attempt to offset the decrease in market value of
its portfolio securities which could result. Or the Fund might purchase such a
contract in the anticipation of a significant decrease in interest rates to
offset the increased cost of securities it hopes to purchase in the future. No
index futures contracts have yet been developed which are suitable for
investment by the Funds in the AARP Income Trust.
The investment restriction concerning futures contracts does not
specify the types of index-based futures contracts into which the Funds may
enter because it is impossible to foresee what particular indices may be
developed and traded or may prove useful to the Funds in implementing their
overall risk management strategies. For example, price trends for a particular
index-based futures contract may show a significant correlation with price
trends in the securities held by the Funds, or either of them, even though the
securities comprising the index are not necessarily identical to those held by
such Fund or Funds. In any event, the Funds would not enter into a particular
index-based futures contract unless the Fund Manager determined that such a
correlation existed.
Index Futures Contracts and Debt Futures Contracts currently are
actively traded on the Chicago Board of Trade and the International Monetary
Market at the Chicago Mercantile Exchange.
Options on Futures Contracts. To attempt to gain additional protection
against the effects of interest rate fluctuations, a Fund may purchase and write
(sell) put and call options on futures contracts that are traded on a U.S.
exchange or board of trade and enter into related closing transactions. There
can be no assurance that such closing transactions will be available at all
times. In return for the premium paid, such an option gives the purchaser the
right to assume a position in a futures contract at any time during the option
period for a specified exercise price. The AARP U.S. Stock Index Fund invests
its assets in futures contracts in order to invest uncommitted cash balances, to
maintain liquidity or to minimize trading costs.
A Fund may purchase put options on futures contracts in lieu of, and
for the same purpose as, sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve
the same purpose as the actual purchase of the futures contracts. A Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
A Fund may write (sell) a call option on a futures contract in order to
hedge against a decline in the prices of the index or debt securities underlying
the futures contracts. If the price of the futures contract at expiration is
below the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing (selling) of a put option on a futures contract is similar
to the purchase of the futures contracts, except that, if market price declines,
a Fund would pay more than the market price for the underlying securities or
index units. The net cost to that Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Limitations on Futures Contracts and Options on Futures Contracts. A
Fund will not engage in transactions in futures contracts or related options for
speculation but only as a hedge against changes resulting from market conditions
in the values of debt securities held in its portfolio or which it intends to
purchase and where the transactions are appropriate to the reduction of the
Fund's risks. The Trustees have adopted policies (which are not fundamental and
may be modified by the Trustees without a shareholder vote) that, immediately
after the purchase for a Fund of a futures contract or an option on a futures
contract, the value of the aggregate initial margin deposits with respect to all
futures contracts (both for receipt and delivery), and premiums paid on options
on futures contracts, entered into on behalf of the Fund will not exceed 5% of
the fair market value of the Fund's total assets. Additionally, the value of the
aggregate premiums paid for all put and call options held by a Fund will not
exceed 20% of its net
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assets. Futures contracts and put options written (sold) by a Fund will be
offset by assets of the Fund held in a segregated account in an amount
sufficient to satisfy obligations under such contracts and options.
AARP Income Trust and AARP Tax Free Income Trust have received from the
CFTC an interpretative letter confirming its opinion that it is not a "commodity
pool" as defined under the Commodity Exchange Act. To ensure that its futures
transactions meet this definition, each Fund will enter into such transactions
for the purposes and with the hedging intent specified in CFTC regulations. It
will further determine that the price fluctuations in the futures contracts used
for hedging are substantially related to price fluctuations in securities held
by the Fund or which it expects to purchase, though there can be no assurance
this result will be achieved. The Funds' futures transactions will be entered
into for traditional hedging purposes-- that is, futures contracts will be sold
(or related put options purchased) to protect against a decline in the price of
securities that a Fund owns, or futures contracts (or related call options) will
be purchased to protect the Fund against an increase in the price of securities
it intends to purchase. As evidence of this hedging intent, each Fund expects
that approximately 75% of its long futures positions (purchases of futures
contracts or call options on futures contracts) will be "completed"; that is,
upon sale (or other termination) of these long contracts, the Fund will have
purchased, or will be in the process of, purchasing, equivalent amounts of
related securities in the cash market. However, under unusual market conditions,
a long futures position may be terminated without the corresponding purchase of
securities.
Covered Call Options. Each of the Growth and Income Funds (with the
exception of the AARP U.S. Stock Index Fund), AARP Growth Funds, AARP Global
Funds and AARP Income Funds may write (sell) covered call options on their
portfolio securities in an attempt to enhance investment performance. The AARP
U.S. Stock Index Fund invests its assets in covered call options in order to
invest uncommitted cash balances, to maintain liquidity, or to minimize trading
costs. The writing of covered call options by each Fund is subject to
limitations imposed by certain state securities authorities.
When a Fund writes (sells) a covered call option, it gives the
purchaser of the option the right to buy the underlying security at the price
specified in the option (the "exercise price") at any time during the option
period, generally ranging up to nine months. If the option expires unexercised,
the Fund will realize gain to the extent of the amount received for the option
(the "premium") less any commission paid. If the option is exercised, a decision
over which the Fund has no control, the Fund must sell the underlying security
to the option holder at the exercise price. By writing a covered option, a Fund
forgoes, in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
When a Fund sells an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked-to-market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a offsetting transaction (i.e., the Fund
terminates its obligation as the writer of the option by purchasing a call
option on the same security with the same exercise price and expiration date as
the option previously written), the Fund will realize a gain (or loss if the
cost of a closing purchase transaction exceeds the net premium received when the
option was sold) and the deferred credit related to such option will be
eliminated. If an option is exercised, the Fund will realize a long-term or
short-term gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received.
The writing of covered options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
options are written will be segregated on the books of the Fund's custodian.
Purchasing Options on Stock Indices. To protect the value of their
portfolios against declining stock prices, a Fund may purchase put options on
stock indices. The AARP U.S. Stock Index Fund invests its assets in options on
stock indices in order to invest uncommitted cash balances, to maintain
liquidity, or to minimize trading costs. To protect against an increase in the
value of securities that it wants to purchase, a Fund may purchase call options
on stock indices. A stock index (such as the S&P 500) assigns relative values to
the common stocks included in the index and the index fluctuates with the
changes in the market values of the common stocks so included. Options on stock
indices are similar to options on stock except that, rather than giving the
purchaser the right to take delivery of stock at a specified price, an option on
a stock index gives the purchaser the right to receive cash. The amount of cash
is equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
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multiple (the "multiplier"). The writer of the option is obligated, in return
for the premium received, to make delivery of this amount. Gain or loss with
respect to options on stock indices depends on price movements in the stock
market generally rather than price movements in individual stocks.
The multiplier for an index option performs a function similar to the
unit of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Because the value of a stock index option depends upon movements in the
level of the stock index rather than the price of a particular stock, whether a
Fund will realize a gain or loss on the purchase of a put or call option on a
stock index depends upon movements in the level of stock prices in the stock
market generally or in an industry or market segment rather than movements in
the price of a particular stock. Accordingly, successful use by a Fund of both
put and call options on stock indices will be subject to the Fund Manager's
ability to accurately predict movements in the direction of the stock market
generally or of a particular industry. In cases where the Fund Manager's
prediction proves to be inaccurate, a Fund will lose the premium paid to
purchase the option and it will have failed to realize any gain.
In addition, a Fund's ability to hedge effectively all or a portion of
its securities through transactions in options on stock indices (and therefore
the extent of its gain or loss on such transactions) depends on the degree to
which price movements in the underlying index correlate with price movements in
the Fund's securities. Inasmuch as such securities will not duplicate the
components of an index, the correlation probably will not be perfect.
Consequently, a Fund will bear the risk that the prices of the securities being
hedged will not move in the same amount as the option. This risk will increase
as the composition of a Fund's portfolio diverges from the composition of the
index.
Over-the-counter options ("OTC options") are purchased from or sold to
securities dealers, financial institutions or other parties ("Counterparties")
through direct bilateral agreements with the Counterparty. In contrast to
exchange listed options, which generally have standardized terms and performance
mechanics, the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guarantees and security, are set by
negotiation of the parties. A Fund will only sell OTC options (other than OTC
currency options) that are subject to a buy-back provision permitting a Fund to
require the Counterparty to sell the option back to the Fund at a formula price
within seven days. A Fund expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Fund Manager must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. A Fund will engage in OTC option transactions only
with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers", or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of A-1 from S&P or P-1 from Moody's or an equivalent rating from any other
nationally recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 15% of its assets in illiquid securities.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued
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and exchange listed options sold by the Fund other than those above generally
settle with physical delivery, and the Fund will segregate an amount of assets
equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
Risks of Futures and Options Investments. A Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate Funds for the benefit of brokers as margin to guarantee
performance of its futures and options on futures contracts. In addition, while
such contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while a Fund may benefit from the
use of futures contracts and options on futures contracts, unanticipated changes
in interest rates may result in a poorer overall performance for that Fund than
if it had not entered into any such contracts. Additionally, the skills required
to invest successfully in futures and options may differ from skills required
for managing other assets in the Fund's portfolio.
The AARP Growth and Income Funds, AARP Growth Funds and AARP Global
Funds may engage in over-the-counter options transactions with broker-dealers
who make markets in these options. The Fund Manager will consider risk factors
such as their creditworthiness when determining a broker-dealer with which to
engage in options transactions. The ability to terminate OTC option positions is
more limited than with exchange-traded option positions because the predominant
market is the issuing broker rather than an exchange, and may involve the risk
that broker-dealers participating in such transactions will not fulfill their
obligations. Certain OTC options may be deemed to be illiquid securities and may
not be readily marketable. The Fund Manager will monitor the creditworthiness of
dealers with whom the Funds enter into such options transactions under the
general supervision of the Funds' Trustees.
Convertible Securities. Convertible securities include convertible
bonds, notes and debentures, convertible preferred stocks, and other securities
that give the holder the right to exchange the security for a specific number of
shares of common stock. Convertible securities entail less credit risk than the
issuer's common stock because they are considered to be "senior" to common
stock. Convertible securities generally offer lower interest or dividend yields
than non-convertible debt securities of similar quality. They may also reflect
changes in value of the underlying common stock.
Foreign Securities. All the AARP Growth and Income Funds, AARP Growth
Funds and AARP Global Funds may invest without limit in foreign securities. The
AARP High Quality Short Term Bond Fund may invest without limit in U.S. dollar
denominated foreign securities and may invest up to 20% of its assets in foreign
bonds denominated in foreign currencies although no more than 5% of the Fund's
total assets will be represented by a given foreign currency. The AARP Bond Fund
for Income may invest without limit in U.S. dollar denominated investment-grade
foreign securities and may invest up to 20% of its assets in foreign bonds
denominated in foreign currencies. The AARP High Quality Money Fund, AARP High
Quality Tax Free Money Fund, and AARP Premium Money Fund may currently invest in
U.S. dollar-denominated certificates of deposit and bankers' acceptances of
foreign branches of large U.S. banks.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in United States securities and
which may favorably or unfavorably affect the Funds' performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
United States and, at times, volatility of price can be greater than in the
United States. Fixed commissions on some foreign securities exchanges and bid to
asked spreads in foreign bond markets are generally higher than commissions on
bid to asked spreads on U.S. markets, although the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S. It may be more difficult for the
Funds' agents to keep currently informed about corporate actions which may
affect the prices of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Payment for securities without
delivery may be required in certain foreign markets. In addition, with respect
to certain foreign countries, there is the possibility of expropriation or
confiscatory
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taxation, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Investments in
foreign securities may also entail certain risks such as possible currency
blockages or transfer restrictions, and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Further, to the extent
investments in foreign securities involve currencies of foreign countries, the
Funds may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations and may incur costs in connection with
conversion between currencies.
Investments in companies domiciled in developing countries may be
subject to potentially greater risks than investments in developed countries.
The possibility of revolution and the dependence on foreign economic assistance
may be greater in these countries than in developed countries. The management of
each Fund seeks to mitigate the risks associated with these considerations
through diversification and active professional management.
Forward Foreign Currency Exchange Contracts. Each of the AARP Growth
and Income Funds, AARP Growth Funds, AARP Global Funds and the AARP High Quality
Short Term Bond Fund and the AARP Bond Fund for Income may enter into forward
foreign currency exchange contracts in connection with its investments in
foreign securities. A forward foreign currency exchange contract ("forward
contract") involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. They may
be used by a Fund only to hedge against possible variations in exchange rates of
currencies in countries in which it may invest. These contracts are traded in
the interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
The maturity date of a forward contract may be any fixed number of days
from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month, and forward contracts may be in any amount
agreed upon by the parties rather than predetermined amounts. Also, forward
contracts are traded directly between banks or currency dealers so that no
intermediary is required. A forward contract generally requires no margin or
other deposit. Closing transactions with respect to forward contracts are
effected with the currency trader who is a party to the original forward
contract.
The Funds may enter into foreign currency futures contracts in several
circumstances. First, when the Funds enter into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Funds
anticipates the receipt in a foreign currency of interest and dividend payments
on such a security which it holds, the Funds may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such interest and
dividend payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of U.S. dollars, of the amount of
foreign currency involved in the underlying transactions, the Funds will attempt
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend payment is declared, and the date on which such
payments are made or received.
General Investment Policies of the AARP Funds
Changes in the portfolio securities of the AARP Funds are made on the
basis of investment considerations and it is against the policy of the Fund
Manager to make changes for trading purposes.
The AARP Funds cannot guarantee a gain or eliminate the risk of loss.
The net asset value of a non-Money Fund's shares will increase or decrease with
changes in the market prices of the Fund's investments and there is no assurance
that a Fund's objective(s) will be achieved.
Except where otherwise indicated, the objectives and policies stated
above may be changed for a fund by the Board of Trustees of the applicable Trust
without a vote of the shareholders of that Fund.
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Investment Restrictions
The following restrictions may not be changed with respect to a Fund
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (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.
Each Fund has elected to be classified as a diversified series of an
open-end, management investment company.
(A) In addition, as a matter of fundamental policy, each Fund will 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) 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;
(4) 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;
(5) purchase physical commodities or contracts relating to
physical commodities; or
(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.
(B) In addition, as a matter of fundamental policy, each Fund other than
AARP Diversified Income with Growth Portfolio and AARP Diversified
Growth Portfolio will not:
(1) 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 (except that
each of AARP High Quality Money Fund, AARP Premium Money Fund
and AARP High Quality Tax Free Money Fund reserves the freedom
of action to concentrate its investments in instruments issued
by domestic banks).
(C) In addition, as a matter of fundamental policy, each of AARP
Diversified Income with Growth Portfolio and AARP Diversified Growth
Portfolio will not:
(1) concentrate its investments in investment companies, as the
term "concentrate" is used in the Investment Company Act of
1940, as amended and interpreted by regulatory authority
having jurisdiction from time to time; except that the Fund
may concentrate in an underlying fund. However, each
underlying AARP Mutual Fund in which each Fund will invest may
concentrate its investments in a particular industry.
(D) In addition, as a matter of fundamental policy, each of AARP High
Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund
will:
(1) have at least 80% of its net assets invested in securities
that are exempt from Federal income tax during periods of
normal market conditions.
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The following restrictions are not fundamental and may be changed by a Fund
without shareholder approval, in compliance with applicable law, regulation or
regulatory policy.
As a matter of non-fundamental policy, each of the following Funds
currently do not intend to:
AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP
U.S. Stock Index Fund, AARP Global Growth Fund, AARP Capital Growth
Fund, AARP International Stock Fund, AARP Small Company Stock Fund,
AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury
Fund, AARP Bond Fund for Income, AARP Diversified Income with Growth
Portfolio, and AARP Diversified Growth Portfolio
(1) borrow money in an amount greater than 5% of its total
assets, except for (i) temporary or emergency purposes and
(ii) by engaging in reverse repurchase agreements, dollar
rolls, or other investments or transactions described in the
Trust's registration statement which may be deemed to be
borrowings;
AARP High Quality Money Fund, AARP Premium Money Fund, AARP High
Quality Tax Free Money Fund, and AARP Insured Tax Free General Bond
Fund
(2) borrow money in an amount greater than 5% of its total
assets, except for temporary or emergency purposes;
AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP
U.S. Stock Index Fund, AARP Global Growth Fund, AARP Capital Growth
Fund, AARP International Stock Fund, and AARP Small Company Stock Fund
(3) enter into either reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP
U.S. Stock Index Fund, AARP Global Growth Fund, AARP Capital Growth
Fund, AARP International Stock Fund, AARP Small Company Stock Fund,
AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury
Fund, AARP Bond Fund for Income and AARP Insured Tax Free General Bond
Fund
(4) 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;
(5) purchase options, unless the aggregate premiums paid on
all such options held by the Fund at any time do not exceed
20% of the Fund's total assets; or sell put options, if as a
result, the aggregate value of the obligations underlying such
put options would exceed 50% of the Fund's total assets;
(6) enter into futures contracts or purchase options on
futures contracts, 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 options on futures contracts does not exceed
5% of the Fund's total assets; provided that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
(7) purchase warrants if as a result, such securities, taken
at the lower of cost or market value, would represent more
than 5% 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
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AARP High Quality Money Fund, AARP Premium Money Fund, AARP High
Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund, AARP
Bond Fund for Income, AARP High Quality Tax Free Money Fund, and AARP
Insured Tax Free General Bond Fund
(8) lend portfolio securities in an amount greater than 5% of
the Fund's assets.
PURCHASES
General Information
Scudder Investor Services, Inc., as the AARP Funds' agent will send
confirmations of each transaction following the transaction. By retaining
year-to-date confirmations, an investor will have an historical record of the
account activity.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in United States currency and must be drawn on a
United States financial institution.
If shares are purchased by a check which proves to be uncollectible,
the Trusts reserve the right to cancel the purchase immediately and the
purchaser will be responsible for any loss incurred by a Fund or the principal
underwriter by reason of such cancellation. Each Trust has the authority, as
agent of the shareholder, to redeem shares in the account to reimburse one of
its Funds or the principal underwriter for any loss incurred. Investors whose
orders have been canceled may be prohibited from, or restricted in, placing
future orders in any of the AARP Mutual Funds in the Program or in other Funds
advised by the AARP Funds' investment adviser or an affiliate.
Wire Transfer of Federal Funds
In the case of wire purchases, failure to receive timely and complete
account information will delay investment and subsequent accrual of dividends
and will result in the federal funds being returned to the sender on the day
following receipt by State Street Bank and Trust Company, for all funds except
AARP Global Growth Fund, or by Brown Brothers Harriman & Co., for AARP Global
Growth Fund (each the "Custodian", respectively). Unlike shareholders
subscribing by check, purchasers who wire funds will be able to redeem shares so
purchased by any method without any limitation as to the period of time such
shares have been on a Fund's books.
To obtain the net asset value determined as of the close of regular
trading on the New York Stock Exchange, Inc. (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 a 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, Scudder Investor Services, Inc. or the AARP Funds
pay a fee for receipt by the Custodian of "wired funds," but the right to charge
investors for this service is reserved.
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 custodians are not open to receive
the federal funds on behalf of a Fund.
Share Price
Accepted purchases for shares in all the AARP Funds will be filled at
the net asset value next computed after receipt of the application in good
order. Each Fund's net asset value per share is currently determined once daily,
as of the close of regular trading on each day the Exchange is open for trading.
For AARP High Quality Money Fund, AARP Premium Money Fund and AARP High Quality
Tax Free Money Fund, Scudder Fund Accounting Corporation also
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determines net asset value per share as of noon Eastern time on each day the
Exchange is open for trading. Orders received after the close of regular trading
will be filled at the next day's net asset value per share for the relevant
Fund. 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") by the close of regular trading on the Exchange.
There is no sales charge in connection with purchase of shares of any
of the AARP Funds.
Share Certificates
Due to the desire of each Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the AARP
Funds. Share certificates now in a shareholder's possession may be sent to the
AARP Funds' transfer agent for cancellation and credit to such shareholder's
account. Shareholders who prefer may hold the certificates now in their
possession until they wish to exchange or redeem such shares.
Direct Deposit Program
Investors can have Social Security or other checks from the U.S.
Government or any other regular income checks such as pension, dividends, and
even payroll checks automatically deposited directly to their accounts.
Investors may allocate a minimum of 25% of their income checks into any AARP
Fund. Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
Other Information
Each Trust 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 Funds' behalf. Orders for purchase or redemption will be deemed to
have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a 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 a 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 Funds' principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of Fund shares at any time for any reason.
Purchases and sales of the AARP Funds, except the AARP Money Funds,
should be made for long-term investment purposes only. Each of the Funds and
Scudder Investor Services, Inc. reserves the right to reject purchases of Fund
shares (including exchanges) for any reason including when a pattern of frequent
purchases and sales made in response to short-term fluctuations in a Fund's
share price appears evident.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Funds reserve 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 Funds with a tax identification number
during the 30-day notice period.
The Trusts may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of, the assets of any investment
company or personal holding company, subject to the requirements of the 1940
Act.
REDEMPTIONS
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General Information
If a shareholder redeems all shares in an account after the record date
of a dividend, the shareholder will receive, in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The AARP Funds do not impose
a redemption charge.
The proceeds of redemption transactions are normally available to be
mailed or wired to the designated bank account within one business day, and in
any event will be available within seven calendar days, following receipt of a
redemption request in good order.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares of a Fund and to receive payment 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 a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for a Fund fairly to determine the value of its net assets, or (d)
the SEC may by order permit such a suspension for the protection of a Fund'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.
The Trustees may suspend or terminate the offering of shares of a Fund
at any time.
Redemption by Telephone
Redemption by telephone is not available for shares for which share
certificates have been issued. Redemptions of certificated shares must be
requested by mail as explained in the section entitled "Redemption by Mail or
Fax" below.
For other investors, the following procedures are available.
TO ADDRESS OF RECORD: New investors automatically receive the option,
without having to elect it, to redeem by telephone to their address of record
for any amount up to $100,000 per Fund. Telephone redemption to address of
record may be used as long as the account registration address has not changed
within the last 15 days. In order to decline this feature, the shareholder must
notify the Program in writing. Any shareholder who refuses Telephone Redemption
to Address of Record can later establish the feature with a signature guaranteed
written request. This request must be done prior to utilizing this service for
the first time.
TO YOUR BANK--BY MAIL OR BY WIRE: In order to request redemptions by
telephone to their bank, shareholders must have completed the telephone
redemption authorization included in the enrollment form and have sent the
authorization to the Program. This authorization requires designation of a bank
account to which the redemption payment is to be sent. The proceeds will be
mailed or wired only to the designated bank account.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the enrollment form, and send it to the Program.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a predesignated bank account or who want to
change the bank account previously designated to receive
redemption payments should either enter the new information on
the "Telephone Option Form" which may be obtained by calling
the Program, or send a signature guaranteed letter identifying
the account and specifying the exact information to be
changed. In each case, the letter must be signed exactly as
the shareholder's name(s) appears on the account. All requests
for telephone redemption should be accompanied by a voided
check from the designated bank account. All signatures will
require a guarantee, which can be obtained from most banks,
credit unions or savings associations, or from broker/dealers,
government securities broker/dealers, national securities
exchanges, registered securities associations, or clearing
agencies deemed eligible by the SEC. An original signature and
an original signature guarantee are required for each person
in whose name the account is registered. Signature guarantees
by notaries public are not acceptable.
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In addition, if shares to be redeemed were purchased by check, mailing
of the redemption proceeds may be delayed long enough to assure that the
purchase check has cleared.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve wire to the bank account
designated on the application form unless a request is made that the redemption
be mailed to the designated bank account. For each wire redemption, the program
charges a $5.00 fee which is deducted from the proceeds of the redemption.
To Your Savings Bank: Investors designating a savings bank to receive
their telephone redemption proceeds are advised that if the savings bank is not
a participant in the Federal Reserve System, redemption proceeds must be wired
through a commercial bank which is a correspondent of the savings bank. As this
may delay receipt by the shareholder's account, it is suggested that investors
wishing to use a savings bank discuss wire procedures with their bank and submit
any special wire transfer information with the telephone redemption
authorization. If appropriate wire information is not supplied, redemption
proceeds will be mailed to the designated bank.
The Trusts and their agents each reserve the right to modify,
interrupt, suspend or terminate the telephone redemption privilege at any time,
without notice. A shareholder may cancel the telephone redemption authorization
upon written notice. Each Trust employs procedures including recording telephone
calls, testing a caller's identity, and sending written confirmation of
telephone transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Trust does not follow such procedures, it may be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption by Mail or Fax
Any shareholder may redeem his or her shares by writing to the Program.
All written requests must be signed by at least one person on the account's
registration exactly as registered. In addition, for the protection of the
shareholder and to prevent fraudulent redemptions, a signature guarantee is
required on all written redemption requests for over $100,000. A signature
guarantee is also required on written redemption requests for any amount if the
check is made payable to someone other than the registered shareholder, if the
proceeds are to be forwarded to an address other than the address of record, or
if the address of record has changed in the last 15 days. In order to ensure
proper authorization before redeeming shares, the Program may request additional
documents such as, but not restricted to, stock powers, Trust instruments,
certificates of death, appointments as executor, certificates of corporate
authority and waivers of tax required in some states when settling estates.
Redemption to Address of Record for up to $100,000 without a signature
guarantee is an automatic feature of any AARP Fund account unless it has been
declined by the shareholder in writing. Any shareholder who refuses this feature
can later establish it with a written request containing a signature guarantee.
This request must be made prior to utilizing the feature for the first time.
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with the signature(s) guaranteed as explained
above. It is suggested that the shareholders holding certificated shares or
shares registered in other than individual names contact the Program prior to
requesting a redemption to ensure that all necessary documents accompany the
request. When shares are held in the name of a corporation, trust, fiduciary or
partnership, the transfer agent requires, in addition to the stock power,
certified evidence of authority to sign. These procedures are for the protection
of shareholders and should be followed to help ensure prompt payment. Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption will be sent within seven (7) days after receipt of a request
for redemption that complies with the above requirements. Delays of more than
seven (7) days for payment for shares tendered for repurchase or redemption may
result but only until the purchase check has cleared.
Redemption by Checkwriting
All new investors in the AARP Money Funds and existing shareholders of
these Funds who apply to State Street Bank and Trust Company for checks may use
them to pay any person, provided that each check is for at least $100 for either
the AARP High Quality Money Fund or the AARP High Quality Tax Free Money Fund,
or at least
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$1,000 for the Premium Money Fund and in any case not more than $1,000,000. By
using one of these checks, the shareholder will receive daily dividend credit on
his or her shares in either Fund until the check has cleared the banking system.
Investors who purchased shares by check may write checks against those shares
only after they have been on the Fund's books for 7 days. Shareholders who use
this service may also use other redemption procedures. The Funds pay the bank
charges for this service. However, each Fund will review the cost of operation
periodically and it reserves the right to determine if direct charges to the
persons who avail themselves of this service would be appropriate. An account
cannot be closed using the "free checkwriting" privilege. The Trusts, the
transfer agent and the custodian each reserve the right at any time to suspend
or terminate the "free checkwriting" privilege.
Redemption-in-Kind
The AARP Growth Trust and AARP Managed Investment Portfolios Trust
reserve the right to permit the AARP Balanced Stock and Bond Fund, AARP Growth
and Income Fund, the AARP Global Growth Fund, AARP Capital Growth Fund, AARP
International Stock Fund, AARP Small Company Stock Fund, AARP U.S. Stock Index
Fund, AARP Diversified Income With Growth Portfolio and AARP Diversified Growth
Portfolio, if conditions exist which make cash payments undesirable, to honor
any request for redemption or repurchase order by making payment in whole or in
part in readily marketable securities chosen by the Fund and valued as they are
for purposes of computing the Fund's net asset value (a redemption-in-kind). If
payment is made in securities, a shareholder may incur transaction expenses in
converting these securities into cash. The AARP Growth Trust has elected,
however, to be governed by Rule 18f-1 under the 1940 Act as a result of which
each Fund of the Trust is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of such Fund at the beginning of the
period.
Other Information
The value of shares redeemed or repurchased may be more or less than
the shareholder's cost depending on the net asset value at the time of
redemption or repurchase. The Funds do not impose a redemption or repurchase
charge. Redemptions of shares, including redemptions undertaken to effect an
exchange for shares of another Fund in the Program, may result in tax
consequences (gain or loss) to the shareholder and the proceeds of such
redemptions may be subject to backup withholding (see "TAXES", below).
Shareholders who wish to redeem shares from Retirement Plans (see
"RETIREMENT PLANS," below) should contact the Trustee or custodian of the Plan
for the requirements.
The Trustees have established certain minimum investment and account
size requirements. For AARP Balanced Stock and Bond Fund, AARP Growth and Income
Fund and AARP GNMA and U.S. Treasury Fund, the minimum investment is $500. For
AARP Premium Money Fund, the minimum investment is $10,000. For all other AARP
Mutual Funds, the minimum investment is $2,000. An account may be opened in any
AARP Mutual Fund for $500 if an Automatic Investment Plan of $100 per month is
established. Each Trust reserves the right to adopt a policy that if
transactions at any time reduce a shareholder's account in a Fund to below the
applicable minimum, the shareholder will be notified that, unless the account is
brought up to at least the applicable minimum the Fund will redeem all shares
and close the account by making payment to the shareholder. The shareholder has
sixty days to bring the account up to the applicable minimum before any action
will be taken by the Fund. Reductions in value that result solely from market
activity will not trigger an involuntary redemption. No transfer from an
existing to a new account may be for less than the minimums set forth above;
otherwise the new account may be redeemed as described above. (This policy
applies to accounts of new shareholders in a particular Fund, but does not apply
to Retirement Plan Accounts.) The Trustees have the authority to increase the
minimum account size.
EXCHANGES
The procedure for exchanging shares from one AARP Fund to another AARP
Fund in the Program, when the account in the new AARP Fund is established with
the same registration, telephone option, dividend option and address as the
present account, is set forth under "MAKING EXCHANGES AND REDEMPTIONS" in the
Prospectus. If the registration data for the account receiving the proceeds of
the exchange is to be different in any respect from the account from which
shares are to be exchanged, the exchange request must be in writing and must
contain a signature guarantee
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as described under "SIGNATURE GUARANTEES" in the Prospectus. If an exchange
involves an initial investment in the Fund being acquired, the amount to be
exchanged must be at least $2000 for non-retirement plan accounts ($500 for AARP
Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP GNMA and U.S.
Treasury Fund, and $10,000 for AARP Premium Money Fund). For IRA, Keogh Plan and
UGMA/UTMA accounts the amount must be $250. If the exchange is made into an
existing account, there is no minimum requirement, except where the existing
account is in the AARP Premium Money Fund, which requires an exchange into an
existing account to be $1,000 or more.
Only exchange orders received between 8:00 a.m. and 4:00 p.m. eastern
time on any business day will ordinarily be accomplished at respective net asset
values determined on that day. Exchange orders received after 4:00 p.m. are
processed on the next business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one AARP Fund to an
existing account in another AARP Fund through the AARP Funds' Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the phone or in writing. Automatic Exchanges will continue until
the shareholder requests by phone or in writing to have the feature removed, or
until the originating account is depleted. The Trusts and the Transfer Agent
each reserve the right to modify, interrupt, suspend or terminate the privilege
of the Automatic Exchange Program at any time, without notice.
There is no charge to the shareholder for any exchange described above.
An exchange from any AARP Fund other than the AARP Money Funds is likely to
result in recognition of gain or loss to the shareholder.
Investors currently receive the exchange privilege automatically
without having to elect it. The Trusts and the AARP Funds' distributor, Scudder
Investor Services, Inc., reserve the right to suspend or terminate the exchange
privilege at any time. Telephone exchange may be initiated by anyone able to
identify the registration of an account, but the proceeds will only be invested
in another AARP Fund with the same registration. The AARP Funds employ
procedures to give reasonable assurance that telephone instructions are genuine,
including recording telephone calls, testing a caller's identity and sending
written confirmation of such transactions. If an AARP Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions.
All of the AARP Funds in the Program into which investors may make an
exchange are described in the combined Prospectus and in this Statement of
Additional Information. Before making an exchange, shareholders should read the
information in the Prospectus regarding the Fund into which the exchange is
being contemplated.
TRANSACT BY PHONE
Shareholders, whose bank of record is a member of the Automated
Clearing House Network (ACH) and who have enrolled in the "Transact by Phone"
option, may purchase or redeem shares by telephone. Shareholders may purchase
shares valued at up to $250,000 but not less than $250 ($1,000 for the AARP
Premium Money Fund). Shareholders may redeem shares in an amount not less than
$250.
In order to utilize the Transact by Phone service, shareholders must
have completed the Transact by Phone authorization. This authorization requires
designation of a bank account from which the purchase payment will be debited or
to which the redemption payment will be credited. New investors wishing to
establish the Transact by Phone service can do so by completing the appropriate
section on the enrollment form. Existing shareholders who wish to establish
Transact by Phone will need to complete a Transact by Phone Enrollment Form. If
a shareholder has previously elected the "Telephone Redemption to Bank of
Record" and/or the "Automatic Investment Plan" services, the banking information
must be identical for all of these services for each of the shareholder's Funds.
After sending in their enrollment forms, shareholders should allow 15 days for
the service to be activated. The Trusts and their agents each reserve the right
to modify, interrupt, suspend or terminate the Transact by Phone service at any
time, without notice.
Purchasing Shares by Transact by Phone
To purchase shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time. Shares will be purchased at that
night's closing share price. The shareholder's bank account will be debited on
the
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first business day following the purchase request. Requests received after 4:00
p.m. will be purchased at the next business day's closing price.
Redeeming Shares by Transact by Phone
To redeem shares by Transact by Phone, a shareholder should call an
AARP Mutual Fund representative before 4:00 p.m. eastern time to receive that
day's closing share price. Requests received after 4:00 p.m. will be sold at the
next business day's closing price. The shareholder's bank account will be
credited with redemption proceeds on the second or third business day following
the redemption request.
The AARP Funds employ procedures to give reasonable assurance that
telephone instructions are genuine, including recording telephone calls, testing
a caller's identity and sending written confirmation of such transactions. If an
AARP Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
FEATURES AND SERVICES OFFERED BY THE AARP MUTUAL FUNDS
Automatic Dividend Reinvestment
Investors may elect on their enrollment form whether they wish to
receive any dividends from net investment income or any distributions from
realized capital gains in cash or to reinvest such dividends and distributions
in additional shares of the Fund paying the dividend or distribution. They may
also elect to have these payments invested in shares of any other AARP Fund in
the Program in which they have an account. If no election is made, dividends and
distributions will be reinvested in additional shares. A change of instructions
for the method of payment may be given to the Program at any time prior to a
record date.
Each distribution, whether by check or reinvested in a Fund, will
include a brief explanation of the source of the distribution.
Distributions Direct
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the AARP Funds'
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-253-2277. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Reports to Shareholders
The AARP Funds send to shareholders semiannually financial statements,
which are examined annually by independent accountants, including a list of
investments held and statements of assets and liabilities, operations, changes
in net assets, and financial highlights.
Investors receive a brochure entitled Your Guide to Simplified
Investment Decisions when they order an investment kit for the 16 AARP Funds
which also contains a prospectus. The Shareholder's Handbook is sent to all new
shareholders to help answer any questions they may have about investing.
Similarly, an IRA Handbook is sent to all new IRA shareholders. Every month,
shareholders will be sent the newsletter, Financial Focus. Retirement plan
shareholders will be sent a special edition of Financial Focus on a quarterly
basis. The newsletters are designed to help you keep up to date on economic and
investment developments, and any new financial services and features of the
Program.
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Consolidated Statements
Shareholders with investments in two or more AARP Funds will receive,
without charge, a convenient monthly Consolidated Statement. IRA and Keogh Plan
accounts receive Consolidated Statements quarterly. This statement contains the
market value of all holdings, a complete listing of transactions for the
statement period and a summary of the shareholder's investment program for the
statement period and for the year to date. Information may be obtained by
contacting the AARP Investment Program from Scudder, P.O.
Box 2540, Boston, Massachusetts 02208-2540, or by calling toll free,
1-800-253-2277.
RETIREMENT PLANS
Shares of AARP High Quality Money Fund, AARP Premium Money Fund, AARP
High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund, AARP Bond
Fund for Income, AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund,
AARP Global Growth Fund, AARP Capital Growth Fund, AARP U.S. Stock Index Fund,
AARP International Stock Fund and AARP Small Company Stock Fund may be purchased
in connection with several types of tax-deferred retirement plans. These plans
were created for members of AARP. Each plan is briefly described below. The
plans provide convenient ways for AARP members to make investments which may be
tax-deductible for their retirement and have taxes on any income from their
investment deferred until their retirement, when they may be in a lower tax
bracket. Additional information on each plan may be obtained by contacting the
AARP Investment Program from Scudder, P.O. Box 2540, Boston, Massachusetts,
02208-2540, or by calling toll free, 1-800-253-2277. Investment professionals
and retirement-benefits experts estimate that prospective retirees will need 70%
to 80% of their current salaries during each year of their retirement, with
adjustment for changes in prices during retirement, to maintain their current
life-style. Investment professionals recommend diversifying investments among
stock, bonds and cash-equivalents when building retirement reserves. It is
advisable for an investor considering any of the plans described below to
consult with an attorney or tax advisor with respect to the terms, suitability
requirements and tax aspects of the plan.
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")
Shares of the Eligible Funds may be purchased as the underlying
investment for an AARP No-Fee IRA which meets the requirements of Section 408(a)
of the Internal Revenue Code. Any AARP member with earned income or wages is
eligible to make annual contributions to the AARP No-Fee IRA for each year
before the year the member attains age 70 1/2. An individual may establish an
AARP No-Fee IRA whether or not he or she is an active participant in another
tax-qualified retirement plan, including a tax-sheltered annuity or government
plan.
AARP No-Fee IRA participants may generally contribute to an AARP No-Fee
IRA up to the lesser of $2,000 or 100% of their compensation or earned income.
If both a husband and wife work, each may set up an AARP No-Fee IRA before the
year they attain age 70 1/2, permitting a potential maximum contribution of
$4,000 per year for both persons. Alternatively, if your compensation during the
taxable year exceeds your spouse's and you file a joint income tax return, you
may contribute up to the lesser of $4,000 or 100% of your aggregate income to
separate IRAs for yourself and your spouse, but no more than $2,000 to either
IRA.
An individual will be allowed a full deduction for contributions to an
AARP No-Fee IRA only if (1) neither the individual, nor his or her spouse, if
they file a joint return, is an active participant in an employer-maintained
retirement plan, or (2) the individual (and his or her spouse, if applicable)
has an adjusted gross income below a certain level. However, an individual not
permitted to make a deductible contribution may nonetheless make a nondeductible
contribution to an AARP No-Fee IRA.
Any AARP member who is entitled to receive a qualifying distribution
from a qualified retirement plan (including a tax-sheltered annuity plan) or
another IRA may make a rollover contribution of all or any portion of the
distribution to the AARP No-Fee IRA, either in a direct rollover or within 60
days after receipt of the distribution, whether or not the member has attained
age 70 1/2. If a qualified rollover contribution is made, the distribution will
not be subject to Federal income tax until distributed from the AARP No-Fee IRA;
however, distributions not directly rolled over might be subject to automatic
20% federal tax withholding.
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AARP mutual fund representatives are available to help you transfer
your IRA to the AARP No-Fee IRA. You pay no transfer fees for this service. An
AARP Mutual Fund Representative can help you with the paperwork, contact your
present IRA custodian, help to transfer your funds to the AARP No-Fee IRA, and
send you a confirmation when your transfer is complete.
Earnings on the AARP No-Fee IRA are not subject to current Federal
income tax until distributed; distributions are taxed as ordinary income.
Withdrawals attributable to nondeductible contributions are not taxable.
Distributions of amounts that are includible in income (and therefore taxable)
also may be subject to an additional 10% early distribution tax if distributions
are taken before the individual reaches age 59 1/2 or becomes disabled or dies,
unless one of certain exceptions applies. Distributions must begin by April 1st
following the taxable year in which the participant reaches age 70 1/2.
AARP Keogh Plan
Shares of the Eligible Funds may be purchased for the AARP Keogh Plan
("Keogh Plan"). The Keogh Plan is designed as a tax-qualified retirement plan
consisting of a profit sharing plan and a money purchase pension plan which can
be adopted by self-employed persons who are members of AARP and by corporations
whose principal shareholders are members of AARP. Self-employed persons may make
annual tax-deductible contributions to the Keogh Plan equal to the lesser of
$30,000 or 20% of their earned income. An adopting corporation may contribute
for each employee the lesser of $30,000 or 25% of the employee's taxable
compensation. No more than $150,000 (as adjusted) of earned income or taxable
compensation may be taken into account, however. If the Keogh Plan is "top
heavy," a minimum contribution may be required for certain employees. Additional
information on contributions to the Keogh Plan is found in Your Guide to the
AARP Keogh Plan.
The Keogh Plan provides that contributions may continue to be made on
behalf of participants after they have reached the age of 70 1/2 if they are
still working.
Lump sum distributions from the Keogh Plan may be eligible to be taxed
for Federal income tax purposes according to a favorable 5-year averaging (or
10-year averaging for individuals who reached age 50 before 1986) method not
available to IRA distributions. Five-year averaging has been eliminated for
taxable years beginning after December 31, 1999. If members eligible to join the
Keogh Plan choose to roll over pension and profit-sharing distributions from
other tax-qualified retirement plans, they will retain the right to use the
averaging method for such distributions.
The Keogh Plans are prototype plans approved by the Internal Revenue
Service.
In general, distributions from tax-qualified plans, such as the Keogh
Plan, must begin by April 1st in the year following the year in which the
participant reaches age 70 1/2, or following the year in which the participant
retires, if later, unless the participant is a 5% owner, whether or not he or
she continues to be employed. Excise taxes will apply to
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premature distributions, and to taxpayers who are required, but fail, to receive
a distribution after reaching age 70 1/2. Special favorable tax treatment for
certain distributions is reduced or phased out, except where grandfathering
provisions apply.
Shares of the Eligible Funds may be purchased also as an investment for
an IRA or tax-qualified retirement plan (including a tax-sheltered annuity plan)
other than those described above, if permitted by the provisions of the relevant
plan.
Roth Individual Retirement Account (Roth IRA)
Shares of the Funds may be purchased as the underlying investment for
an 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 from a Roth IRA are taxable
and subject to a 10% tax penalty unless an exception applies. Exceptions to the
10% penalty include: disability, deductible medical expenses, certain purchases
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.
OTHER PLANS
Automatic Investment
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts. The minimum pre-authorized investment amount
is $500. New shareholders who open a Gift to Minors Account pursuant to the
Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA)
and who sign up for the Automatic Investment Plan will be able to open a Fund
account for less than $500 if they agree to increase their investment to $500
within a 10 month period. Investors may also invest in any AARP mutual fund for
$500 a month if they establish a plan with a minimum automatic investment of at
least $100 per month. This feature is only available to Gifts to Minors Account
investors. The Automatic Investment Plan may be discontinued at any time without
prior notice to a shareholder if any debit from their bank is not paid, or by
written notice to the shareholder at least thirty days prior to the next
scheduled payment to the Automatic Investment Plan.
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
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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.
Automatic Withdrawal Plan
Shareholders who own or purchase $10,000 or more of shares of a AARP
Fund may establish an Automatic Withdrawal Plan with that Fund. The investor can
then receive monthly, quarterly or periodic redemptions from his or her account
for any designated amount of $50 or more. Shareholders may designate which day
they want the automatic withdrawal to be processed. The check amounts may be
based on the redemption of a fixed dollar amount, fixed share amount or percent
of account value or declining balance. The Automatic Withdrawal Plan provides
for income dividends and capital gains distributions, if any, to be reinvested
in additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "MAKING EXCHANGES AND REDEMPTIONS" in the Prospectus. Any such
request must be received by the AARP Fund's Transfer Agent 10 days prior to the
date of the first automatic withdrawal. An Automatic Withdrawal Plan may be
terminated at any time by the shareholder, the AARP Funds or their agents on
written notice, and will be terminated when all shares of the Funds under the
Plan have been liquidated or upon receipt by the Funds of notice of death of the
shareholder. For more information concerning this plan, write to the AARP
Investment Program from Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call,
toll-free, 1-800-253-2277.
Direct Payment of Regular Fixed Bills
Shareholders who own or purchase $10,000 or more of shares of an AARP
Fund may arrange to have regular fixed bills such as rent, mortgage or other
payments of more than $50 made directly from their account. The arrangements are
virtually the same as for an Automatic Withdrawal Plan (see above). For more
information concerning this plan, write to the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
DIVIDENDS AND YIELD
AARP Income Funds, AARP Growth and Income Funds, AARP Growth Funds, AARP Global
Funds and AARP Managed Investment Portfolios
Each AARP Fund intends to follow the practice of distributing
substantially all of its investment company taxable income (which includes, for
example, interest, dividends and any excess of net realized short-term capital
gains over net realized long-term capital losses, less deductible expenses), and
its net tax-exempt interest income, if any. Each AARP Fund also intends to
follow the practice of distributing any excess of net realized long-term capital
gains over net realized short-term capital losses after reduction for any
capital loss carryforwards. However, if it appears to be in the best interests
of a Fund and its shareholders, the Fund may retain all or part of such gain for
reinvestment.
AARP U.S. Stock Index Fund, AARP Balanced Stock and Bond Fund and AARP
Growth and Income Fund intend to pay dividends in March, June, September and
December of each year and any net realized capital gains after the September 30
fiscal year end. AARP Small Company Stock Fund, AARP International Stock Fund,
AARP Global Growth Fund and AARP Capital Growth Fund intend to pay dividends and
any realized capital gains over net realized short-term capital losses after
reduction for any capital loss carryforwards in December after the September 30
fiscal year end. (See "TAXES" below.)
Both types of distributions will be made in shares of the respective
AARP Fund and confirmations will be mailed to each shareholder unless a
shareholder has elected to receive cash, in which case a check will be sent.
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The net income of each of the AARP Income Funds and the AARP Insured
Tax Free General Bond Fund, is determined as of the close of trading on the
Exchange (usually 4:00 p.m. eastern time) on each day on which the Exchange is
open for business. All of the net income so determined normally will be declared
as a dividend daily to shareholders of record as of 4:00 p.m. on the preceding
day, and distributed monthly. Dividends commence on the next business day after
purchase. Dividends which are not paid by check will be reinvested in additional
shares of the particular Fund at the net asset value per share determined as of
a day selected within five days of the last business day of the month. Checks
will be mailed to shareholders no later than the fourth business day of the
following month, and consolidated statements confirming the months dividends
will be mailed to shareholders electing to invest dividends in additional
shares. Dividends will ordinarily be invested on the last business day of each
month at the net asset value per share determined as of the close of regular
trading on the Exchange.
AARP Money Funds
The net investment income of the AARP Money Funds is determined as of
the close of regular trading on the Exchange (normally 4:00 p.m. eastern time)
on each day on which the Exchange is open for business.
All the investment income of the AARP Money Funds so determined
normally will be declared as a dividend to shareholders of record as of
determination of the net asset value at twelve o'clock noon after the purchase
and redemption of shares. Shares purchased as of the determination of net asset
value made as of the close of the Exchange will not participate in that day's
dividend; in such cases dividends commence on the next business day. Checks will
be mailed to shareholders electing to take dividends in cash, and confirmations
will be mailed to shareholders electing to invest dividends in additional shares
for the month's dividends on the fourth business day of the next month.
Dividends will be invested at the net asset value per share, normally $1.00,
determined as of 4 p.m. on the first business day of each month.
Dividends are declared daily on each day on which the Exchange is open
for business. The dividends for a business day immediately preceding a weekend
or holiday will normally include an amount equal to the net income for the
subsequent days on which dividends are not declared. However, no daily dividend
will include any amount of net income in respect of a subsequent semi-annual
accounting period.
Because the net investment income of the AARP Money Funds is declared
as a dividend each time the net income of the Fund is determined, the net asset
value per share of the Fund (i.e., the value of the total assets of the Fund,
less all of its liabilities, by the total number of shares of the Fund) will
remain at $1.00 per share immediately after each such determination and dividend
declaration, unless (i) there are unusual or extended fluctuations in short-term
interest rates or other factors, such as unfavorable changes in the
creditworthiness of issuers affecting the value of securities in the Fund's
portfolio, or (ii) net investment income is a negative amount.
Net investment income (from the time of the immediately preceding
determination thereof) consists of (i) all interest income accrued on the
portfolio assets of a Fund less (ii) all actual and accrued expenses. Interest
income included in the daily computation of net income is comprised of original
issue discount earned on discount paper accrued ratably to the date of maturity
as well as accrued interest. Expenses of the AARP Money Funds, including the
management fee payable to the Fund Manager, are accrued each day.
Normally the AARP Money Funds will have a positive net investment
income at the time of each determination thereof. Net investment income may be
negative if an unexpected liability must be accrued or a loss realized. If the
net investment income of the AARP Money Funds determined at any time is a
negative amount, the net asset value per share will be reduced below $l.00
unless one or more of the following steps are taken: the Trustees have the
authority (l) to reduce the number of shares in each shareholder's account, (2)
to offset each shareholder's pro rata portion of negative net investment income
from the shareholder's accrued dividend account or from future dividends, or (3)
to combine these methods in order to seek to maintain the net asset value per
share at $l.00. The AARP Money Funds may endeavor to restore the net asset value
per share to $l.00 by not declaring dividends from net investment income on
subsequent days until restoration, with the result that the net asset value per
share will increase to the extent of positive net investment income which is not
declared as a dividend.
Distributions of realized capital gains, if any, are paid in November
or December of the AARP Money Funds' taxable year although the Fund may make an
additional distribution within three months of the Fund's fiscal year end of
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September 30. The AARP Money Funds expect to follow the practice of distributing
all net realized capital gains to shareholders and expect to distribute realized
capital gains at least annually. However, if any realized capital gains are
retained by the AARP Money Funds for reinvestment and federal income taxes are
paid thereon by the Fund, the Fund will elect to treat such capital gains as
having been distributed to shareholders; as a result, shareholders would be able
to claim their share of the taxes paid by the Fund on such gains as a credit
against their individual federal income tax liability.
Should the AARP Money Funds incur or anticipate any unusual or
unexpected significant expense, depreciation or loss which would affect
disproportionately the Fund's income for a particular period, the Trustees of
the Funds or the Executive Committee of the Trustees may at that time consider
whether to adhere to the dividend policy described above or to revise it in the
light of the then prevailing circumstances in order to ameliorate to the extent
possible the disproportionate effect of such expense or loss on then existing
shareholders. Such expenses may nevertheless result in a shareholder's receiving
no dividends for the period during which the shares are held and in receiving
upon redemption a price per share lower than that which was paid.
Performance Information: Computation of Yields and Total Return
a) The AARP Money Funds
From time to time, quotations of an AARP Money Fund's yield may be
included in advertisements, sales literature or shareholder reports. These yield
figures are calculated in the following manner:
The current yield is the net annualized yield based on a specified 7
calendar-days calculated at simple interest rates. Current yield is calculated
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period and dividing such change by the value of the account at the
beginning of the base period to obtain the base-period return. The base-period
return is then annualized by multiplying it by 365/7; the resultant product
equals net annualized current yield. The current yield figure is stated to the
nearest hundredth of one percent. The current yield of the AARP High Quality
Money Fund, AARP High Quality Tax Free Money Fund and the AARP Premium Money
Fund for the seven-day period ended September 30, 1999, was 4.63%, 2.88% and
5.06%, respectively.
The effective yield is the net annualized yield for a specified 7
calendar-days assuming a reinvestment in Fund shares of all dividends during the
period, i.e., compounding. Effective yield is calculated by using the same
base-period return used in the calculation of current yield except that the
base-period return is compounded by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, according to the
following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1.
The effective yield of the AARP High Quality Money Fund, AARP High
Quality Tax Free Money Fund and the AARP Premium Money Fund for the seven-day
period ended September 30, 1999, was 4.74% 2.92% and 5.19%, respectively.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and are
not intended to indicate future performance. Current yield and effective yield
will vary based on changes in market conditions and the level of Fund expenses.
In connection with communicating its current yield and effective yield
to current or prospective shareholders, a Fund also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
b) The AARP Money Funds, AARP Income Funds, AARP Growth and Income Funds
AARP Growth Funds, AARP Global Funds and AARP Managed Investment
Portfolios
From time to time, quotations of a Fund's total return may be included
in advertisements, sales literature or shareholder reports. This total return
figure is calculated in the following manner:
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The total return is the average annualized compound rate of return for,
where applicable, the periods of one year, five years and ten years, all ended
on the last day of a recent calendar quarter. Total return quotations reflect
changes in the price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Total return is calculated by finding the average annualized
compound rates of return of a hypothetical investment over such periods,
according to the following formula (total return is then expressed as a
percentage):
<TABLE>
<CAPTION>
T = (ERV/P)1/n - 1
Where: <S> <C> <C>
T = average annualized compound total rate of return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the
value at the end of the applicable period,
of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>
<TABLE>
<CAPTION>
Total Return
------------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/99 9/30/99 9/30/99
------- ------- -------
<S> <C> <C> <C>
AARP High Quality Money Fund 4.38% 4.71% 4.64%
AARP High Quality Tax Free Money Fund* 2.37 2.76 3.18
AARP High Quality Short Term Bond 1.21 6.89 7.17
AARP GNMA and U.S. Treasury 0.99 6.54 7.01
AARP Bond Fund for Income+ -0.46 N/A N/A
AARP Insured Tax Free General Bond -1.21 6.13 6.80
AARP Balanced Stock and Bond Fund+ 5.84 12.51 N/A
AARP Growth and Income 12.10 16.94 13.64
AARP U.S. Stock Index Fund+ 28.02 N/A N/A
AARP Global Growth Fund+ 18.36 N/A N/A
AARP Capital Growth 36.83 22.66 13.58
AARP International Stock Fund+ 16.52 N/A N/A
AARP Premium Money Fund+ N/A N/A N/A
AARP Small Company Stock Fund+ 5.70 N/A N/A
AARP Diversified Income With Growth Portfolio+ 4.21 N/A N/A
AARP Diversified Growth Portfolio+ 11.08 N/A N/A
</TABLE>
* Prior to August 1, 1991, the AARP High Quality Tax Free Money Fund
operated as the AARP Insured Tax Free Short Term Fund. The total return
figures for the five and ten years ended September 30, 1999, for the
AARP High Quality Tax Free Money Fund are representative of the Fund
prior to its conversion date except that the figures have been adjusted
to reflect its conversion to a money market fund.
+ AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund, AARP Small Company Stock Fund, AARP
Diversified Income With Growth Portfolio and AARP Diversified Growth
Portfolio commenced operations on February 1, 1997 and, as of September
30, 1999, had life of fund annual total returns of 5.23%, 22.01%,
10.55%, 7.13%, 7.12% and 10.50%, respectively. AARP Balanced Stock and
Bond commenced operations on February 1, 1994 and, as of September 30,
1999, had a life of fund annual total return of 10.81%. AARP Global
Growth Fund commenced operations on February 1, 1996 and, as of
September 30, 1998, had a life of fund annual total return of 11.51%.
AARP Premium Money Fund commenced operations on February 1, 1999, and
therefore does not have an annualized return to report.
In addition to total return described above, the Funds may
quote nonstandard "cumulative total return."
The cumulative total return is the rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of a Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by
53
<PAGE>
finding the rates of return of a hypothetical investment over such periods,
according to the following formula. (Cumulative total return is then expressed
as a percentage):
<TABLE>
<CAPTION>
C = (ERV/P) -1
<S> <C> <C>
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>
<TABLE>
<CAPTION>
Cumulative Total Return
--------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/99 9/30/99 9/30/99
------- ------- -------
<S> <C> <C> <C>
AARP High Quality Money Fund 4.38% 25.90% 57.32%
AARP High Quality Tax Free Money Fund 2.37 14.56 36.69
AARP High Quality Short Term Bond 1.21 39.55 99.81
AARP GNMA and U.S. Treasury 0.99 37.29 96.98
AARP Bond Fund for Income+ -0.46 N/A N/A
AARP Insured Tax Free General Bond -1.21 34.64 93.15
AARP Balanced Stock and Bond Fund+ 5.84 80.25 N/A
AARP Growth and Income Fund 12.10 118.69 259.31
AARP U.S. Stock Index Fund+ 28.02 N/A N/A
AARP Global Growth Fund+ 18.36 N/A N/A
AARP Capital Growth Fund 36.83 177.71 257.32
AARP International Stock Fund+ 16.52 N/A N/A
AARP Premium Money Fund+ N/A N/A N/A
AARP Small Company Stock Fund+ 5.70 N/A N/A
AARP Diversified Income with Growth Portfolio+ 4.21 N/A N/A
AARP Diversified Growth Portfolio+ 11.08 N/A N/A
</TABLE>
+ AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund, AARP Small Company Stock Fund, AARP
Diversified Income with Growth Portfolio and AARP Diversified Growth
Portfolio commenced operations on February 1, 1997 and, as of September
30, 1999, had life of fund cumulative total returns of 14.52%, 69.75%,
30.59%, 20.09%, 20.08% and 30.43%, respectively. AARP Balanced Stock
and Bond Fund commenced operations on February 1, 1994 and, as of
September 30, 1999, had a life of fund cumulative total return of
78.85%. AARP Global Growth Fund commenced operations on February 1,
1996 and, as of September 30, 1999, had a life of fund cumulative total
return of 49.05%. AARP Premium Money Fund commenced operations on
February 1, 1999, and as of September 30, 1999, had a life of fund
cumulative total return of 3.09%.
c) The AARP Income Funds, AARP Insured Tax Free General Bond Fund and AARP
Diversified Income with Growth Portfolio
From time to time, quotations of an AARP Fund's yield may be included
in advertisements, sales literature or shareholder reports. This yield is
calculated in the following manner.
The yield is the net annualized SEC yield based on a specified 30-day
(or one month) period assuming semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
54
<PAGE>
<TABLE>
<CAPTION>
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
<S> <C> <C>
a = Dividends and interest earned during the period, including (except for mortgage
or receivable-backed obligations) the amortization of market premium or accretion
of market discount. For mortgage or receivables-backed obligations, this amount
includes realized gains or losses based on historic cost for principal repayments
received.
b = Expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
Yield for the 30-day period
Fund ended September 30, 1999
---- ------------------------
AARP High Quality Short Term Bond Fund 5.78%
AARP GNMA and U.S. Treasury Fund 6.10
AARP Bond Fund for Income+ 7.22
AARP Insured Tax Free General Bond Fund 4.31
+ AARP Bond Fund for Income commenced operations on February 1, 1997.
d) AARP Insured Tax Free General Bond and AARP High Quality Tax Free Money
Fund
The tax equivalent yield is the net annualized after-tax yield based on
a specified seven day period for money market funds or on a specified 30-day
(one month) period for non-money market funds assuming a reinvestment of all
dividends paid during the period, i.e., compounding. Tax equivalent yield is
calculated by dividing that portion of the Fund's yield (as computed in the
yield description above) which is tax-exempt by one minus a stated income tax
rate and adding the product to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Equivalent Taxable Yields
period ended September 30, 1999
Fund 28% Tax Bracket 31% Tax Bracket
---- --------------- ---------------
AARP High Quality Tax Free Money Fund 4.00% 4.17%
AARP Insured Tax Free General Bond Fund 5.99 6.25
(e) General Performance Information
Quotations of an AARP Fund's performance are based on historical
earnings and are not intended to indicate future performance of the Fund. An
investor's shares when redeemed may be worth more or less than their original
cost. Performance of a Fund will vary based on changes in market conditions and
the level of the Fund's expenses. In periods of declining interest rates a
Fund's quoted yield and 30-day current yield will tend to be somewhat higher
than prevailing market rates, and in periods of rising interest rates a Fund's
quoted yield and 30-day current yield will tend to be somewhat lower.
Comparison of non-standard performance data of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.
From time to time, in marketing and other AARP Fund literature, these
AARP Funds' performances may be compared to the performance of broad groups of
mutual funds with similar investment goals, as tracked by independent
organizations, such as Lipper Analytical Services, Inc. ("Lipper"), Investment
Company Data, Inc. ("ICD"), CDA
55
<PAGE>
Investment Technologies, Inc. ("CDA"), Value Line Mutual Fund Survey,
Morningstar, Inc. and other independent organizations. For instance, AARP Growth
Funds will be compared to funds in the growth fund category; and so on. In
similar fashion, the performance of the AARP GNMA and U.S. Treasury Fund will be
compared to that of certificates of deposit. Evaluations of AARP Fund
performance made by independent sources or independent experts may also be used
in advertisements concerning the AARP Funds, including reprints of, or
selections from, editorials or articles about these Funds.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Indices with which the Fund may be compared include but are
not limited to, the following: Dow Jones Industrial Average, Standard & Poor's
500 Composite Stock Price Index (S&P 500), The Europe/Australia/Far East (EAFE)
Index, Russell 2000 Index, Lehman Brothers Aggregate Bond Index, Merrill Lynch
Master Mortgage Index, Morgan Stanley Capital International World Index, J.P.
Morgan Global Traded Bond Index, and Salomon Brothers World Government Bond
Index.
Investors may want to compare the performance of a Fund to certificates
of deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds.
TRUST ORGANIZATION
Each of the AARP Funds is a separate series of a Massachusetts business
trust. AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund,
and the AARP Bond Fund for Income are series of AARP Income Trust. AARP High
Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund are
series of AARP Tax Free Income Trust which changed its name from AARP Insured
Tax Free Income Trust on August 1, 1991. AARP Balanced Stock and Bond Fund, AARP
Growth and Income Fund, AARP U.S. Stock Index Fund, AARP Global Growth Fund,
AARP Capital Growth Fund, AARP International Stock Fund and AARP Small Company
Stock Fund are series of AARP Growth Trust. Each of the above Trusts was
established under a separate Declaration of Trust dated June 8, 1984. AARP High
Quality Money Fund and the AARP Premium Money Fund are series of the AARP Cash
Investment Funds, which was established under a Declaration of Trust dated
January 20, 1983. The original name of AARP Cash Investment Funds was Master
Investment Services Fund. That name was changed to AARP Money Fund Trust on
February 6, 1985 and to its present name on May 24, 1985. AARP Diversified
Income with Growth Portfolio and AARP Diversified Growth Portfolio are series of
AARP Managed Investment Portfolios Trust which was established under a
Declaration of Trust on October 21, 1996. Each Trust's shares of beneficial
interest of $.01 (AARP High Quality Tax Free Money Fund $.001) par value per
share are issued in separate series. AARP Cash Investment Funds has one series
in addition to AARP High Quality Money Fund and AARP Premium Money Fund that is
not currently offered. None of the other Trusts has an existing series which is
not currently being offered. Other series may be established and/or offered by
the Trusts in the future. Each share of a series represents an interest in that
series which is equal to each other share of that series.
56
<PAGE>
The assets of each 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 each Trust are segregated on the books of account of each Trust, and
are to be charged with the liabilities of that series. The Trustees of each
Trust have determined that expenses with respect to all series of each Trust are
to be allocated in proportion to the net asset value, or such other reasonable
basis, of the respective series in that Trust except where allocations of direct
expenses can otherwise be more fairly made. The officers of each Trust, subject
to the general supervision of the Trustees, have the power to determine which
liabilities are allocable to all the series in the Trust. Each Trust's
Declaration of Trust provides that allocations made to each series of the Trust
shall be binding on all persons. While each Declaration of Trust provides that
liabilities of a series may be satisfied only out of the assets of that series,
it is possible that if a series were unable to meet its obligations, a court
might find that the assets of other series in the Trust should satisfy such
obligations. In the event of the dissolution or liquidation of a Trust, the
holders of the shares of each series are entitled to receive, as a class, the
underlying assets of that series available for distribution to shareholders.
Shareholders are entitled to one vote per share. Separate votes are
taken by each series of a 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 a Trust, in
which case only shareholders of that series shall vote thereon. For example, a
change in investment policy for a series of a Trust would be voted upon only by
shareholders of the series affected. Additionally, approval of each Trust's
investment advisory agreement is determined separately by each series in that
Trust. Approval of the advisory agreement by the shareholders of one series in a
Trust is effective as to that series whether or not enough votes are received
from the shareholders of other series in the Trust to approve agreement as to
the other series.
The Trustees of each 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.
Each 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.
MANAGEMENT OF THE FUNDS
Scudder Kemper Investments, Inc., an investment management firm, acts
as investment adviser to the Funds. The principal source of the Fund Manager'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.
Pursuant to an Agreement between the Fund Manager and AMA Solutions,
Inc., a subsidiary of the American Medical Association (the "AMA"), dated May 9,
1997, the Fund Manager 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 Fund Manager with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM Program. The Fund
Manager 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
57
<PAGE>
participates in the AMA InvestmentLinkSM Program will be a customer of the Fund
Manager (or of a subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLinkSM is a service mark of AMA Solutions, Inc.
The Fund Manager maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Fund Manager 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 Fund Manager's clients. However, the Fund Manager regards
this information and material as an adjunct to its own research activities. The
Fund Manager international investment management team travels the world,
researching hundreds of companies. In selecting the securities in which a Fund
may invest, the conclusions and investment decisions of the Fund Manager with
respect to a Fund are 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 Fund Manager. 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 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 Fund Manager to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by a Fund. Purchase and sale orders for a Fund may be combined
with those of other clients of the Fund Manager in the interest of achieving the
most favorable net results to a Fund.
The present investment management agreements for all Funds (the
"Agreements") were approved by the Trustees on August 4, 1998, became effective
September 7, 1998, and were approved at a shareholder meeting held on December
15, 1998. The Agreements will continue in effect until August 31, 2000 and from
year to year thereafter only if their continuance is approved annually by the
vote of a majority of those Trustees who are not parties to such Agreements or
interested persons of the Fund Manager or the particular Trust, cast in person
at a meeting called for the purpose of voting on such approval and either by
vote of a majority of the Trustees or, with respect to each Fund, by a majority
of the outstanding voting securities of that Fund. The Agreements 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 their assignment.
Under the Agreements, the Fund Manager regularly provides each Fund
with continuing investment management for each 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 each Fund's
assets shall be held uninvested, subject to each Trust's Declaration of Trust,
By-Laws, the 1940 Act, the Code and to each Fund's investment objective,
policies and restrictions, and subject, further, to such policies and
instructions as the Board of Trustees of each Trust may from time to time
establish. The Fund Manager also advises and assists the officers of the Funds
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 each Fund.
Under the Agreements, the Fund Manager renders significant
administrative services (not otherwise provided by third parties) necessary for
the Funds' operations as open-end investment companies 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 a Fund (such as a Fund's Transfer Agent,
pricing agents, Custodian, accountants and others); preparing and making filings
with the SEC and other regulatory agencies; assisting in the preparation and
filing of a Fund's federal, state and local tax returns; preparing and filing a
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 a Fund under applicable federal
and state securities laws; maintaining a Fund's books and records to the extent
not otherwise maintained by a third party; assisting in establishing accounting
policies of a Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring a Fund's operating budget; processing the payment of
a Fund's bills; assisting a Fund in, and otherwise arranging for, the payment of
distributions and dividends and otherwise assisting a Fund in the conduct of its
business, subject to the direction and control of the Trustees.
58
<PAGE>
The Fund Manager assumes responsibility for the compensation and
expenses of all officers and executive employees of each Trust and makes
available or causes to be made available, without expense to the Trusts, the
services of such of its partners, directors, officers and employees as may duly
be elected officers or Trustees of a Trust, subject to their individual consent
to serve and to any limitations imposed by law, and pays the Trusts' office rent
and provides, or causes to be provided, investment advisory, research and
statistical facilities and related clerical services. For these services the
AARP Funds pay the Fund Manager a monthly fee consisting of a base fee and an
individual fund fee. The base fee is based on average daily net assets of all
Funds in the AARP Investment Program, as follows:
Program Assets Annual Rate at Each
(Billions) Asset Level
---------- -----------
First $2 0.35%
$2-$4 0.33
$4-$6 0.30
$6-$8 0.28
$8-$11 0.26
$11-$14 0.25
Over $14 0.24
Total program assets as of September 30, 1999 were over $17 billion.
All AARP Funds pay a flat individual fund fee monthly based on the
average daily net assets of that Fund, except AARP Diversified Investment Income
Portfolio and AARP Diversified Investment Growth Portfolio.
The individual Fund fees are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------- -----------------------------
AARP Mutual Fund Individual Fund Fee Rate
------------------------------------------------------- -----------------------------
------------------------------------------------------- -----------------------------
<S> <C>
AARP High Quality Money Fund 0.10%
------------------------------------------------------- -----------------------------
AARP High Quality Tax Free Money Fund 0.10%
------------------------------------------------------- -----------------------------
AARP Premium Money Fund 0.10%
------------------------------------------------------- -----------------------------
AARP High Quality Short Term Bond Fund 0.19%
------------------------------------------------------- -----------------------------
AARP GNMA and U.S. Treasury Fund 0.12%
------------------------------------------------------- -----------------------------
AARP Insured Tax Free General Bond Fund 0.19%
------------------------------------------------------- -----------------------------
AARP Bond Fund for Income 0.28%
------------------------------------------------------- -----------------------------
AARP Balanced Stock and Bond Fund 0.19%
------------------------------------------------------- -----------------------------
AARP Growth and Income Fund 0.19%
------------------------------------------------------- -----------------------------
AARP U.S. Stock Index Fund none
------------------------------------------------------- -----------------------------
AARP Capital Growth Fund 0.32%
------------------------------------------------------- -----------------------------
AARP Small Company Stock Fund 0.55%
------------------------------------------------------- -----------------------------
AARP Global Growth Fund 0.55%
------------------------------------------------------- -----------------------------
AARP International Stock Fund 0.60%
------------------------------------------------------- -----------------------------
AARP Diversified Income with Growth Portfolio none
------------------------------------------------------- -----------------------------
AARP Diversified Growth Portfolio none
------------------------------------------------------- -----------------------------
</TABLE>
59
<PAGE>
The advisory fees from the Management Agreement for the three fiscal
years ended September 30, 1997, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund $ 1,760,550 $ 1,866,955 $ 2,002,782
AARP Premium Money Fund*** N/A N/A 211,923
AARP GNMA and U.S. Treasury Fund 19,228,620 18,153,539 17,789,059
AARP High Quality Short Term Bond Fund 2,287,683 2,092,824 2,018,512
AARP Bond Fund for Income** 97,012 615,552 1,159,527
AARP High Quality Tax Free Money Fund 410,859 380,516 360,800
AARP Insured Tax Free General Bond Fund 8,224,295 8,035,738 7,913,284
AARP Balanced Stock and Bond Fund 2,445,813 3,420,192 3,507,049
AARP Growth and Income Fund 25,101,044 33,479,324 31,563,131
AARP U.S. Stock Index Fund** 38,841 201,960 1,040,960
AARP Global Growth Fund* 932,182 1,277,487 1,250,584
AARP Capital Growth Fund 6,053,108 7,953,203 9,574,273
AARP International Stock Fund** 59,143 292,161 337,378
AARP Small Company Stock Fund** 111,376 718,086 721,832
AARP Diversified Income with Growth Portfolio** N/A N/A N/A
AARP Diversified Growth Portfolio** N/A N/A N/A
</TABLE>
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund, AARP Small Company Stock Fund, AARP
Diversified Income with Growth Portfolio and AARP Diversified Growth
Portfolio commenced operations on February 1, 1997.
*** AARP Premium Money Fund commenced operations on February 1, 1999.
Each Management Agreement provides that the Fund Manager will reimburse
the AARP Funds or the Trust for annual expenses, although no payments are
required to be made by the Fund Manager pursuant to this reimbursement provision
in excess of the annual fee paid by the funds of a Trust to the Fund Manager.
Certain expenses such as brokerage commissions, taxes, extraordinary expenses
and interest are excluded from such limitation. The Fund Manager has agreed that
its obligation to reimburse the Funds will not be restricted to the amounts of
the management fees. Such agreement may be modified or withdrawn without
shareholder approval.
The expense ratios, net of voluntary and statutory fee waivers and
reimbursements of expenses, for the periods ended September 30, 1997, 1998 and
1999 were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund 0.91% 0.87% 0.87%
AARP Premium Money Fund*** N/A N/A 0.50
AARP High Quality Short Term Bond Fund 0.93 0.90 0.87
AARP GNMA and U.S. Treasury Fund 0.65 0.61 0.65
AARP Bond Fund for Income** n.a. 0.19 0.42
AARP High Quality Tax Free Money Fund 0.85 0.83 0.85
AARP Insured Tax Free General Bond Fund 0.66 0.62 0.67
AARP Balanced Stock and Bond Fund 0.91 0.84 0.88
AARP Growth and Income Fund 0.71 0.67 0.76
AARP U.S. Stock Index Fund** 0.50+ 0.50 0.50
AARP Global Growth Fund* 1.75 1.65 1.65
AARP Capital Growth Fund 0.92 0.87 0.91
AARP International Stock Fund** 1.75+ 1.75 1.75
AARP Small Company Stock Fund** 1.75+ 1.75 1.70
AARP Diversified Income With Growth Portfolio** N/A N/A N/A
AARP Diversified Growth Portfolio** N/A N/A N/A
</TABLE>
+ Annualized
60
<PAGE>
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund, AARP Small Company Stock Fund, AARP
Diversified Income With Growth Portfolio and AARP Diversified Growth
Portfolio commenced operations on February 1, 1997.
*** AARP Premium Money Fund commenced operations on February 1, 1999.
For the fiscal year ended September 30, 1999, the reimbursement by the
Fund Manager based on the expense limitation in effect was $224,814 to AARP
Premium Money Fund
For the fiscal year ended September 30, 1997, the reimbursement by the
Fund Manager based on the expense limitation in effect was $74,953 to AARP
Global Growth Fund.
For the fiscal year ended September 30, 1998, the reimbursement and
expense reductions based on the expense limitation in effect was $923,233 to
AARP Bond Fund for Income, and $986,523 for the fiscal year ended September 30,
1999.
For the fiscal year ended September 30, 1998, the reimbursement and
expense reductions based on the expense limitation in effect was $43,315 to AARP
Small Company Stock Fund.
For the fiscal year ended September 30, 1998, the reimbursement and
expense reductions based on the expense limitation in effect was $474,469 to
AARP U.S. Stock Index Fund, and $971,542 for the fiscal year ended September 30,
1999.
For the fiscal year ended September 30, 1998, the reimbursement and
expense reductions based on the expense limitation in effect was $218,739 to
AARP International Stock Fund, and $249,677 for the fiscal year ended September
30, 1999.
If reimbursement is required, it will be made as promptly as
practicable after the end of each Fund's fiscal year. However, no fee payment
will be made to the Fund Manager during any fiscal year which will cause
year-to-date expenses to exceed the cumulative pro rata expense limitation at
the time of such payment. The amortization of organizational costs is described
herein under "ADDITIONAL INFORMATION-- Other Information."
Under the Management Agreements, each Trust is responsible for all of
its other expenses including organizational expenses; clerical salaries; fees
and expenses incurred in connection with membership in investment company
organizations; brokers' commissions; any fees for portfolio pricing paid to a
pricing agent; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the cost of preparing share
certificates, if any, and any other expenses including clerical expenses of
issue, redemption or repurchase of shares; the expenses and fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees of the
Trust who are not affiliated with the Fund Manager, Scudder Kemper Investments,
Inc., AARP Financial Services Corporation or AARP; the cost of preparing and
distributing reports and notices to shareholders; and the fees and disbursements
of custodians. Each Trust may arrange to have third parties assume all or part
of the expenses of sale, underwriting and distribution of shares of the Trust.
Each Trust is also responsible for its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees with respect thereto. The custodian
agreement for each Trust provides that the custodian shall compute the net asset
value for that Trust.
Each Management Agreement provides that the Fund Manager shall not be
required to pay expenses of distribution of the Funds' shares to the extent that
(i) such distribution expenses are, pursuant to a written contract, to be borne
by a principal underwriter of the Trust ("Scudder Investor Services, Inc." is
principal underwriter for the AARP Trusts), (ii) the Trust shall have adopted a
plan in conformity with Rule 12b-1 under the 1940 Act ("Rule 12b-1 plan")
providing for the Trust (or the Funds or some other party) to assume some or all
of such expenses, or (iii) such expenses
61
<PAGE>
are required to be paid by the Fund Manager. To the extent such expenses of
distribution are not to be borne by a principal underwriter, or are not
permitted to be paid by the Trust (or a Fund or such other party) pursuant to a
Rule 12b-1 plan, they are to be assumed by the Fund Manager. (The adoption of a
Rule 12b-1 plan by a Trust would require the approval of the Trustees, including
a majority of those Trustees who are not interested persons of the Trust, and of
a majority of the outstanding voting securities of each Fund.)
Pursuant to a Subadvisory Agreement between the Fund Manager and
Bankers Trust Company, Bankers Trust Company (the "Subadviser") provides
subadvisory services relating to the management of the AARP U.S. Stock Index
Fund. The fee paid to the Subadviser is calculated on a quarterly basis and
depends on the level of total assets in the AARP U.S. Stock Index Fund. The fee
rate decreases as the level of total assets for the Fund increases. The fee rate
for each level of assets is: 0.07% of the first $100 million of average daily
net assets, 0.03% of such assets in excess of $100 million, and 0.01% of such
assets in excess of $200 million with a minimum annual fee of $75,000. For the
period from February 1, 1997 to February 1, 1998, the Subadviser agreed to
discount the fee by 15%. Fees paid to the Subadviser during the fiscal period
ended September 30, 1997 totaled $42,323. Without the discount during that
period, such fees would have totaled $75,000. For the fiscal year ended
September 30, 1998, the Subadviser received $71,250 in fees. Without the
discount during that period, such fees would have totaled $75,000. For the
fiscal year ended September 30, 1999, the Subadviser received $92,000 in fees.
On November 30, 1998, Bankers Trust Corporation, the parent company of
the Subadviser, Deutsche Bank AG ("Deutsche Bank") and Circle Acquisition
Corporation, a subsidiary of Deutsche Bank, entered into a merger Agreement
pursuant to which Bankers Trust Corporation would merge with and into a
subsidiary of Deutsche Bank (the "Merger"). Deutsche Bank is a global banking
institution that is engaged in a wide range of financial services, including
retail and commercial banking, investment banking, and insurance. On June 4,
1999, the Merger was completed and the Subadviser became an indirect
wholly-owned subsidiary of Deutsche Bank. As a result of the Merger, the
existing Subadvisory Agreement between the Fund Manager and the Subadviser, with
respect to AARP U.S. Stock Index Fund, may have been deemed assigned and
terminated. Accordingly, on March 3, 1999, the Board approved a new Subadvisory
Agreement between the Fund Manager and the Subadviser to take effect upon
consummation of the Merger. The new Subadvisory Agreement contains substantially
the same terms and conditions as the existing Subadvisory Agreement, except for
the initial term and the dates of execution and termination. On May 25, 1999,
the Securities and Exchange Commission issued an exemptive order to the
Subadviser and certain affiliates to permit the implementation of new investment
advisory agreements, such as the new Subadvisory Agreement, without shareholder
approval in connection with the Merger. The order permits the Subadviser to
provide subadvisory services under the new Subadvisory Agreement without
receiving shareholder approval for a period of up to 150 days following the date
the Merger was consummated (i.e., June 4, 1999) but in no event later than
November 30, 1999 (the "Interim Period"). Pending shareholder approval of the
new Subadvisory Agreement or the termination of the Interim Period without
shareholder approval, advisory fees under the new Subadvisory Agreement will be
held in interest bearing escrow accounts with financial institutions
unaffiliated with the Subadviser. The Board will be notified before the fees are
released to the Subadviser in the event shareholders approve the new Subadvisory
Agreement, or before the fees are released to the AARP U.S. Stock Index Fund in
the event shareholders do not approve the new Subadvisory Agreement. The
Subadviser believes that, under this new corporate structure, the services
provided by the Subadviser to the AARP U.S. Stock Index Fund will be maintained
at their current level.
On March 11, 1999, the Subadviser announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and early 1996. Pursuant to its agreement with the U.S. Attorney's Office, the
Subadviser pleaded guilty to misstating entries in its books and records and
agreed to pay a $60 million fine to federal authorities. Separately, the
Subadviser agreed to pay a $3.5 million fine to the State of New York. The
events leading up to the guilty pleas did not arise out of the investment
advisory or mutual fund management activities of the Subadviser or its
affiliates.
As a result of the plea, absent an order from the SEC, the Subadviser
would not be able to continue to provide investment advisory services to the
Fund. The SEC has granted a temporary order to permit the Subadviser and its
affiliates to continue to provide investment advisory services to registered
investment companies. The Subadviser has submited an application for a permanent
order. However, there is no assurance that the SEC will grant a permanent order.
62
<PAGE>
A Special Servicing Agreement (the "Service Agreement") has been
entered into among the Fund Manager, the Underlying AARP Mutual Funds, Scudder
Service Corporation, Scudder Fund Accounting Corporation, Scudder Investor
Services, Inc. and the AARP Managed Investment Portfolios Trust on February 1,
1997. Under the Service Agreement, the Fund Manager will arrange for all
services pertaining to the operation of the Trust including the services of
Scudder Service Corporation and Scudder Fund Accounting Corporation to act as
Shareholder Servicing Agent and Fund Accounting Agent, respectively, for each
Portfolio. In addition, the Service Agreement will provide that, if the officers
of any Underlying AARP Mutual Fund, at the direction of the Board of Trustees,
determine that the aggregate expenses of a Portfolio are less than the estimated
savings to the Underlying AARP Mutual Fund from the operation of that Portfolio,
the Underlying AARP Mutual Fund will bear those expenses in proportion to the
average daily value of its shares owned by that Portfolio. No Underlying AARP
Mutual Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly in
the Underlying AARP Mutual Funds and the resulting reduction in shareholder
servicing costs. In this regard, the shareholder servicing costs to any
Underlying AARP Mutual Fund for servicing one account registered to the Trust
would be significantly less than the cost to that same Underlying AARP Mutual
Fund of servicing the same pool of assets contributed in the typical fashion by
a large group of individual shareholders owning small accounts in each
Underlying AARP Mutual Fund.
Based on actual expense data from the Underlying AARP Mutual Funds and
certain very conservative assumptions with respect to the Trust, the Fund
Manager, the Underlying AARP Mutual Funds, Scudder Service Corporation, Scudder
Investor Services, Inc., Scudder Fund Accounting Corporation, Scudder Trust
Company and the Managed Investment Portfolios anticipate that the aggregate
financial benefits to the Underlying AARP Mutual Funds from these arrangements
will exceed the costs of operating the Portfolios. If such turns out to be the
case, there will be no charge to the Trust for the services under the Service
Agreement. Rather, in accordance with the Service Agreement, such expenses will
be passed through to the Underlying AARP Mutual Funds in proportion to the value
of each Underlying AARP Mutual Fund's shares held by each Portfolio.
In the event that the aggregate financial benefits to the Underlying
AARP Mutual Funds do not exceed the costs of a Portfolio, the Fund Manager will
pay, on behalf of that Portfolio, that portion of costs, as set forth herein,
determined to be greater than the benefits. The determination of whether and the
extent to which the benefits to the Underlying AARP Mutual Funds from the
organization of the Trust will exceed the costs to such funds will be made based
upon the analysis criteria set forth in the order. This cost-benefit analysis
was initially reviewed by the Trustees of the Underlying AARP Mutual Funds
before participating in the Service Agreement. For future years, there will be
an annual review of the Service Agreement to determine its continued
appropriateness for each Underlying AARP Mutual Fund.
Certain non-recurring and extraordinary expenses will not be paid in
accordance with the Service Agreement including: the fees and costs of actions,
suits or proceedings and any penalties or damages in connection therewith, to
which a Portfolio may incur directly, or may incur as a result of its legal
obligation to provide indemnification to its officers, trustees and agents; the
fees and costs of any governmental investigation and any fines or penalties in
connection therewith; and any federal, state or local tax, or related interest
penalties or additions to tax, incurred, for example, as a result of the
Portfolios' failure to distribute all of its earnings, failure to qualify under
subchapter M of the Internal Revenue Code, or failure to timely file any
required tax returns or other filings. Under unusual circumstances, the parties
to the Service Agreement may agree to exclude certain other expenses.
Each Investment Management Agreement provides that the Fund Manager
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with matters to which the respective
agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Fund Manager in the performance of its
duties or from reckless disregard by the Fund Manager of its obligations and
duties under the respective agreement.
In reviewing the terms of each Investment Management Agreement and in
discussions with the Fund Manager concerning such agreements, the Trustees of
each Trust who are not "interested persons" of that Trust have been represented
by independent counsel at the Trust's expense.
Pursuant to Member Services Agreements with the Fund Manager, dated
September 7, 1998, AARP Financial Services Corp. ("AFSC") provides the Fund
Manager with nondistribution related service and advice primarily
63
<PAGE>
concerning designing and tailoring the AARP Investment Program from Scudder and
its Funds to meet the needs of AARP's members on an ongoing basis. AARP
Financial Services Corp. receives, as compensation for its services, a Monthly
Member Services fee. The fee paid to AFSC is calculated on a daily basis and
depends on the level of total assets of the AARP Investment Program. The fee
rate decreases as the level of total assets increases. The fee rate for each
level of assets is 0.07 of 1% for the first $6 billion, 0.06 of 1% for the next
$10 billion and 0.05 of 1% thereafter.
The Member Services Agreements will remain in effect until August 31,
1999 and from year to year thereafter only if its continuance is specifically
approved at least annually by the vote of a majority of those Trustees who are
not "interested persons" of the Fund Manager, AFSC, or the Funds cast in person
at a meeting called for the purpose of voting on such approval and either by
vote of a majority of the Trustees or, with respect to each Fund, by a majority
of the outstanding voting securities of that Fund. The continuance of each
Member Services Agreement was last approved by the Trustees of each respective
Trust (including a majority of the Trustees who are not such "interested
persons") on August 4, 1998 and by shareholders on December 15, 1998. The Member
Services Agreements may be terminated at any time without payment of penalty by
the Funds on sixty days' written notice, or by AFSC upon six months' notice to
the Funds and to the Fund Manager, and automatically terminates in the event of
its assignment or the assignment of the Management Agreement.
Pursuant to Service Mark License Agreements, dated March 20, 1996 among
the Trusts, the Fund Manager and AARP, use of the AARP service marks by a Trust
and its Funds will be terminated, unless otherwise agreed to by AARP, upon
termination of that Trust's Management Agreement.
Officers and employees of the Fund Manager from time to time may have
transactions with various banks, including the AARP Funds' custodian bank. It is
the Fund Manager's opinion that the terms and conditions of those transactions
which have occurred were not influenced by existing or potential custodial or
other Fund relationships.
The Fund Manager may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees of a Trust may have dealings with that
Trust as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Funds.
Personal Investments by Employees of Scudder
Employees of Scudder are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in Scudder's
Code of Ethics. The Code of Ethics contains provisions and requirements designed
to identify and address certain conflicts of interest between personal
investment activities and the interests of investment advisory clients such as
the Funds. Among other things, the Code of Ethics, which generally complies with
standards recommended by the Investment Company Institute's Advisory Group on
Personal Investing, prohibits certain types of transactions absent prior
approval, imposes time periods during which personal transactions may not be
made in certain securities, and requires the submission of duplicate broker
confirmations and monthly reporting of securities transactions. Additional
restrictions apply to portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular circumstances
after review by appropriate personnel.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Name, Address Position(s) Principal Scudder Investor
and Age with Trusts Occupation** Services, Inc.
- ------- ----------- ------------ --------------
<S> <C> <C>
Linda C. Coughlin##* (48) Chairperson of the Managing Director of Scudder Director and Senior
Board and Trustee Kemper Investments, Inc. Vice President
64
<PAGE>
Position with
Underwriter,
Name, Address Position(s) Principal Scudder Investor
and Age with Trusts Occupation** Services, Inc.
- ------- ----------- ------------ --------------
Horace B. Deets+* (61) Vice Chairperson Executive Director, AARP --
(Trustee of AARP Cash Investment and Trustee
Funds, AARP Growth Trust and AARP
Tax Free Income Trust only)
Carole Lewis Anderson (55) Trustee Principal, Suburban Capital --
3616 Reservoir Road, N.W. Markets, Inc.; President, MASDUN
Washington, DC Capital Advisors; Director,
VICORP Restaurants, Inc.;
Trustee, Hasbro Children's
Foundation; Founder and
Director, Forum for Women
Corporate Directors; Member of
Corporate Advisory Counsel of
WREI (The Women's Research and
Education Institute)
(1993-1999); Member of the
Board, Association for Corporate
Growth of Washington, D.C.
(1993-1996); Member of the
Board, CREW (Commercial Real
Estate Women) of Maryland
(1994-1996); Trustee, Mary
Baldwin College (1987-1997);
Trustee, Pennsylvania State
Alumni Association (1987-1997)
Adelaide Attard (69) Trustee Consultant, Gerontology Member, --
270-28N Grand Central Parkway New York City Department of
Floral Park, NY Aging Advisory Council; Board
Member, American Association of
International Aging (1981-1996)
Robert N. Butler, M.D. (73) Trustee CEO and President, International
211 Central Park West Longevity Center; Professor of
Apt. 7F Geriatrics and Adult
New York, NY Development, Henry L. Schwartz
Department of Geriatrics and
Adult Development, Mount Sinai
Medical Center (1982 to
present); Formerly Director,
National Institute on Aging,
National Institute of Health
(1976-1982)
65
<PAGE>
Position with
Underwriter,
Name, Address Position(s) Principal Scudder Investor
and Age with Trusts Occupation** Services, Inc.
- ------- ----------- ------------ --------------
Esther Canja+* (72) Trustee President-elect, AARP; Member, --
(AARP Managed Investment Portfolios AARP Finance Committee; Trustee,
Trust and AARP Income Trust only) Andrus Foundation; AARP State
Director of Florida (1990-1992)
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic --
50023 Brogden Counsellor, The Conference
Chapel Hill, NC Board, Inc.
Lt. Gen. Eugene P. Forrester (73) Trustee Lt. General (Retired), U.S. Army --
1101 S. Arlington Ridge Rd. and International Trade
Arlington, VA Counselor; Consultant (1983 to
present)
George L. Maddox, Jr. (74) Trustee Professor Emeritus and Director, --
P.O. Box 2920 Long Term Care Resources
Duke University Medical Center Program, Duke University Medical
Durham, NC Center; Senior Fellow Center for
the Study of Aging and Human
Development, Duke University;
Member, Board of Trustees, The
Forest at Duke, Durham, North
Carolina
Robert J. Myers (87) Trustee Actuarial Consultant --
9610 Wire Ave. (1983-present); Trustee,
Silver Spring, MD Manufacturers Investment Trust,
Inc. (1997-1998); Member,
Prospective Payment Assessment
Commission (1993-1997); Chairman
of the Board of Advisors,
Seniors Coalition (1992-1996)
James H. Schulz (63) Trustee Professor of Economics and --
158 Scruton Pond Road Kirstein Professor of Aging
Barrington, NH Policy, Policy Center on Aging,
Florence Heller Graduate School,
Brandeis University
Gordon Shillinglaw (74) Trustee Professor Emeritus of --
115 Live Oak Lane Accounting, Columbia University
Largo, FL Graduate School of Business
66
<PAGE>
Position with
Underwriter,
Name, Address Position(s) Principal Scudder Investor
and Age with Trusts Occupation** Services, Inc.
- ------- ----------- ------------ --------------
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial
3816 Military Road, NW Institutions Issues, U.S.
Washington, D.C. General Accounting Office
(1996-1997); Partner, Fulbright
& Jaworski Law Firm (1978-1996)
William F. Glavin, Jr.## (41) Vice President Managing Director of Scudder Vice President
Kemper Investments, Inc.
James E. Masur## (39) Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Ann M. McCreary# (43) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
John Millette## (37) Vice President and Assistant Vice President of --
Assistant Secretary Scudder Kemper Investments, Inc.
James W. Pasman## (48) Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Kathryn L. Quirk# (47) Vice President and Managing Director of Scudder Director, Senior Vice
Secretary Kemper Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
John R. Hebble## (40) Treasurer Senior Vice President, Scudder Treasurer
Kemper Investments, Inc.
Cornelia M. Small# (55) President Managing Director of Scudder --
Kemper Investments, Inc.
</TABLE>
* Mr. Deets, Ms. Canja and Ms. Coughlin are Trustees of each of the
Trusts and are considered by the Trusts and their counsel to be persons
who are "interested persons" of the Trusts within the meaning of the
1940 Act.
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
# Address: 345 Park Avenue, New York, New York
## Address: Two International Place, Boston, Massachusetts
+ Address: 601 E Street, N.W., Washington, D.C.
As of December 31, 1999, 1,958,289 shares in the aggregate, 13.67% of
the outstanding shares of AARP Bond Fund for Income were held in the name of
State Street Bank and Trust Company, Custodian for AARP Diversified income with
Growth Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to
be the beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
67
<PAGE>
As of December 31, 1999, 1,878,943 shares in the aggregate, 7.13% of
the outstanding shares of AARP U.S. Stock Index Fund were held in the name of
State Street Bank and Trust Company, Custodian for AARP Diversified Income
Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of December 31, 1999, 244,625 shares in the aggregate, 8.26% of the
outstanding shares of AARP International Growth & Income Fund were held in the
name of State Street Bank and Trust Company, Custodian for AARP Diversified
Growth Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to
be the beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of December 31, 1999, 359,439 shares in the aggregate, 10.95% of the
outstanding shares of AARP Small Company Stock Fund were held in the name of
State Street Bank and Trust Company, Custodian for AARP Diversified Growth
Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of December 31, 1999, 336,430 shares in the aggregate, 4.34% of the
outstanding shares of AARP Global Growth Fund which were held in the name of
State Street Bank and Trust Company, custodian for AARP Diversified Income
Portfolio, One Heritage Drive, Quincy, MA 02171, which may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the best of each Trust's knowledge, as of December 31, 1999, no
person owned beneficially more than 5% of any Fund's outstanding shares, except
as stated above.
As of December 31, 1999, all Trustees and officers of the Funds as a
group owned beneficially (as that term is defined under Section 13(d) of the
Securities Exchange Act) less than 1% of the outstanding shares of each Fund,
except as stated above.
REMUNERATION
Several of the officers and Trustees of the Trusts may be officers or
employees of Scudder, Scudder Service Corporation, Scudder Investor Services,
Inc., Scudder Fund Accounting Corp., or Scudder Trust Company and will
participate in the fees received by such entities. No individual affiliated with
AARP will participate directly in any such fees. The Trusts pay no direct
remuneration to any officer of the Trusts. However, each of the Trustees who is
not affiliated with Scudder or AARP will be paid by the Trust(s) for which he or
she serves as Trustee. Until September 30, 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 Fund Manager 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 Fund Manager, a maximum
fee of $800 for meetings of the Board, meetings of the unaffiliated members of
the Board for the purpose of considering arrangements between the Fund and the
Fund Manager or any of its affiliates or the audit committees of such Funds, and
$400 for all other committee meetings or meetings of the unaffiliated members of
the Board is paid, to be divided equally among the Funds. For the year ended
September 30, 1999, the Trustees' fees and expenses for the Funds were as
follows:
Fund Expense
---- -------
AARP Premium Money Fund $15,978
AARP High Quality Money Fund $25,038
AARP High Quality Short Term Bond Fund $26,448
AARP GNMA and U.S. Treasury Fund $25,988
AARP High Quality Tax Free Money Fund $27,123
AARP Insured Tax Free General Bond Fund $24,673
AARP Balanced Stock and Bond Fund $26,172
AARP Growth and Income Fund $27,611
68
<PAGE>
Fund Expense
---- -------
AARP Bond Fund for Income $24,565
AARP U.S. Stock Index Fund $26,723
AARP International Stock Fund $27,728
AARP Small Company Stock Fund $27,423
AARP Global Growth Fund $25,475
AARP Capital Growth Fund $27,094
AARP Diversified Income and Growth $ 0.00
AARP Diversified Growth $ 0.00
The following table shows the aggregate compensation received by each
unaffiliated Trustee from each Trust and from all AARP Trusts and other funds in
the Scudder Fund complex for the year ended December 31, 1999.
<TABLE>
<CAPTION>
AARP All AARP
AARP Cash AARP Tax Free AARP Paid Trusts+
Investment Income Income Growth by the Fund and Scudder
Name Funds+ Trust@ Trust# Trust## Manager Fund Complex
- ---- ------- ------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Carole L. Anderson $5,212 $7,617 $ 5,078 $17,949 $0.00 $40,935
(16 funds)
Adelaide Attard $4,892 $7,137 $ 4,758 $16,829 $0.00 $38,375
(16 funds)
Robert N. Butler $4,318 $6,477 $4,318 $15,289 $0.00 $34,855
(16 funds)
Edgar R. Fiedler $4,132 $5,997 $3,998 $14,169 $8,835 $54,495
(27 funds)
Eugene P. Forrester $5,212 $7,617 $5,078 $17,949 $0.00 $40,935
(16 funds)
George L. Maddox, Jr. $5,212 $7,617 $5,078 $17,949 $0.00 $40,935
(16 funds)
Robert J. Myers $4,892 $7,137 $4,758 $16,654 $0.00 $38,200
(16 funds)
James H. Schulz $4,732 $6,897 $4,598 $16,269 $0.00 $37,095
(16 funds)
Gordon Shillinglaw $5,052 $7,377 $5,043 $21,889 $0.00 $44,280
(16 funds)
Jean Gleason Stromberg $5,212 $7,617 $5,078 $17,949 $0.00 $40,935
(16 funds)
</TABLE>
+ AARP Cash Investment Funds consists of two Funds: AARP High Quality
Money Fund and AARP Premium Money Fund.*
69
<PAGE>
@ AARP Income Trust consists of three Funds: AARP High Quality Short Term
Bond Fund, AARP GNMA and U.S. Treasury Fund, and AARP Bond Fund for
Income.*
# AARP Tax Free Income Trust consists of two Funds: AARP High Quality Tax
Free Money Fund and AARP Insured Tax Free General Bond Fund.
## AARP Growth Trust consists of seven Funds: AARP Balanced Stock and Bond
Fund, AARP U.S. Stock Index Fund,* AARP Growth and Income Fund, AARP
Global Growth Fund,* AARP Capital Growth Fund, AARP International Stock
Fund,* and AARP Small Company Stock Fund.*
+ Includes AARP Managed Investment Portfolios Trust, which consists of
two Funds: AARP Diversified Income with Growth Portfolio* and AARP
Diversified Growth Portfolio.*
* AARP Global Growth Fund commenced operations on February 1, 1996. AARP
Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International
Stock Fund, AARP Small Company Stock Fund, AARP Diversified Income with
Growth Portfolio, and AARP Diversified Growth Portfolio commenced
operations on February 1, 1997. AARP Premium Money Fund commenced
operations on February 1, 1999.
Amounts include the pro rata share of Trustee's fees of AARP Managed
Investment Portfolios Trust paid by each of the Trusts pursuant to the Service
Agreement. See discussion of the Service Agreement under "Management of the
Funds" for further information.
Members of the Board of Trustees of the Managed Investment Portfolios
Trust who are employees of the Fund Manager 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 each Portfolio.
DISTRIBUTOR
Each of the Trusts has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), a Massachusetts corporation, which is a
subsidiary of Scudder, a Delaware corporation. The underwriting agreements for
all of the Trusts dated September 7, 1998 will remain in effect until August 31,
2000 and from year to year thereafter only if their continuance is approved
annually by a majority of the members of the Board of Trustees of each Trust who
are not parties to such agreement or interested persons of any such party and
either by vote of a majority of the Board of Trustees of each Trust or a
majority of the outstanding voting securities of each Trust.
Under each Trust's principal underwriting agreement, the Trust is
responsible for: the payment of all fees and expenses in connection with the
preparation and filing with the SEC of its registration statement and prospectus
and any amendments and supplements thereto; the registration and qualification
of shares for sale in the various states, including registering the Trust as a
broker or dealer; the fees and expenses of preparing, printing and mailing
prospectuses (see below for expenses relating to prospectuses paid by the
Distributor), notices, proxy statements, reports or other communications
(including newsletters) to shareholders of the Trust; the cost of printing and
mailing confirmations of purchases of shares and the prospectuses accompanying
such confirmations; any issue taxes or any initial transfer taxes; a portion of
shareholder toll-free telephone charges; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); and the cost of printing and postage of business reply envelopes.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of shares of the
Funds to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Funds to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion
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of the cost of toll-free telephone service and expenses of customer service
representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
each Trust.
Note: Although each Trust does not currently have a Rule 12b-1 Plan and
shareholder approval would be required in order to adopt one, the underwriting
agreements for each Trust provide that the Trust will also pay those fees and
expenses permitted to be paid or assumed by that Trust pursuant to a Rule 12b-1
Plan, if any, adopted by the Trust, notwithstanding any other provision to the
contrary in the underwriting agreement and each Trust or a third party will pay
those fees and expenses not specifically allocated to the Distributor in the
underwriting agreement.
As agent, the Distributor currently offers shares of the Funds to
investors in all states. Each underwriting agreement provides that the
Distributor accepts orders for shares at net asset value because no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of any of the Funds.
TAXES
Each AARP Fund has qualified and intends to elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code (the "Code"), as amended, since its inception and intends to
continue to so qualify. (Such qualification does not involve supervision of
management or investment practices or policies by a government agency.) In any
year in which a Fund so qualifies and distributes at least 90% of its investment
company taxable income, and at least 90% of its net tax-exempt income, if any,
the Fund generally is not subject to Federal income tax to the extent that it
distributes to shareholders its investment company taxable income and net
realized capital gains in the manner required under the Code.
Each AARP Fund must distribute its taxable income according to a
prescribed formula and will be subject to a 4% nondeductible excise tax on
amounts not so distributed. The formula requires a Fund to distribute each
calendar year at least 98% of its ordinary income (excluding tax-exempt income)
for the calendar year, at least 98% of the excess of its capital gains over
capital losses (adjusted for certain ordinary losses) realized during the
one-year period ending October 31 of such year, and any ordinary income and
capital gains for prior years that was not previously distributed.
The determination of the nature and amount of investment company
taxable income of a Fund will be based solely on the transactions in, and on the
income received and expenses incurred by or allocated to, the Fund. Each AARP
Fund intends to offset any realized net capital gains against any capital loss
carryforward before making capital gains distributions to shareholders.
Distributions of any investment company taxable income (which includes
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss, less expenses) are taxable to shareholders as ordinary
income. If a portion of a Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible for
the corporate dividends-received deduction.
Generally, each Fund will distribute any net capital gains (the excess
of its net realized long-term capital gain over its net realized short-term
capital loss). If a Fund retains its net capital gains for investment, requiring
Federal income tax to be paid thereon by the Fund, the Fund intends to elect to
treat such capital gains as having been distributed to its shareholders. As a
result, shareholders (a) will be required to include in income for Federal
income tax purposes, as long-term capital gains their proportionate share of
such undistributed amounts and (b) will be entitled to credit their
proportionate share of the Federal income tax paid thereon by the Fund against
their Federal income tax liability. In the case of shareholders whose long-term
capital gains would be taxed at a lower rate, the amount of the credit for tax
paid by a Fund in excess of the shareholder's actual tax on capital gains may be
applied to reduce the net amount of tax otherwise payable by such shareholders
in respect of their other income or, if no tax is payable, the excess may be
refunded. For Federal income tax purposes, the tax basis of shares owned by a
shareholder of a Fund will be increased by an amount equal to the difference
between its pro rata share of such gains and its tax credit. If a Fund retains
net capital gains, it may not be treated as having met the excise tax
distribution requirement.
Distributions of net capital gains that a Fund designates as capital
gains dividends are taxable to shareholders as long-term capital gains,
regardless of the length of time the shares of the Fund have been held by such
shareholders and
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are not eligible for the corporate dividends - received deduction. Any loss
realized upon the redemption of shares held at the time of redemption for six
months or less will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain on such shares.
Distributions of investment company taxable income and net realized
capital gains by a Fund will be taxable as described above, whether made in
shares or in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in each
share received equal to the net asset value of a share of the Fund on the
reinvestment date.
Distributions by a Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, such distribution nevertheless would be taxable to the shareholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a return of capital upon
distribution which will nevertheless be taxable to them.
Shareholders who redeem, sell or exchange shares of a Fund may realize
gain or loss if the proceeds are more or less than the shareholder's purchase
price. Such gain or loss generally will be a capital gain or loss if the Fund
shares were capital assets in the hands of the shareholder, and generally will
be long-term or short-term, depending on the length of time the Fund shares were
held. However, if a shareholder realizes a loss on the sale of a share held at
the time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period. A gain realized on a redemption, sale
or exchange will not be affected by a reacquisition of shares. A loss realized
on a redemption, sale or exchange, however, will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by a Fund upon payment of a premium in connection
with the purchase of a put or call option. The character of any gain or loss
recognized (i.e., long-term or short-term) will generally depend in the case of
a lapse or sale of the option on the Fund's holding period for the option and in
the case of an exercise of a put option on the Fund's holding period for the
underlying security. The purchase of a put option may constitute a short sale
for federal income tax purposes, causing an adjustment in the holding period of
the underlying security or a substantially identical security of the Fund. If a
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as a
short-term capital gain or loss. If a call option written by a Fund is
exercised, the character of the gain or loss depends on the holding period of
the underlying security. The exercise of a put option written by a Fund is not a
taxable transaction for the Fund.
Many futures contracts, certain foreign currency forward contracts and
all listed nonequity options (including options on debt securities, options on
futures contracts, options on securities indices and options on broad-based
stock indices) will constitute "section 1256 contracts." Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or losses. Also, section 1256 contracts held by the
Funds at the end of each taxable year (and, for purposes of the 4% excise tax,
on October 31) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60% long-term and 40% short-term capital gain or loss. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options, and
similar financial instruments entered into or acquired by a Fund will be treated
as ordinary income or loss.
Positions of a Fund which consist of at least one security and at least
one option or other position with respect to the security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term
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capital losses. An exception to these straddle rules exists for any "qualified
covered call options" on stock written by a Fund.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures contract, foreign currency forward
contract or nonequity option governed by Section 1256 which substantially
diminishes the Fund's risk of loss with respect to such other position will be
treated as a "mixed straddle." Although mixed straddles are subject to the
straddle rules of Section 1092 of the Code, certain tax elections exist for them
which reduce or eliminate the operation of these rules. Each Fund will monitor
its transactions in options and futures and may make certain tax elections in
connection with these investments.
Notwithstanding any of the foregoing, a Fund may recognize gain (but
not loss) from a constructive sale of certain "appreciated financial positions"
if the 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 the Fund's taxable year, if certain conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will recognize gain at that time as though it
had closed the short sale. Future regulatories may supply similar treatment to
other 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 a Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain futures
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
A Fund may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds the Fund's adjusted basis in these
shares; any mark to market losses and any loss from an actual disposition of
shares would be deductible as ordinary losses to the extent of any set
mark-to-market gains included in income in prior years. The effect of the
election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to a Fund level tax when distributed to
shareholders as a dividend. Alternatively, the Fund may elect to include as
income and gain its share of the ordinary earnings and net capital gain of
certain foreign investment companies in lieu of being taxed in the manner
described above.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by those countries.
The AARP Global Growth Fund and the AARP International Stock Fund each
may qualify for the election permitted under Section 853 of the Code so that
shareholders may (subject to limitations) be able to claim a credit or
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deduction on their federal income tax returns for, and will be required to treat
as part of the amounts distributed to them, their pro rata portion of qualified
taxes paid by the Fund to foreign countries (which taxes relate primarily to
investment income). The Fund may make an election under Section 853 of the Code,
provided that more than 50% of the value of the total assets of the Fund at the
close of the taxable year consists of securities in foreign corporations. The
foreign tax credit available to shareholders is subject to certain limitations
imposed by the Code, except in the case of certain electing individual taxpayers
who have limited creditable foreign taxes and no foreign source income other
than passive investment-type income. Furthermore, the payment of foreign taxes
withheld on dividends if the dividend-paying shares or the shares of the Fund
are held by the Fund or the shareholder, as the case may be, for less than 16
days (46 days in the case of preferred shares) during the 30-day period (90-day
period for preferred shares) beginning 15 days (45 days for preferred shares)
before the shares become ex-dividend. In addition, if the Fund fails to satisfy
these holding period requirements, it cannot elect under Section 853 to pass
through to shareholders the ability to claim a deduction for the related foreign
taxes.
If a Fund does not make the election permitted under section 853 any
foreign taxes paid or accrued will represent an expense to the Fund which will
reduce its investment company taxable income. Absent this election, shareholders
will not be able to claim either a credit or a deduction for their pro rata
portion of such taxes paid by the Fund, nor will shareholders be required to
treat as part of the amounts distributed to them their pro rata portion of such
taxes paid.
Certain of the debt securities acquired by the Funds may be treated as
debt securities that were originally issued at a discount. Original issue
discount represents interest for Federal income tax purposes and can generally
be defined as the difference between the price at which a security was issued
and its stated redemption price at maturity. Although no cash income is actually
received by the Funds, original issue discount earned in a given year generally
is treated for Federal income tax purposes as income earned by the Funds, and
therefore is subject to the distribution requirements of the Code. The amount of
income earned by the Funds is determined on the basis of a constant yield to
maturity which takes into account at least semi-annual or annual compounding
(depending on the date of the security) of accrued interest. If a Fund invests
in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Fund by its corporate shareholders, to the extent attributable
to such portion of accrued original issue discount, may be eligible for this
deduction for dividends received by corporations if so designated by the Fund in
a written notice to shareholders.
In addition, some of the debt securities may be purchased by the Funds
at a discount which exceeds the original issue discount on such debt securities,
if any. This additional discount represents market discount for Federal income
tax purposes. The gain realized on the disposition of many debt securities,
including tax-exempt securities, having market discount will be treated as
ordinary income to the extent it does not exceed the accrued market discount on
such debt security. Generally, market discount accrues on a daily basis for each
day the debt security is held by the Funds at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Funds, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest.
The Funds will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. All such distributions and proceeds may be subject to
withholding of Federal income tax at the rate of 31% in the case of non-exempt
shareholders who fail to furnish the Funds with their taxpayer identification
numbers and with required certifications regarding their status under Federal
income tax laws. Withholding may also be required if a Fund is notified by the
IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions or proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Investors may wish to consult their tax advisers about the applicability of the
backup withholding provisions.
In addition to Federal taxes, shareholders of the Funds may be subject
to state and local taxes on distributions from the Funds. Under the laws of
certain states, distributions of investment company taxable income are taxable
to shareholders as dividend income even though a substantial portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by the resident of such state, would be exempt from such
state's
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income tax. Shareholders should consult their own tax advisers with respect to
the tax status of distributions from the Funds in their own state and
localities.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, Trusts and estates). Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and foreign
tax consequences of ownership of shares of the Fund, including the likelihood
that such a shareholder would be subject to a U.S. withholding tax at a rate of
31% (or at a lower rate under a tax treaty) on amounts constituting ordinary
income to him or her.
Special Information Regarding AARP High Quality Tax Free Money Fund and
AARP Insured Tax Free General Bond Fund: Each of the AARP High Quality Tax Free
Money and AARP Insured Tax Free General Bond Funds intend to qualify to pay
"exempt-interest dividends" to its shareholders. Each Fund will be so qualified
if, at the close of each quarter of its taxable year, at least 50% of the value
of its total assets consists of securities of states, U.S. possessions, their
political subdivisions, and the District of Columbia, the interest on which is
exempt from Federal tax. To the extent that the Funds' dividends distributed to
shareholders are derived from earnings on interest income exempt from Federal
tax and are designated as "exempt-interest dividends" by the Funds, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
"Exempt-interest dividends," however, must be taken into account by shareholders
in determining whether their total incomes are large enough to result in
taxation of up to 85% of their Social Security benefits. In addition, interest
on certain municipal obligations (private activity bonds) will be treated as a
preference item for purposes of calculating the alternative minimum tax for
individuals and for corporations. Similarly, income distributed by the Funds,
including exempt-interest dividends, may constitute an adjustment to alternative
minimum taxable income of corporate shareholders. The Funds do not intend to
purchase any private activity bonds. The Funds will inform shareholders annually
as to the portion of the distributions from the Funds which constituted
"exempt-interest dividends."
To the extent that the Funds' dividends are derived from interest on
their temporary taxable investments or from an excess of net short-term capital
gain over net long-term capital loss, they are considered ordinary taxable
income for Federal income tax purposes. Distributions, if any, of net long-term
capital gains from the sale of securities are taxable as long-term capital gains
regardless of the length of time the shareholder has owned Fund shares. However,
if a shareholder realizes a loss on the sale of a share held at the time of sale
for six months or less, such loss will be treated as long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
during such six-month period. Furthermore, a loss realized by a shareholder on
the sale of shares of the Funds with respect to which exempt-interest dividends
have been paid will be disallowed if such shares have been held by the
shareholder for six months or less (to the extent of exempt-interest dividends
paid).
Under the Code, a shareholder's interest expense deductions with
respect to indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends, such as either of the AARP
Tax Free Funds, may be limited. In addition, under rules issued by the Internal
Revenue Service for determining when borrowed Funds are considered used for the
purposes of purchasing or carrying particular assets, the purchase of shares may
be considered to have been made with borrowed Funds even though the borrowed
Funds are not directly traceable to the purchase of shares.
Opinions relating to the validity of municipal securities and the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the issuer. Neither AARP, the Fund Manager, nor Counsel to the Funds
makes any review of proceedings relating to the issuer of municipal securities
or the bases of such opinions.
The foregoing description regarding the AARP Tax Free Funds relates
only to Federal income tax law. Investors should consult with their tax advisers
as to exemption from other state or local law. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
industrial development bonds should consult their tax advisers before purchasing
shares of the Funds.
Special Information Regarding the AARP Managed Investment Portfolios:
Distributions of an underlying AARP Mutual Fund's investment company taxable
income are taxable as ordinary income to an AARP Managed Investment Portfolio
which invests in the Fund. Distributions of the excess of an underlying AARP
Mutual Fund's net long-term capital gain over its net short-term capital loss,
which are properly designated as "capital gain dividends," are reported as
long-term capital gain by an AARP Managed Investment Portfolio which invests in
the Fund, regardless of
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how long the Portfolio held the Fund's shares, and are not eligible for the
corporate dividends-received deduction. Upon the sale or other disposition by an
AARP Managed Investment Portfolio of shares of an underlying AARP Mutual Fund,
the Portfolio generally will realize a capital gain or loss which will be
long-term or short-term, generally depending upon the Portfolio's holding period
for the shares. The AARP Managed Investment Portfolios will not be eligible to
elect to "pass through" to their shareholders the ability to claim a deduction
or credit with respect to foreign income and similar taxes paid by an underlying
AARP Mutual Fund.
BROKERAGE AND PORTFOLIO TURNOVER
Brokerage Commissions
Allocation of brokerage is supervised by the Fund Manager.
The primary objective of the Fund Manager in placing orders for the
purchase and sale of securities for a 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 Fund Manager 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 a Fund to reported
commissions paid by others. The Fund Manager routinely reviews commission rates,
execution and settlement services performed and makes internal and external
comparisons.
The Funds' purchases and sales of fixed-income portfolio securities are
generally placed by the Fund Manager with primary market makers for these
securities on a net basis, without any brokerage commission being paid by 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.
AARP Managed Investment Portfolio investments are made directly in
Underlying AARP Funds with no commissions.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Fund Manager's practice to place orders with
broker/dealers who supply brokerage and research services to the Fund Manager or
a 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 Fund
Manager is authorized when placing portfolio transactions, as applicable, for a
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 Fund Manager 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 Fund Manager or a Fund in exchange for the direction by the Fund Manager
of brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity transactions. The Fund
Manager will not place orders with broker/dealers on the basis that the
broker/dealer has or has not sold shares of a 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 Fund Manager
will place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Fund Manager;
the Distributor will place orders on behalf of the Funds with issuers,
underwriters or other brokers and dealers. The Distributor will not receive any
commission, fee or other remuneration from the Funds for this service.
Although certain research services from broker/dealers may be useful to
a Fund and to the Fund Manager, it is the opinion of the Fund Manager that such
information only supplements the Fund Manager's own research effort since the
information must still be analyzed, weighed, and reviewed by the Fund Manager's
staff. Such information may be useful to the Fund Manager in providing services
to clients other than a Fund, and not all such information is used by the
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Fund Manager in connection with a Fund. Conversely, such information provided to
the Fund Manager by broker/dealers through whom other clients of the Fund
Manager effect securities transactions may be useful to the Fund Manager in
providing services to a Fund.
The Trustees review, from time to time, whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended September 30, 1997, 1998 and 1999 the AARP
Growth and Income Fund paid total brokerage commissions of $4,618,820,
$6,932,351 and $5,595,250, respectively. For the fiscal year ended September 30,
1999, $3,428,769 (61.28%) of the total brokerage commissions paid by AARP Growth
and Income Fund resulted from orders for transactions placed, consistent with
the policy of obtaining the most favorable net results, with brokers and dealers
who provided supplementary research information to the Fund or the Fund Manager.
The amount of such transactions aggregated $4,958,748,228 of which
$2,786,299,794 (56.19% of all brokerage transactions) were transactions which
included research commissions. The balance of such brokerage was not allocated
to a particular broker or dealer with regard to the above-mentioned or other
special factors.
For each year of the fiscal years ended September 30, 1997, 1998 and
1999 the AARP Capital Growth Fund paid total brokerage commissions of $734,958,
$1,239,270 and $1,895,753, respectively. For the fiscal year ended September 30,
1999, $1,529,053 (80.66%) of the total brokerage commissions paid by AARP
Capital Growth Fund resulted from orders for transactions placed, consistent
with the policy of obtaining the most favorable net results, with brokers and
dealers who provided supplementary research information to the Fund or the Fund
Manager. The amount of such transactions aggregated $2,157,351,250, of which
$1,721,527,653 (79.80% of all brokerage transactions) were transactions which
included research commissions. The balance of such brokerage was not allocated
to a particular broker or dealer with regard to the above-mentioned or other
special factors.
For each year of the fiscal years ended September 30, 1997, 1998 and
1999 the AARP Balanced Stock and Bond Fund paid brokerage commissions of
$229,436, $386,854 and $394,165, respectively. For the fiscal year ended
September 30, 1999, $345,984 (87.78%) of the total brokerage commissions paid by
AARP Balanced Stock and Bond Fund resulted from orders for transactions placed,
consistent with the policy of obtaining the most favorable net results, with
brokers and dealers who provided supplementary research information to the Fund
or the Fund Manager. The amount of such transactions aggregated $738,738,024, of
which $655,744,273 (88.77% of all brokerage transactions) were transactions
which included research commissions. The balance of such brokerage was not
allocated to a particular broker or dealer with regard to the above-mentioned or
other special factors.
For each year of the fiscal years ended September 30, 1997, 1998 and
1999, AARP Global Growth Fund paid brokerage commissions of $180,078, $209,360
and $217,428, respectively. For the fiscal year ended September 30, 1999,
$187,243 (86.12%) of the total brokerage commissions paid by AARP Global Growth
Fund resulted from orders for transactions placed, consistent with the policy of
obtaining the most favorable net results, with brokers and dealers who provided
supplementary research information to the Fund or the Fund Manager. The amount
of such transactions aggregated $181,914,752, of which $157,956,938 (86.83% of
all brokerage transactions) were transactions which included research
commissions. The balance of such brokerage was not allocated to a particular
broker or dealer with regard to the above-mentioned or other special factors.
For the fiscal period February 1, 1997 (commencement of operations)
until September 30, 1997, the AARP Small Company Stock Fund paid total brokerage
commissions of $37, and for the fiscal years ended September 30, 1998 and 1999
paid brokerage commissions of $106,149 and $78,436, respectively. For the fiscal
year ended September 30, 1999, $73,784 (94%) of the total brokerage commissions
paid by AARP Small Company Stock Fund resulted from orders for transactions
placed, consistent with the policy of obtaining the most favorable net results,
with brokers and dealers who provided supplementary research information to the
Fund or the Fund Manager. The amount of such transactions aggregated
$67,964,040, of which $60,424,485 (88.91% of all brokerage transactions) were
transactions which included research commissions. The balance of such brokerage
was not allocated to a particular broker or dealer with regard to the
above-mentioned or other special factors.
For the fiscal period February 1, 1997 (commencement of operations)
until September 30, 1997, the AARP International Stock Fund paid total brokerage
commissions of $74,937, and for the fiscal years ended September 30, 1998 and
1999 paid brokerage commissions of $163,064 and $304,427, respectively. For the
fiscal period ended
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September 30, 1999, $250,512 (82.29%) of the total brokerage commissions paid by
AARP International Stock Fund resulted from orders for transactions placed,
consistent with the policy of obtaining the most favorable net results, with
brokers and dealers who provided supplementary research information to the Fund
or the Fund Manager. The amount of such transactions aggregated $166,723,154, of
which $140,174,425 (84.08% of all brokerage transactions) were transactions
which included research commissions. The balance of such brokerage was not
allocated to a particular broker or dealer with regard to the above-mentioned or
other special factors.
Portfolio Turnover
Each Fund's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. A higher rate
involves greater brokerage and transaction expenses to a Fund and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for a Fund's portfolio whenever
necessary, in management's opinion, to meet each Fund's objective. The portfolio
turnover rates for the fiscal years ended September 30, 1997, 1998 and 1999 for
five of the non-money market Funds were: AARP High Quality Short Term Bond Fund,
83.26%, 137.60% and 78.97%; AARP GNMA and U.S. Treasury Fund, 86.76%, 160.40%
and 245.22%; AARP Insured Tax Free General Bond Fund, 7.61%, 6.21% and 7.89%;
AARP Growth and Income Fund, 33.40%, 40.19% and 30.41%; and AARP Capital Growth
Fund, 39.04%, 53.18% and 68.10%, all respectively. The portfolio turnover rates
for the fiscal years ended September 30, 1997, 1998 and 1999 for the AARP
Balanced Stock and Bond Fund were 26.79%, 56.69% and 47.64%, respectively. The
portfolio turnover rates for AARP Global Growth Fund for the fiscal years ended
September 30, 1997, 1998 and 1999 were 31.34%, 59.15% and 54.76%, respectively.
The portfolio turnover rates for AARP Bond Fund for Income, AARP U.S. Stock
Index Fund, AARP International Stock Fund, and AARP Small Company Stock Fund for
the period February 1, 1997 (commencement of operations) to September 30, 1997
were 13.69%, 14.52%, 50.73% and 5.01%, respectively; and for the fiscal years
ended September 30, 1998 and 1999 were 130.56%, 1.11%, 75.28% and 12.4%,
respectively, and 63.90%, 3.56%, 214.14% and 17.42%, respectively.
NET ASSET VALUE
AARP Money Funds
The net asset value per share of the Funds is determined by Scudder
Fund Accounting Corporation twice daily as of twelve o'clock noon and the close
of regular trading on the Exchange, normally 4 p.m. eastern time, on each day
when the Exchange is open for trading. The Exchange is normally closed on the
following national holidays: New Year's Day, 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 a Saturday or Sunday, respectively. Net
asset value is determined by dividing the total assets of the Fund, less all of
its liabilities, by the total number of shares of the Fund outstanding. The
valuation of AARP High Quality Money Fund's, AARP Premium Money Fund's, and AARP
High Quality Tax Free Money Fund's portfolio securities is each based upon their
amortized cost which does not take into account unrealized securities gains or
losses. This method involves initially valuing an instrument at its cost and
thereafter amortizing to maturity any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price each Fund would receive if it sold the instrument. During periods of
declining interest rates, the quoted yield on shares of each Fund may tend to be
higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized cost
by each Fund resulted in a lower aggregate portfolio value on a particular day,
a prospective investor in the Fund would be able to obtain a somewhat higher
yield if he purchased shares of the Fund on that day, than would result from
investment in a fund utilizing solely market values, and existing investors in
the Fund would receive less investment income. The converse would apply in a
period of rising interest rates. Other securities and assets for which market
quotations are not readily available are valued in good faith at fair value
using methods determined by the Trustees and applied on a consistent basis. For
example, securities with remaining maturities of more than 60 days for which
market quotations are not readily available are valued on the basis of market
quotations for securities of comparable maturity, quality and type. The Trustees
review the valuation of AARP High Quality Money Fund's, AARP Premium Money
Fund's, and AARP High Quality Tax Free Money Fund's securities through
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receipt of regular reports from the Fund Manager at each regular Trustees'
meeting. Determinations of net asset value made other than as of the close of
the Exchange may employ adjustments for changes in interest rates and other
market factors.
AARP Non-Money Market Funds
The net asset value of shares of each Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading
(the "Value Time"). 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 a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of a 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, the security is valued at the most
recent bid quotation. An equity security, which is traded on the Nasdaq Stock
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 is
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 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 Fund Manager may
calculate the price of that debt security, subject to limitations established by
the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
Trading in securities on foreign securities exchanges is normally
completed before the close of regular trading on the Exchange. Trading on these
foreign exchanges may not take place on all days on which there is regular
trading on the Exchange, or may take place on days on which there is no regular
trading on the Exchange. If events materially affecting the value of a Fund's
portfolio securities occur between the time when these foreign exchanges close
and the time when the Fund's net asset value is calculated, such securities will
be valued at fair value as determined by each Trust's Board of Directors. Shares
of AARP Underlying Funds in which the AARP Diversified Portfolios invest in
determine net asset value after the order to purchase shares of an AARP
underlying fund is placed by the Portfolios.
If, in the opinion of each 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
<PAGE>
manner which, in the discretion of the Valuation Committee most fairly reflects
fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial highlights of each Fund included in the Funds' 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 auditing and accounting. . PricewaterhouseCoopers LLP
audits the financial statements of each P Fund and provides other audit,tax, and
related services.
Shareholder Indemnification
Each of the Trusts is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. Each Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Trust property or the
acts, obligations or affairs of the Trust. Each Declaration of Trust also
provides for indemnification out of the Trust property of any shareholder held
personally liable for the claims and liabilities to which a shareholder may
become subject by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Trust itself would be unable to meet its
obligations. No series of one Trust is liable for the obligations of another
series in the AARP complex.
Ratings of Corporate Bonds
The three highest ratings of Moody's for corporate bonds are Aaa, Aa
and A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa ratings group, they comprise what are generally known as high-grade bonds.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa securities. Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Although factors
giving security to principal and interest on bonds rated A are adequate, other
elements may be present which suggest a susceptibility to impairment sometime in
the future.
The three highest ratings of S&P for corporate bonds are AAA (Prime),
AA (High-grade) and A. Bonds rated AAA have the highest rating assigned by
Standard and Poor's Corporation to a debt obligation. Capacity to pay interest
and repay principal is extremely strong. Bonds rated AA have a very strong
capacity to pay interest and repay principal and differ from the highest rating
issues only in small degree. Bonds rated A have a strong capacity to pay
principal and interest, although they are more susceptible to the adverse
effects of changes in circumstances and economic conditions. Bonds rated BBB
have an adequate capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in higher
rated categories.
Ratings of Commercial Paper
The ratings Prime-1 and Prime-2 are the highest commercial paper
ratings assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be
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inherent in certain areas; (3) evaluation of the issuer's products in relation
to competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; 6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.
Prime-2 ratings are assigned by Moody's to commercial paper issuers
which have a strong capacity for meeting their obligations in a timely fashion.
However, their financial, economic and managerial capacities will be less than
that of Prime-1 borrowers. Financial characteristics such as earnings, coverage
ratios and capitalization will be more affected by external economic factors
than Prime-1 borrowers. Liquidity is still believed to be ample.
The two highest ratings of S&P for commercial paper are A-1 and A-2.
Commercial paper rated A-1 or better by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements; long-term senior debt
is rated A or better, although in some cases BBB credits may be allowed; the
issuer has access to at least two additional channels of borrowing; basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; the reliability and quality of
management are unquestioned.
S&P will assign an A-2 rating to the commercial paper of companies
which have the capacity for timely payment on issues. However, the relative
degree of safety is less than for issuers rated A-1.
Ratings of Municipal Bonds
The three highest ratings of Moody's for municipal bonds are Aaa, Aa,
and A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they comprise what are generally known as high-grade bonds. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
The three highest ratings of S&P for municipal bonds are AAA (Prime),
AA (High-grade), and A (Good grade). Bonds rated AAA have the highest rating
assigned by S&P to a municipal obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in a
small degree. Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of Funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
S&P's top ratings for municipal notes are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The ratings F-1+ and F-1 are the two highest ratings assigned by Fitch
Investors Service. Among the factors considered by Fitch in assigning these
rating are: (1) the issuer's liquidity; (2) its standing in the industry; (3)
the size of its debt; (4) its ability to service its debt; (5) its
profitability; (6) its return on equity; (7) its alternative sources of
financing; and (8) its ability to access the capital markets. Analysis of the
relative strength or weakness of these factors and others determines whether an
issuer's commercial paper is within these two ratings.
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Other Information
Each AARP Fund has a fiscal year ending on September 30.
The CUSIP number for AARP High Quality Money Fund is 000036E-10-7
The CUSIP number for AARP GNMA & U.S. Treasury Fund is 00036M-10-9.
The CUSIP number for AARP High Quality Short Term Bond Fund is 00036M-20-8.
The CUSIP number for AARP Bond Fund for Income Fund is 00036M-30-7.
The CUSIP number for AARP Tax Free Money Fund is 00036Q-10-0.
The CUSIP number for AARP Insured Tax Free General Bond Fund is 00036Q-20-9.
The CUSIP number for AARP Balanced Stock & Bond is 00036J-30-4.
The CUSIP number for AARP Growth & Income Fund is 00036J-10-6.
The CUSIP number for AARP Capital Growth Fund is 00036J-20-5.
The CUSIP number for AARP Global Growth Fund is 00036J-40-3.
The CUSIP number for AARP U.S. Stock Index Fund is 00036J-50-2
The CUSIP number for AARP International Stock Fund is 00036J-60-1.
The CUSIP number for AARP Small Company Stock is 00036J-70-0.
The CUSIP number for AARP Diversified Income with Growth Portfolio is
00036W-20-6.
The CUSIP number for AARP Diversified Growth Portfolio is 00036W-10-7.
The CUSIP number for AARP Premium Money Fund is 00036E-20-6.
Portfolio securities of the AARP Funds (except the AARP Global Growth
Fund and the AARP International Stock Fund) are held separately, pursuant to a
custodian agreement with each Trust, by State Street Bank and Trust Company of
Boston as Custodian.
Portfolio securities of AARP Global Growth Fund are held separately,
pursuant to a custodian agreement with AARP Growth Trust on behalf of the AARP
Global Growth Fund and the AARP International Stock Fund, by Brown Brothers
Harriman & Co. of Boston as Custodian.
The firm of Dechert Price & Rhoads is legal counsel for the Trusts.
The Trusts also have a shareholder servicing agreement with Scudder
Service Corporation ("SSC"), a subsidiary of the Fund Manager. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount charged to each Fund by SSC is
shown in the table below, and is included in "Services to shareholders" in the
Statements of Operations in the Financial Statements.
For the period ended September 30 the amounts charged by SSC to the Funds were
as follows:
<TABLE>
<CAPTION>
1999 Amount Total SSC 1998 Amount 1997 Amount
Charged to Unpaid at Charged to Charged to
Fund Fund by SSC(a) September 30, Fund by SSC(b) Fund by SSC(c)
1999*
- ------------------------------------------------- ---------------- ---------------- --------------------------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $1,441,810 $ 82,459 $1,468,693 $1,505,677
AARP High Quality Tax Free Money Fund 195,011 12,068 223,127 256,965
AARP Premium Money Fund (d) 77,787 77,614 -- --
AARP GNMA and U.S. Treasury Fund 6,524,199 459,993 6,193,111 6,732,169
AARP High Quality Short Term Bond Fund 1,014,444 57,602 1,289,889 1,455,652
AARP Insured Tax Free General Bond Fund 1,990,200 157,566 1,592,232 1,741,482
AARP Bond Fund for Income 302,284 202,937 -- --
AARP Balanced Stock and Bond Fund 1,700,543 100,735 1,791,697 1,357,972
AARP Growth and Income Fund 10,441,357 763,636 8,952,348 6,853,761
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AARP U.S. Stock Index Fund 851,528 345,031 -- --
AARP Capital Growth Fund 2,823,393 211,407 2,369,216 1,889,072
AARP Small Company Stock Fund 327,749 12,364 435,353 93,491
AARP Global Growth Fund 477,014 25,187 600,827 558,504
AARP International Stock Fund 124,308 80,236 150,764 --
</TABLE>
* Total unpaid amounts are included in "Other payables and accrued
expenses" in the Statements of Assets and Liabilities in the Financial
Statements.
(a) SSC did not impose any or a portion of its fee for the AARP Premium
Money Fund, amounting to $$10,442.
(b) SSC did not impose any or a portion of its fee for the AARP Bond Fund
for Income and AARP U.S. Stock Index Fund, amounting to $241,377 and
$185,110, respectively.
(c) SSC did not impose any or a portion of its fee for the AARP Bond Fund
for Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund,
and AARP International Stock Fund, amounting to $40,906, $60,094,
$25,298, and $54,419, respectively.
(d) AARP Premium Money Fund commenced operations on February 1, 1999.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Fund
Manager, Two International Place, Boston, Massachusetts, 02110-4103, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Funds. AARP High Quality
Money Fund, AARP Premium Money Fund, and AARP High Quality Tax Free Money Fund
each pay Scudder Fund Accounting an annual fee equal to 0.020% on the first $150
million of average daily net assets, 0.0060% of such assets in excess of $150
million, up to and including $1 billion and 0.0035% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. AARP Tax Free
General Bond Fund pays Scudder Fund Accounting an annual fee equal to 0.024% on
the first $150 million of average daily net assets, 0.0070% on such assets in
excess of $150 million up to and including $1 billion, and 0.0040% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. AARP High Quality Short Term Bond Fund, AARP GNMA and U.S. Treasury
Fund and AARP Bond Fund for Income each pay Scudder Fund Accounting an annual
fee equal to 0.025% of the first $150 million of average daily net assets,
0.0075% of such assets in excess of $150 million up to and including $1 billion,
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, AARP U.S. Stock Index Fund, AARP Capital Growth Fund and AARP Small
Company Stock Fund each pay Scudder Fund Accounting an annual fee equal to
0.025% on the first $150 million of average daily net assets, 0.0075% of such
assets in excess of $150 million up to and including $1 billion, and 0.0045% of
such assets in excess of $1 billion, plus holding and transaction charges. AARP
Global Growth Fund and Scudder International Stock Fund each pay Scudder Fund
Accounting Corporation an annual fee equal to 0.065% on the first $150 million
of average daily net assets, 0.0400% of such assets in excess of $150 million up
to and including $1 billion, and 0.0200% of such assets in excess of $1 billion,
plus holding and transaction charges for this service.
The amount charged to each Fund by SFAC is shown in the table below,
and is included in "Custodian and accounting fees" in the Statements of
Operations in the Financial Statements.
<TABLE>
<CAPTION>
1999 Amount Total SFAC 1998 Amount 1997 Amount
Charged to Unpaid at Charged to Charged to
Fund Fund by September 30, Fund by Fund by
SFAC(a) 1999* SFAC(b) SFAC(c)
- ------------------------------------------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $ 57,539 $ 4,313 $ 55,805 $ 54,052
AARP High Quality Tax Free Money Fund 32,500 5,000 30,000 30,023
AARP Premium Money Fund(d) 17,516 17,516 -- --
AARP GNMA and U.S. Treasury Fund 628,816 55,381 511,379 480,845
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AARP High Quality Short Term Bond Fund 62,354 5,493 67,802 82,859
AARP Insured Tax Free General Bond Fund 160,181 12,738 160,713 162,915
AARP Bond Fund for Income 53,828 35,749 -- --
AARP Balanced Stock and Bond Fund 108,991 8,515 113,887 95,386
AARP Growth and Income Fund 383,063 30,065 406,629 323,033
AARP U.S. Stock Index Fund 150,160 79,160 -- --
AARP Capital Growth Fund 144,450 12,214 129,318 110,317
AARP Small Company Stock Fund 42,175 2,861 50,709 25,445
AARP Global Growth Fund 127,248 10,528 128,117 95,221
AARP International Stock Fund 50,317 797 55,689 --
</TABLE>
* Total unpaid amounts are included in "Other payables and accrued
expenses" in the Statements of Assets and Liabilities in the Financial
Statements.
(a) SFAC did not impose any or a portion of its fee for the AARP Premium
Money Fund, amounting to $2,449.
(b) SFAC did not impose any or a portion of its fee for the AARP Bond Fund
for Income and AARP U.S. Stock Index Fund, amounting to $41,412 and
$91,841, respectively.
(c) SFAC did not impose any or a portion of its fee for the AARP Bond Fund
for Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund,
and AARP International Stock Fund, amounting to $25,000, $73,071,
$6,725, and $33,333, respectively.
(d) AARP Premium Money Fund commenced operations on February 1, 1999.
Many of the investment changes in the Funds will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders. These transactions will reflect investment decisions
made by the Fund Manager in light of the objectives and policies of the Funds,
and such factors as its other portfolio holdings and tax considerations, and
should not be construed as recommendations for similar action by other
investors.
Costs of $13,000 incurred by AARP Bond Fund for Income in conjunction
with its organization are amortized over the five-year period beginning February
1, 1997.
Costs of $16,000 incurred by AARP U.S. Stock Index Fund in conjunction
with its organization are amortized over the five-year period beginning February
1, 1997.
Costs of $13,000 incurred by AARP International Stock Fund in
conjunction with its organization are amortized over the five-year period
beginning February 1, 1997.
Costs of $13,000 incurred by AARP Small Company Stock Fund in
conjunction with its organization are amortized over the five-year period
beginning February 1, 1997.
Each Trust is located at Two International Place, Boston, Massachusetts
02110-4103 (telephone: 1-800-253-2277). Each Trust has filed with the U.S.
Securities and Exchange Commission, Washington, D.C. 20549, a Registration
Statement under the Securities Act of 1933, as amended, with respect to the
shares of the Funds offered by the Prospectus. The Prospectus and this Statement
of Additional Information do not contain all of the information set forth in the
Registration Statements, certain parts of which are omitted in accordance with
Rules and Regulations of the SEC. The Registration Statements may be inspected
at the principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C.
and copies of the Registration Statements may be obtained from the SEC for a
fee.
Tax-Exempt Income vs. Taxable Income
The following chart demonstrates that tax-free yields are equivalent to
higher taxable yields due to their tax-exempt status. For example, tax-free
interest of 5% is the equivalent of 6.94% taxable in a 28% tax bracket. Please
refer to the chart below for more examples.
84
<PAGE>
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the 1999
calendar year.
<TABLE>
<CAPTION>
1999 Taxable Income To Equal Hypothetical Tax-Free Yields of 5%, 7%
Brackets+ and 9%, a Taxable Investment Would Have To Earn**
Individual Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
<S> <C> <C> <C> <C>
$0 - $25,750 15.0% 5.88% 8.24% 10.59%
$25,751 - $62,450 28.0 6.94 9.72 12.5
$62,451 - $130,250 31.0 7.25 10.14 13.04
$130,251 - $283,150 36.0 7.81 10.94 14.06
Over $283,150 39.6 8.28 11.59 14.9
Joint Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
$0 - $43,050 15.0% 5.88% 8.24% 10.59%
$43,051 - $104,050 28.0 6.94 9.72 12.5
$104,051 - $158,550 31.0 7.25 10.14 13.04
$158,551 - $283,150 36.0 7.81 10.94 14.06
Over $283,150 39.6 8.28 11.59 14.9
</TABLE>
** These illustrations assume the federal alternative minimum tax is not
applicable, that an individual is not a "head of household" and claims
one exemption and that taxpayers filing a joint return claim two
exemptions. Note also that these federal income tax brackets and tax
rates do not take into account the effects of (i) a reduction in the
deductibility of itemized deductions for taxpayers whose federal
adjusted gross income exceeds $124,500 ($62,250 in the case of a
married individual filing a separate return), or (ii) the gradual
phase-out of the personal exemption amount for taxpayers whose federal
adjusted gross income exceeds $124,500 (for single individuals) or
$186,800 (for married individuals filing jointly). The effective
federal tax rates and equivalent yields for such taxpayers would be
higher than those shown above.
+ This illustration is based on estimated break points using the Internal
Revenue Service's formula.
Example:*
Based on 1999 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $50,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
There is no guarantee that an AARP Fund will achieve a specific yield.
While most of the income distributed to the shareholders of the AARP High
Quality Tax Free Money Fund and the AARP Insured Tax Free General Bond Fund will
be exempt from federal income taxes, portions of such distributions may be
subject to federal income taxes and may also be subject to state and local
taxes.
* Net amount subject to federal income tax after deductions and
exemptions, exclusive of the federal alternative minimum tax.
FINANCIAL STATEMENTS
85
<PAGE>
The financial statements and notes, including the investment portfolio,
of each AARP Fund, together with the Report of Independent Accountants and
Supplementary Information are incorporated by reference in this SAI.
86
<PAGE>
AARP INCOME TRUST
AARP HIGH QUALITY SHORT TERM BOND FUND
AARP GNMA AND U.S. TREASURY FUND
AARP BOND FUND FOR INCOME
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C> <C>
(a) (a)(1) Amended and Restated Declaration of Trust dated September 13, 1996.
(Previously filed as Exhibit 2(a)(4) to Post-Effective Amendment No. 20 to
the Registration Statement).
(b) (b)(1) By-laws of the Registrant as amended March 17, 1993. (Previously filed as
Exhibit 2(a)(2) to Post-Effective Amendment No. 25 to the Registration
Statement)
(b)(2) Certificate as to Resolution of Board Members dated June 24, 1996 amending
By-Laws of the Registrant dated March 17, 1993. (Previously filed as Exhibit
2(a)(3) to Post-Effective Amendment No. 20 to the Registration Statement)
(c) (c)(1) Establishment of Series dated November 27, 1984. (Previously filed as
Exhibit 1(b)(1) to Post-Effective Amendment No. 25 to the Registration
Statement)
(c)(2) Redesignation of Series dated March 28, 1990. (Previously filed as Exhibit
1(b)(2) to Post-Effective Amendment No. 25 to the Registration Statement)
(c)(3) Establishment and Designation of Series of Beneficial Interest dated
November 12, 1996. (Previously filed as Exhibit 1(b)(3) to Post-Effective
Amendment No. 20 to the Registration Statement)
(d) (d)(1) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. dated September 7, 1998. (Previously filed as Exhibit
(d)(5) to Post-Effective Amendment No. 26 to the Registration Statement)
(d)(2) Subadvisory Agreement among AARP/Scudder Financial Management Company,
Scudder, Stevens & Clark, Inc., the Registrant, AARP Growth Trust and AARP
Insured Tax Free Income Trust dated December 16, 1985. (Previously filed as
Exhibit (d)(6) to Post-Effective Amendment No. 26 to the Registration
Statement)
(e) (e)(1) Underwriting Agreement between the Registrant and Scudder Fund Distributors,
Inc. dated September 7, 1998. (Previously filed as Exhibit (e)(2) to
Post-Effective Amendment No. 26 to the Registration Statement)
(f) Inapplicable.
(g) (g)(1) Custodian Agreement between the Registrant and State Street Bank and Trust
Company dated November 30, 1984. (Previously filed as Exhibit 8(a)(1) to
Post-Effective Amendment No. 25 to the Registration Statement)
(g)(2) Fee Schedule for Exhibit (g)(1). (Previously filed as Exhibit 8(a)(2) to
Post-
2
<PAGE>
Effective Amendment No. 25 to the Registration Statement)
(g)(3) Amendment dated July 29, 1985 to the Custodian Contract between the
Registrant and State Street Bank and Trust Company dated November 30, 1984.
(Previously filed as Exhibit 8(a)(4) to Post-Effective Amendment No. 25 to
the Registration Statement)
(g)(4) Amendment dated September 23, 1987 to Custodian Agreement between the
Registrant and State Street Bank and Trust Company dated November 30, 1984.
(Previously filed as Exhibit 8(a)(5) to Post-Effective Amendment No. 25 to
the Registration Statement)
(g)(5) Amendment dated September 15, 1988 to Custodian Agreement between the
Registrant and State Street Bank and Trust Company dated November 30, 1984.
(Previously filed as Exhibit 8(a)(6) to Post-Effective Amendment No. 25 to
the Registration Statement)
(g)(6) Amendment dated March 3, 1999 to Custodian Agreement between the Registrant
and State Street Bank and Trust Company dated November 30, 1984.
(Incorporated by reference to Post-Effective Amendment No. 28 to the
Registration Statement)
(g)(7) Form of revised fee schedule for Exhibit (g)(1). (Previously filed as
Exhibit 8(a)(7) to Post-Effective Amendment No. 18 to the Registration
Statement)
(h) (h)(1) Transfer Agency and Service Agreement between the Registrant and Scudder
Service Corporation dated October 2, 1989. (Previously filed as Exhibit 9(a)
to Post-Effective Amendment No. 25 to the Registration Statement)
(h)(2) Amendment dated February 1, 1999 to the Transfer Agency and Service
Agreement between the Registrant and Scudder Service Corporation (Previously
filed as Exhibit (h)(2) to Post-Effective Amendment No. 27 to the
Registration Statement)
(h)(3) Fee schedule to the Transfer Agency between the Registrant and Scudder
Service Corporation dated February 1, 1999 (Previously filed as Exhibit
(h)(3) to Post-Effective Amendment No. 27 to the Registration Statement)
(h)(4) Member Services Agreement among AARP Financial Services Corp. and Scudder
Kemper Investments, Inc. dated September 7, 1998. (Previously filed as
Exhibit (h)(4) to Post-Effective Amendment No. 26 to the Registration
Statement)
(h)(5) Service Mark License Agreement among Scudder, Stevens & Clark, American
Association of Retired Persons, the Registrant, AARP Cash Investment Trust,
AARP Growth Trust and AARP Tax Free Income Trust dated March 20, 1996.
(Previously filed as Exhibit 9(c)(1) to Post-Effective Amendment No. 20 to
the Registration Statement)
(h)(6) Shareholder Service Agreement between the Registrant and Scudder Service
Corporation dated June 1, 1988. (Previously filed as Exhibit 9(d) to
Post-Effective Amendment No. 25 to the Registration Statement)
3
<PAGE>
(h)(7) Fund Accounting Services Agreement between the Registrant, on behalf of AARP
GNMA and U.S. Treasury Fund and Scudder Fund Accounting Corporation dated
November 10, 1995. (Previously filed as Exhibit 9(e) to Post-Effective
Amendment No. 18 to the Registration Statement).
(h)(8) Fund Accounting Services Agreement between the Registrant, on behalf of AARP
High Quality Bond Fund and Scudder Fund Accounting Corporation dated October
10, 1995. (Previously filed as Exhibit 9(f) to Post-Effective Amendment No.
18 to the Registration Statement).
(h)(9) Fund Accounting Services Agreement between the Registrant, on behalf of AARP
Bond Fund for Income and Scudder Fund Accounting Corporation dated February
1, 1997 (Previously filed as Exhibit (h)(9) to Post-Effective Amendment No.
27 to the Registration Statement)
(i) Legal Opinion and Consent of Counsel; filed herein
(j) Consent of Independent Auditors; filed herein
(k) Inapplicable
(l) Inapplicable
(m) Inapplicable
(n) Inapplicable
(o) Inapplicable
</TABLE>
Power of Attorney for Adelaide Attard, Robert N. Butler, Edgar R. Fiedler,
Eugene P. Forrester, George L. Maddox, Jr., and Robert J. Myers is incorporated
by reference to the Signature Page of Post-Effective Amendment No. 9.
Power of Attorney for Carol Lewis Anderson and Linda C. Coughlin is incorporated
by reference to the Signature Page of Post-Effective Amendment No. 17 to the
Registration Statement.
Power of Attorney for James H. Schultz and Gordon Shillinglaw is incorporated by
reference to the Signature Pages of Post-Effective Amendment No. 20 to the
Registration Statement.
Power of Attorney for Esther Canja is incorporated by reference to the Signature
Pages of Post-Effective Amendment
No. 21 to the Registration Statement.
Power of Attorney for Jean Gleason Stromberg is incorporated by reference to the
Signature Page of Post-Effective Amendment No. 24 to the Registration Statement.
Item 24. Persons Controlled by or under Common Control with Fund.
- -------- --------------------------------------------------------
None
Item 25. Indemnification.
- -------- ----------------
4
<PAGE>
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1 - 4.3 of the Registrant's Declaration
of Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
Etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in
5
<PAGE>
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a payment by a
Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(A) by the court or other body approving
the settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust,
shall be severable, shall not affect any other rights
to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a person who has
ceased to be such Trustee or officer and shall insure
to the benefit of the heirs, executors,
administrators and assigns of such a person. Nothing
contained herein shall affect any rights to
indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense
to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section
4.3 may be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by
or on behalf of the recipient to repay such amount if
it is ultimately determined that he is not entitled
to indemnification under this Section 4.3, provided
that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested Person" of the
Trust (including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.
Item 26. Business and Other Connections of Investment Adviser
- -------- ----------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
6
<PAGE>
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and President, Scudder Realty Holdings Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member, Group Executive Board, Zurich Financial Services, Inc.##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO and Member, Group Executive Board, Zurich Financial Services, Inc.##
CEO/Branch Offices, Zurich Life Insurance Company##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
7
<PAGE>
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 29.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
8
<PAGE>
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Linda Coughlin Director and Senior Vice President Chairperson and Trustee
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President Vice President
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk None
Two International Place
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President and Secretary
345 Park Avenue Legal Officer and Assistant Clerk
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
9
<PAGE>
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemption Brokerage Other
Underwriter Commissions and Repurchase Commissions Compensation
----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments Inc.., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston and the Commonwealth of Massachusetts on the
28th day of January, 2000.
AARP INCOME TRUST
By /s/ John Millette
------------------------------
John Millette, Vice President
and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Linda C. Coughlin
- --------------------------------------
Linda C. Coughlin* Chairperson and Trustee January 28, 2000
/s/ Carole Lewis Anderson
- --------------------------------------
Carole Lewis Anderson* Trustee January 28, 2000
/s/ Adelaide Attard
- --------------------------------------
Adelaide Attard* Trustee January 28, 2000
/s/ Robert N. Butler
- --------------------------------------
Robert N. Butler* Trustee January 28, 2000
/s/ Esther Canja
- --------------------------------------
Esther Canja* Trustee January 28, 2000
/s/ Edgar R. Fiedler
- --------------------------------------
Edgar R. Fiedler* Trustee January 28, 2000
/s/ Eugene P. Forrester
- --------------------------------------
Eugene P. Forrester* Trustee January 28, 2000
/s/ George L. Maddox, Jr.
- --------------------------------------
George L. Maddox, Jr.* Trustee January 28, 2000
/s/ Robert J. Myers
- --------------------------------------
Robert J. Myers* Trustee January 28, 2000
/s/ James H. Schulz
- --------------------------------------
James H. Schulz* Trustee January 28, 2000
/s/ Gordon Shillinglaw
- --------------------------------------
Gordon Shillinglaw* Trustee January 28, 2000
- --------------------------------------
Jean Gleason Stromberg Trustee January 28, 2000
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John R. Hebble
- --------------------------------------
John R. Hebble Treasurer January 28, 2000
</TABLE>
*By /s/ John Millette
---------------------------------------------------
John Millette
Attorney-in-fact pursuant to the powers of attorney
Attorney-in-fact pursuant to the powers of attorney
for Linda C. Coughlin, Carole Lewis Anderson,
Adelaide Attard, Robert N. Butler, Esther Canja,
Edgar R. Fiedler, Eugene P. Forrester, George L.
Maddox, Jr., Robert J. Myers, James H. Schulz and
Gordon Shillinglaw contained in Post-Effective
Amendment No. 28 to the Registration Statement,
filed on November 26, 1999.
2
<PAGE>
File No. 2-91577
File No. 811-4049
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 29
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 31
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AARP INCOME TRUST
<PAGE>
AARP INCOME TRUST
EXHIBIT INDEX
Exhibit (i)
Exhibit (j)
Law Offices of
Dechert Price & Rhoads
Ten Post Office Square South
Boston, MA 02109-4603
TELEPHONE: (617) 728-7100
FAX: (617) 426-6567
January 21, 2000
AARP Income Trust
Two International Place
Boston, MA 02110-4103
Re: Post-Effective Amendment No. 29 to the Registration Statement on
Form N-1A (SEC File No. 2-91577)
Ladies and Gentlemen:
AARP Income Trust (the "Trust") is a trust created under a
written Declaration of Trust dated June 8, 1984. The Declaration of Trust, as
amended from time to time, is referred to as the "Declaration of Trust." The
beneficial interest under the Declaration of Trust is represented by
transferable shares with a par value of $.01 per share (the "Shares"). The
Trustees have the powers set forth in the Declaration of Trust, subject to the
terms, provisions and conditions therein provided.
We are of the opinion that all legal requirements have been
complied with in the creation of the Trust and that said Declaration of Trust is
legal and valid.
Under Article V, Section 5.4 of the Declaration of Trust, the
Trustees are empowered, in their discretion, from time to time, to issue Shares
for such amount and type of consideration, at such time or times and on such
terms as the Trustees may deem best. Under Article V, Section 5.1, it is
provided that the number of Shares authorized to be issued under the Declaration
of Trust is unlimited. Under Article V, Section 5.11, the Trustees may authorize
the division of Shares into two or more series. By written instruments dated
November 12, 1996 and January 21, 1998, the Trustees of the Trust established
three series of the Trust designated as AARP Bond Fund for Income, AARP GNMA and
U.S. Treasury Fund and AARP High Quality Short Term Bond Fund (the "Funds").
By vote adopted on December 15, 1999 and December 16, 1998,
the Trustees of the Trust authorized the President, any Vice President, the
Secretary and the Treasurer, from time to time, to cause to be registered with
the Securities and Exchange Commission an indefinite number of Shares of each
series of the Trust and to cause such Shares to be offered and sold to the
public.
We understand that you are about to file with the Securities
and Exchange Commission, on Form N-1A, Post-Effective Amendment No. 29 to the
Trust's Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the
<PAGE>
AARP Income Trust
January 21, 2000
Page 2
"Securities Act"), in connection with the continuous offering of the Shares of
the Funds. We understand that our opinion is required to be filed as an exhibit
to the Registration Statement.
We are of the opinion that all necessary Trust action
precedent to the issue of the Shares of the Funds has been duly taken, and that
all such Shares may be legally and validly issued for cash, and when sold will
be fully paid and non-assessable by the Trust upon receipt by the Trust or its
agent of consideration for such Shares in accordance with the terms in the
Registration Statement, subject to compliance with the Securities Act, the
Investment Company Act of 1940, as amended, and applicable state laws regulating
the sale of securities.
We consent to your filing this opinion with the Securities and
Exchange Commission as an Exhibit to Post-Effective Amendment No. 29 to the
Registration Statement.
Very truly yours,
/s/Dechert Price & Rhoads
2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 29 to the Registration Statement on Form N-1A (the "Registration Statement")
of AARP Income Trust comprised of AARP High Quality Short Term Bond Fund, AARP
GNMA and U.S. Treasury Fund, and AARP Bond Fund for Income, of our report dated
November 8, 1999, on the financial statements and financial highlights appearing
in the September 30, 1999 Annual Report to the Shareholders of AARP High Quality
Short Term Bond Fund, AARP GNMA and U.S. Treasury Fund, and AARP Bond Fund for
Income, which is also incorporated by reference into the Registration Statement.
We further consent to the references to our Firm under the heading "Financial
Highlights," in the Prospectus and "Experts" in the Statement of Additional
Information.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 27, 2000
