Filed with the Securities and Exchange Commission on February 1, 1997.
File No. 2-91579
File No. 811-4050
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. 19
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
----
AARP Tax Free 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) 295-2567
--------------
Thomas F. McDonough
Scudder, Stevens & Clark, Inc.
Two International Place, Boston, MA 02110
-----------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
___ immediately upon filing pursuant to paragraph (b)
X on February 1, 1997 pursuant to paragraph (b)
---
___ 60 days after filing pursuant to paragraph (a)(i)
___ on _______________ pursuant to paragraph (a)(i)
___ 75 days after filing pursuant to paragraph (a)(ii)
___ on _______________ pursuant to paragraph (a)(ii) of Rule 485
The Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. The Registrant filed the notice required by Rule 24f-2 for its most
recent fiscal year on November 29, 1996.
<PAGE>
AARP TAX FREE INCOME TRUST
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
PART A Items Required By Form N-1A
- ------ ---------------------------
Item No. Item Caption Prospectus Caption
- -------- ------------ ------------------
<S> <C> <C>
1. Cover Page COVER PAGE
2. Synopsis
FUND EXPENSES
EXAMPLES OF WHAT FUND EXPENSES WOULD BE ON A $1,000
INVESTMENT IN EACH AARP FUND
AN OVERVIEW OF THE AARP INVESTMENT PROGRAM
WHAT DOES THE AARP INVESTMENT PROGRAM OFFER ME?
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information UNDERSTANDING FUND PERFORMANCE
4. General Description AN OVERVIEW OF THE AARP INVESTMENT PROGRAM
of Registrant INVESTMENT OBJECTIVES AND POLICIES
OTHER INVESTMENT POLICIES AND RISK FACTORS
FUND ORGANIZATION
5. Management of the FUND EXPENSES
Fund EXAMPLES OF WHAT FUND EXPENSES WOULD BE ON A $1,000
INVESTMENT IN EACH AARP FUND
FINANCIAL HIGHLIGHTS
FUND ORGANIZATION
AN OVERVIEW OF THE AARP INVESTMENT PROGRAM
5A. NOT APPLICABLE
6. Capital Stock and ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS
Other Securities AND TAXES
FUND ORGANIZATION
ACCESS TO YOUR INVESTMENT
7. Purchase of Securities OPENING AN ACCOUNT
Being Offered ADDING TO YOUR INVESTMENT
EXCHANGING
INVESTOR SERVICES
WIRE TRANSFER INSTRUCTIONS
8. Redemption or EXCHANGING
Repurchase ACCESS TO YOUR INVESTMENT
SIGNATURE GUARANTEES
INVESTOR SERVICES
9. Pending Legal NOT APPLICABLE
Proceedings
</TABLE>
Cross Reference-Page 1
<PAGE>
<TABLE>
<CAPTION>
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
- -------- ------------ ----------------------
<S> <C> <C>
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information TRUST ORGANIZATION
and History
13. Investment Objectives THE FUNDS' INVESTMENT OBJECTIVES
and Policies AND POLICIES
BROKERAGE AND PORTFOLIO TURNOVER
14. Management of the MANAGEMENT OF THE FUNDS
Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders
of Securities
16. Investment Advisory MANAGEMENT OF THE FUNDS
and Other Services TRUSTEES AND OFFICERS
OTHER INFORMATION
17. Brokerage Allocation BROKERAGE AND PORTFOLIO TURNOVER
18. Capital Stock and TRUST ORGANIZATION
Other Securities
19. Purchase, Redemption THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
and Pricing of PURCHASES
Securities Being REDEMPTIONS
Offered RETIREMENT PLANS
OTHER PLANS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculations of DIVIDENDS AND YIELD
Performance Data
23. Financial Statements FINANCIAL STATEMENTS
</TABLE>
Cross Reference-Page 2
<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
PROSPECTUS
February 1, 1997
There are 15 pure no-load(TM) AARP Mutual Fund Portfolios that have been
developed to help meet the investment needs of AARP members. The Funds are
organized into five Trusts (see page 62 for more information on the Trusts).
Trusts AARP Mutual Funds
- ------ -----------------
AARP Cash Investment Funds AARP High Quality Money Fund
AARP Income Trust AARP GNMA and U.S. Treasury Fund
AARP High Quality Bond Fund
AARP Bond Fund for Income
AARP Tax Free Income Trust AARP High Quality Tax Free Money Fund AARP
Insured Tax Free General Bond Fund
AARP Growth Trust AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP U.S. Stock Index Fund
AARP Global Growth Fund
AARP Capital Growth Fund
AARP International Stock Fund
AARP Small Company Stock Fund
AARP Managed Investment AARP Diversified Income Portfolio
Portfolios Trust AARP Diversified Growth Portfolio
This combined Prospectus provides information about the AARP Investment
Program from Scudder that a prospective investor should know before investing.
Please keep it for future reference.
The U.S. Government does not and has never insured or guaranteed shares of
any mutual fund, including the AARP Mutual Funds. For limitations on insurance
relative to the AARP Insured Tax Free General Bond Fund, see page 32. The AARP
High Quality Money Fund and the AARP High Quality Tax Free Money Fund each seek
to maintain a constant net asset value of $1.00 per share. The Fund Manager
cannot assure investors that these funds will be able to maintain a stable $1.00
per share or constant net asset value.
You may get more detailed information in the combined Statement of
Additional Information (SAI) dated February 1, 1997, as amended from time to
time. The SAI is considered part of this Prospectus by reference to it. The SAI
is on file with the Securities and Exchange Commission (SEC).
You may get a copy of the SAI or a LARGER PRINT VERSION OF THIS PROSPECTUS
without charge. Call 1-800-253-2277, or write to Scudder Investor Services,
Inc., P.O. Box 2540, Boston, MA 02208-2540.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS COMBINED
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
1
<PAGE>
FUND EXPENSES
Shareholder Transaction Expenses
The AARP Mutual Funds do not charge sales fees or commissions.
100% of your investment goes to work for you.
o No fees to open your account
o No fees to open or maintain an AARP IRA or AARP Keogh Plan account
o No fees to buy shares
o No fees to exchange (move investments from one fund to another)
o No fees to sell (redeem) shares
o No marketing fees or distribution fees (12b-1 fees)
o No fees to reinvest dividends
There are Annual Fund Operating Expenses for each of the AARP Funds. You do not
pay these expenses directly. The AARP Funds pay these expenses before
distributing net investment income to you. These expenses include the management
fee paid to the Fund Manager as well as other expenses for services such as
maintaining shareholder records and furnishing shareholder statements and fund
reports. The expenses are reflected in the AARP Funds' share prices or dividends
and are not directly charged to shareholder accounts.
The following tables present information on the projected costs and expenses of
investing in an AARP Fund. You may use these tables to compare the fees and
expenses of the AARP Funds with other mutual funds.
Annual Fund Operating Expenses are expressed as a percentage of each AARP Fund's
average daily net assets.
The chart shows the expenses for each of the Funds, except for the AARP Bond
Fund for Income, the AARP U.S. Stock Index Fund, the AARP International Stock
Fund, and the AARP Small Company Stock Fund for the fiscal year ended September
30, 1996. For these four Funds, which were introduced on February 1, 1997,
expenses have been estimated for the coming year.
Effective Total Fund
Management Other Operating
Fund Fee Rate+ Expenses Expenses
- ---- --------- -------- --------
AARP High Quality Money Fund .39% .57% .96%
AARP High Quality Tax Free Money .46% .39% .85%
Fund
AARP GNMA and U.S. Treasury Fund .41% .23% .64%
AARP High Quality Bond Fund .48% .43% .91%
AARP Bond Fund for Income 0%* 0%* 0%*
AARP Insured Tax Free General Bond .49% .17% .66%
Fund
AARP Balanced Stock and Bond Fund .48% .40% .88%
AARP Growth and Income Fund .49% .20% .69%
PROSPECTUS
2
<PAGE>
AARP U.S. Stock Index Fund 0%** .50% .50%**
AARP Global Growth Fund .29%*** 1.46% 1.75%***
AARP Capital Growth Fund .62% .28% .90%
AARP International Stock Fund 0%**** 1.75% 1.75%****
AARP Small Company Stock Fund .51%***** 1.24% 1.75%*****
+ The AARP Funds' fee structure is designed to recognize the degree to
which the pooled resources of the Program provide economies in the
management of the AARP Funds. The fee consists of two elements: a
"Base Fee" and an "Individual Fund Fee." The combined Base Fee and
Individual Fund Fee is called the Effective Management Fee Rate. See
page 64 for information on how the Effective Management Fee Rate is
calculated.
* The AARP Bond Fund for Income was introduced on February 1, 1997. Fund
expenses are projected given the asset forecast as of September 30,
1997. Until January 31, 1998, the Fund Manager has agreed to waive its
management fee for AARP Bond Fund for Income to the extent necessary
so that the total annualized expenses of the Fund do not exceed 0% of
average daily net assets. If the Fund Manager had not agreed to waive
its fee, it is estimated that the total annualized expenses of the
Fund would be: investment management fee .57%, other expenses .84% and
total operating expenses 1.41% for the initial fiscal year.
** The AARP U.S. Stock Index Fund was introduced on February 1, 1997.
Fund expenses are projected given the asset forecast as of September
30, 1997. Until January 31, 1998, the Fund Manager has agreed to waive
its management fee for AARP U.S. Stock Index Fund to the extent
necessary so that the total annualized expenses of the Fund do not
exceed .50% of average daily net assets. In addition, the Subadviser
has agreed to waive a portion of its fee for the first 12 months of
management. If the Fund Manager had not agreed to waive its fee, and
the Subadviser had not agreed to waive a portion of its fee, it is
estimated that the total annualized expenses of the Fund would be:
investment management fee .29%, other expenses 1.59% and total
operating expenses 1.88% for the initial fiscal year.
*** Until January 31, 1998, the Fund Manager has agreed to waive a portion
of its management fee for AARP Global Growth Fund to the extent
necessary so that the total annualized expenses of the Fund do not
exceed 1.75% of average daily net assets. If the Fund Manager had not
agreed to waive its fee, it is estimated that the total annualized
expenses of the Fund would be: investment management fee .84%, other
expenses 1.47% and total operating expenses 2.31% for the fiscal year.
**** The AARP International Stock Fund was introduced on February 1, 1997.
Fund expenses are projected given the asset forecast of September 30,
1997. Until January 31, 1998, the Fund Manager has agreed to waive its
management fee for AARP International Stock Fund to the extent
necessary so that the total annualized expenses of the Fund do not
exceed 1.75% of average daily net assets. If the Fund Manager had not
agreed to waive its fee, it is estimated that the total annualized
expenses of the Fund would be: investment management fee .89%, other
expenses 2.44% and total operating expenses 3.33% for the initial
fiscal year.
***** The AARP Small Company Stock Fund was introduced on February 1, 1997.
Fund expenses are projected given the asset forecast of September 30,
1997. Until January 31, 1998, the Fund Manager has agreed to waive a
portion of its management fee for AARP Small Company Stock Fund to the
extent necessary so that the total annualized expenses of the Fund do
not exceed 1.75% of average daily net assets. If the Fund Manager had
not agreed to waive a portion of its fee, it is estimated that the
total annualized expenses of the Fund would be: investment management
fee .84%, other expenses 1.47% and total operating expenses 2.31% for
the initial fiscal year.
Effective Total Fund
Management Other Operating
Managed Investment Portfolios Fee Rate+ Expenses Expenses
----------------------------- --------- -------- --------
AARP Diversified Income Portfolio@ 0% 0% 0%
AARP Diversified Growth Portfolio@ 0% 0% 0%
@ AARP Managed Investment Portfolios are expected to operate at a zero
expense level. However, each Portfolio's shareholders will indirectly
bear that Portfolio's pro rata share of fees and expenses incurred by
the underlying AARP mutual funds in which that Portfolio is invested.
The investment returns of each Portfolio, therefore, will be net of
that Portfolio's share of the expenses of the underlying AARP mutual
funds in which that Portfolio is invested. The chart on pages 2 and 3
shows the expense ratios of each underlying AARP mutual fund after fee
waiver or reimbursement where applicable, as of September 30, 1996.
Based on this information, the range for the average weighted expense
ratio borne by the AARP Diversified Income Portfolio is expected to be
.10% to 1.26%, and .30% to 1.58% for the AARP Diversified Growth
Portfolio. A range is provided since the average assets of each
PROSPECTUS
3
<PAGE>
Portfolio invested in each of the underlying AARP funds will
fluctuate. Using the midpoint of the ratios set forth above, an
example of the expenses of each Portfolio is included in the chart
below.
EXAMPLES OF WHAT FUND EXPENSES WOULD BE ON A $1,000 INVESTMENT IN EACH AARP FUND
Based on the level of assets as of September 30, 1996 (and projected September
30, 1997 assets for the AARP Bond Fund for Income, the AARP U.S. Stock Index
Fund, the AARP International Stock Fund and the AARP Small Company Stock Fund),
we have calculated the forecasted total expenses of a $1,000 investment in each
AARP Fund over specified periods. These examples assume 5% annual return. There
are three other assumptions: (1) redemption at the end of each period, (2)
reinvestment of all dividends and distributions, and (3) total fund operating
expenses noted on page 2 remain the same each year.
For additional information, including reference to a $5.00 wire service fee that
is charged in some cases, please refer to page 71.
Fund 1 Year 3 Years 5 Years 10 Years
- ---- ------ ------- ------- --------
AARP High Quality Money Fund $ 10 $ 31 $ 53 $118
AARP High Quality Tax Free Money 9 27 48 105
Fund
AARP GNMA and U.S. Treasury Fund 7 20 36 80
AARP High Quality Bond Fund 9 29 50 112
AARP Bond Fund for Income 0 0 N/A N/A
AARP Insured Tax Free General Bond 7 21 37 82
Fund
AARP Balanced Stock and Bond Fund 9 28 49 108
AARP Growth and Income Fund 7 22 38 86
AARP U.S. Stock Index Fund 5 16 N/A N/A
AARP Global Growth Fund 18 55 95 206
AARP Capital Growth Fund 9 29 50 111
AARP International Stock Fund 18 55 N/A N/A
AARP Small Company Stock Fund 18 55 N/A N/A
AARP Diversified Income Portfolio 7 22 N/A N/A
AARP Diversified Growth Portfolio 10 30 N/A N/A
You should not consider these examples as representations of past or future
expenses or returns. Actual fund expenses may be higher or lower in the future.
PROSPECTUS
4
<PAGE>
FINANCIAL HIGHLIGHTS
On the next nine pages you will find a variety of information about the income
and the expenses of each AARP Fund, except for AARP Bond Fund for Income, AARP
U.S. Stock Index Fund, AARP International Stock Fund, AARP Small Company Stock
Fund, AARP Diversified Income Portfolio, and AARP Diversified Growth Portfolio,
which are newly organized. You will also find the following: (1) the net gain or
loss on the investments, (2) the distributions, if any, of income and gain, and,
(3) the change in net asset value per share from the beginning to the end of the
stated periods. Price Waterhouse LLP, the AARP Funds' independent accountants,
have examined this information. The Annual Report to Shareholders includes their
report.
For a copy, free of charge, of the Annual Report to Shareholders dated September
30, 1996 which includes more detailed information concerning the Funds'
performance, complete portfolio listings and audited financial statements,
please contact an AARP Mutual Fund Representative at 1-800-253-2277.
PROSPECTUS
5
<PAGE>
<TABLE>
<CAPTION>
AARP High Quality Money Fund For the Years Ended September 30
-------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period .. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------------------------------------------------------------------------------------------------------------
Net
Investment
Income ..... .045 .049 .028 .021 .040 .060 .073 .080 .060 .050
Distributions
from Net
Investment
Income ..... (.045) (.049) (.028) (.021) (.040)(a) (.060) (.073) (.080) (.060) (.050)
-------------------------------------------------------------------------------------------------------------
Net Asset
Value at
End of
Period ..... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------------------------------------------------------------------------------------------------------------
Total Return
% (b) ...... 4.62 4.99 2.84 2.13 4.12 6.22 7.58 8.32 6.15 5.13
Net Assets
End of
Period
($ millions) 412 384 333 254 323 357 376 324 224 178
Ratio of
Operating
Expenses
Net to
Average Net
Assets % ... .963 .978 1.125 1.312 1.151 1.053 1.058 1.071 1.097 1.160
Ratio of
Operating
Expenses
Before
Expense
Reductions
to
Average Net
Assets % ... .963 .978 1.125 1.312 1.190 1.132 1.169 1.181 1.178 1.593
Ratio of Net
Investment
Income to
Average Net
Assets % ... 4.535 4.887 2.889 2.123 3.613 6.050 7.319 8.061 6.025 5.090
<FN>
(a) Includes approximately $.005 per share of net realized short-term capita gains.
(b) Total returns would have been lower had certain expenses not been reduced.
</FN>
</TABLE>
PROSPECTUS
6
<PAGE>
<TABLE>
<CAPTION>
AARP High Quality Tax Free Money Fund For the Years Ended September 30
----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning of
Period ...... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ .996 $ .998 $ 1.008 $ .998 $ 1.027
----------------------------------------------------------------------------------------------------------
Net
Investment
Income ...... .028 .029 .017 .016 .026 .055 .061 .059 .055 .049
Net Realized
& Unrealized
Investment
Gain (Loss) . -- -- -- -- -- .004 (.002) (.010) .010 (.026)
Distributions
from Net
Investment
Income ...... (.028) (.029) (.017) (.016) (.026) (.055) (.061) (.059) (.055) (.049)
Distributions
from Net
Realized
Gains ....... -- -- -- -- -- -- -- -- -- (.003)
----------------------------------------------------------------------------------------------------------
Total
Distributions (.028) (.029) (.017) (.016) (.026) (.055) (.061) (.059) (.055) (.052)
----------------------------------------------------------------------------------------------------------
Net Asset
Value at End
of Period ... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ .996 $ .998 $ 1.008 $ .998
----------------------------------------------------------------------------------------------------------
Total Return %
(a) ......... 2.80 2.99 1.76 1.62 2.58 6.10 6.02 4.98 6.65 2.25
Net Assets
End of
Period
($ millions) 111 120 129 134 127 119 98 90 79 70
Ratio of
Operating
Expenses
Net to
Average Net
Assets % .... .85 .87 .90 .93 .95 1.06 1.12 1.17 1.27 1.31
Ratio of
Operating
Expenses
Before
Expense
Reductions
to Average
Net Assets % .85 .87 .91 1.15 1.13 1.13 1.12 1.17 1.30 1.35
Ratio of Net
Investment
Income to
Average Net
Assets % .... 2.77 2.94 1.75 1.60 2.54 5.43 6.06 5.85 5.47 4.80
Portfolio
Turnover
Rate % ...... -- -- -- -- -- -- 39.88 21.28 62.73 22.20
<FN>
(a) Total returns would have been lower had certain expenses not been reduced.
</FN>
</TABLE>
PROSPECTUS
7
<PAGE>
<TABLE>
<CAPTION>
AARP GNMA and U.S. Treasury Fund For the Years Ended September 30
-----------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period ... $ 15.19 $ 14.73 $ 15.96 $ 16.19 $ 15.72 $ 14.95 $ 14.98 $ 15.11 $ 14.89 $ 15.99
----------------------------------------------------------------------------------------------------------
Net
Investment
Income ...... .99 1.01 .93 1.15 1.22 1.26 1.31 1.31 1.37 1.35
Net
Realized
& Unrealized
Investment
Gain (Loss) . (.28) .46 (1.23) (.23) .47 .77 (.03) (.13) .22 (1.09)
----------------------------------------------------------------------------------------------------------
Total from
Investment
Operations .. .71 1.47 (.30) .92 1.69 2.03 1.28 1.18 1.59 .26
----------------------------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income ...... (.99) (.98) (.93) (1.15) (1.22) (1.26) (1.31) (1.31) (1.37) (1.35)
Distributions
from Net
Realized
Gains ....... -- -- -- -- -- -- -- -- -- (.01)
Distributions
from
Capital ..... -- (.03) -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Total
Distributions (.99) (1.01) (.93) (1.15) (1.22) (1.26) (1.31) (1.31) (1.37) (1.36)
----------------------------------------------------------------------------------------------------------
Net Asset
Value at
End of
Period ...... $ 14.91 $ 15.19 $ 14.73 $ 15.96 $ 16.19 $ 15.72 $ 14.95 $ 14.98 $ 15.11 $ 14.89
----------------------------------------------------------------------------------------------------------
Total
Return % .... 4.79 10.31 (1.90) 5.89 11.19 14.12 8.86 8.17 11.07 1.54
Net Assets
End of
Period
($ millions) 4,904 5,252 5,585 6,712 5,232 3,311 2,583 2,518 2,837 2,827
Ratio of
Operating
Expenses
to
Average Net
Assets % .... .64 .67 .66 .70 .72 .74 .79 .79 .81 .88
Ratio of
Net
Investment
Income to
Average Net
Assets % .... 6.55 6.77 6.09 7.15 7.69 8.23 8.71 8.76 9.09 8.76
Portfolio
Turnover
Rate % ...... 83.44 70.35 114.54 105.49 74.33 86.64 60.54 48.35 84.72 50.68
</TABLE>
PROSPECTUS
8
<PAGE>
<TABLE>
<CAPTION>
AARP High Quality Bond Fund For the Years Ended September 30
------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period ... $ 16.01 $ 15.05 $ 17.19 $ 16.44 $ 15.71 $ 14.63 $ 15.04 $ 14.80 $ 14.45 $ 15.87
----------------------------------------------------------------------------------------------------------
Net Investment
Income ...... .92 .94 .85 .93 1.03 1.10 1.17 1.23 1.27 1.22
Net Realized
& Unrealized
Investment
Gain (Loss) . (.19) .95 (1.76) .93 .73 1.08 (.41) .24 .46 (1.19)
----------------------------------------------------------------------------------------------------------
Total from
Investment
Operations .. .73 1.89 (.91) 1.86 1.76 2.18 .76 1.47 1.73 .03
----------------------------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income ...... (.92) (.93) (.85) (.93) (1.03) (1.10) (1.17) (1.23) (1.27) (1.22)
Distributions
from Net
Realized
Gains ....... -- -- -- (.18) -- -- -- -- (.05) (.23)
Distributions
from Paid
In Capital .. -- -- -- -- -- -- -- -- (.06) --
Distributions
in Excess
of Net
Realized
Gains ....... -- -- (.38) -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Total
Distributions (.92) (.93) (1.23) (1.11) (1.03) (1.10) (1.17) (1.23) (1.38) (1.45)
----------------------------------------------------------------------------------------------------------
Net Asset
Value at
End of
Period ...... $ 15.82 $ 16.01 $ 15.05 $ 17.19 $ 16.44 $ 15.71 $ 14.63 $ 15.04 $ 14.80 $ 14.45
----------------------------------------------------------------------------------------------------------
Total Return
% (a) ....... 4.59 12.98 (5.55) 11.88 11.56 15.44 5.21 10.38 12.38 (.09)
Net Assets
End of
Period
($ millions) 512 533 568 604 384 201 151 129 123 108
Ratio of
Operating
Expenses to
Average Net
Assets % .... .91 .95 .95 1.01 1.13 1.17 1.14 1.16 1.17 1.18
Ratio of
Operating
Expenses
Before
Expense
Reductions
to Average
Net Assets % .91 .95 .95 1.01 1.13 1.17 1.20 1.21 1.20 1.40
Ratio of Net
Investment
Income to
Average Net
Assets % .... 5.76 6.13 5.31 5.64 6.40 7.26 7.86 8.33 8.55 7.81
Portfolio
Turnover
Rate % ...... 169.96 201.07 63.75 100.98 63.00 90.43 47.39 57.69 23.57 192.80
<FN>
(a) Total returns would have been lower had certain expenses not been reduced.
</FN>
</TABLE>
PROSPECTUS
9
<PAGE>
<TABLE>
<CAPTION>
AARP Insured Tax Free General Bond Fund For the Years Ended September 30
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period ... $ 17.74 $ 16.93 $ 19.00 $ 17.88 $ 17.30 $ 16.12 $ 16.61 $ 16.02 $ 15.00 $ 16.69
----------------------------------------------------------------------------------------------------------
Net Investment
Income ...... .87 .87 .86 .90 .93 1.00 1.04 1.08 1.08 1.07
Net Realized
& Unrealized
Investment
Gain (Loss) . .16 .81 (1.67) 1.55 .75 1.18 (.24) .59 1.02 (1.49)
----------------------------------------------------------------------------------------------------------
Total from
Investment
Operations .. 1.03 1.68 (.81) 2.45 1.68 2.18 .80 1.67 2.10 (.42)
----------------------------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income ...... (.87) (.87) (.86) (.90) (.93) (1.00) (1.04) (1.08) (1.08) (1.07)
Distributions
in Excess
of Net
Realized
Gains ....... -- -- (.34) (.43) (.17) -- (.25) -- -- (.20)
Distributions
from Tax
Return of
Capital ..... -- -- (.06) -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Total
Distributions (.87) (.87) (1.26) (1.33) (1.10) (1.00) (1.29) (1.08) (1.08) (1.27)
----------------------------------------------------------------------------------------------------------
Net Asset
Value at
End of
Period ...... $ 17.90 $ 17.74 $ 16.93 $ 19.00 $ 17.88 $ 17.30 $ 16.12 $ 16.61 $ 16.02 $ 15.00
----------------------------------------------------------------------------------------------------------
Total Return
% ........... 5.88 10.21 (4.48) 14.31 10.01 13.85 4.89 10.66 14.39 (2.94)
Net Assets
End of
Period
($ millions) 1,755 1,807 1,914 2,087 1,487 1,068 771 527 312 238
Ratio of
Operating
Expenses to
Average Net
Assets % .... .66 .69 .68 .72 .74 .77 .80 .84 .92 1.00
Ratio of Net
Investment
Income to
Average Net
Assets % .... 4.83 5.06 4.80 4.90 5.31 5.92 6.29 6.52 6.95 6.58
Portfolio
Turnover
Rate % ...... 18.69 17.45 38.39 47.96 62.45 32.18 48.24 148.94 163.51 135.32
</TABLE>
PROSPECTUS
10
<PAGE>
<TABLE>
<CAPTION>
AARP Balanced Stock and Bond Fund For the Years Ended September 30
------------------------------------------------------------------
1996 1995 1994(a)
------- ------- -------
<S> <C> <C> <C>
Net Asset Value at Beginning of Period ............... $ 16.40 $ 14.64 $ 15.00
---------------------------------
Net Investment Income ................................ .66 .61 .25
Net Realized & Unrealized Investment Gain (Loss) ..... 1.44 1.79 (.37)(b)
---------------------------------
Total from Investment Operations ..................... 2.10 2.40 (.12)
---------------------------------
Distributions from Net Investment Income ............. (.66) (.60) (.24)
Distributions from Net Realized Gains ................ (.21) (.04) --
Total Distributions .................................. (.87) (.64) (.24)
---------------------------------
Net Asset Value at End of Period ..................... $ 17.63 $ 16.40 $ 14.64
---------------------------------
Total Return % ....................................... 13.08 16.80 (.78)(d)
Net Assets End of Period ($ millions) ................ 403 247 175
Ratio of Operating Expenses to Average Net Assets % .. .88 1.01 1.31(e)
Ratio of Net Investment Income to Average Net Assets % 4.09 4.12 3.58(e)
Portfolio Turnover Rate % ............................ 35.22 63.77 49.32(e)
Average Commission Rate Paid (c) ..................... $ .0549 -- --
<FN>
(a) For the period February 1, 1994, commencement of operations.
(b) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and repurchases
of Fund shares in relation to fluctuating market values during the period.
(c) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after September 1, 1995.
(d) Not annualized.
(e) Annualized.
</FN>
</TABLE>
PROSPECTUS
11
<PAGE>
<TABLE>
<CAPTION>
AARP Growth and Income Fund For the Years Ended September 30
------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning of
Period ....... $ 38.36 $ 34.13 $ 32.91 $ 28.67 $ 26.97 $ 22.30 $ 26.11 $ 20.94 $ 25.54 $ 20.88
----------------------------------------------------------------------------------------------------------
Net Investment
Income ....... 1.17 1.11 .94 .83 .97 1.11 1.11 1.01 1.04 .67
Net Realized
& Unrealized
Investment
Gain (Loss) .. 6.40 5.44 1.62 4.58 2.11 4.78 (3.69) 5.20 (3.93) 5.51
----------------------------------------------------------------------------------------------------------
Total from
Investment
Operations ... 7.57 6.55 2.56 5.41 3.08 5.89 (2.58) 6.21 (2.89) 6.18
----------------------------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income ....... (1.15) (1.09) (1.13) (.87) (.90) (1.17) (1.15) (1.04) (.94) (.64)
Distributions
from Net
Realized
Gains ........ (.84) (1.23) (.21) (.30) (.48) (.05) (.08) -- (.77) (.88)
----------------------------------------------------------------------------------------------------------
Total
Distributions (1.99) (2.32) (1.34) (1.17) (1.38) (1.22) (1.23) (1.04) (1.71) (1.52)
----------------------------------------------------------------------------------------------------------
Net Asset
Value at End
of Period .... $ 43.94 $ 38.36 $ 34.13 $ 32.91 $ 28.67 $ 26.97 $ 22.30 $ 26.11 $ 20.94 $ 25.54
----------------------------------------------------------------------------------------------------------
Total Return %
(b) .......... 20.20 20.43 7.99 19.38 11.59 27.19 (10.19) 30.58 (10.75) 30.92
Net Assets
End of
Period
($ millions) . 4,219 3,007 2,312 1,560 748 392 248 236 228 358
Ratio of
Operating
Expenses to
Average Net
Assets % ..... .69 .72 .76 .84 .91 .96 1.03 1.04 1.06 1.08
Ratio of
Operating
Expense
Before Expense
Reductions
to Average
Net Assets % . .69 .72 .76 .84 .91 .96 1.03 1.04 1.06 1.12
Ratio of Net
Investment
Income to
Average Net
Assets % ..... 2.94 3.28 3.00 3.08 3.84 4.61 4.76 4.19 4.52 3.81
Portfolio
Turnover
Rate % ....... 25.02 31.26 31.82 17.44 36.40 53.68 58.47 55.21 61.34 43.25
Average
Commission
Paid Rate (a) $ .0542 -- -- -- -- -- -- -- -- --
<FN>
(a) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after September 1, 1995.
(b) Total returns would have been lower had certain expenses not been reduced.
</FN>
</TABLE>
PROSPECTUS
12
<PAGE>
AARP Global Growth Fund
For the period
February 1, 1996
(commencement of
operations) to
September 30,1996
-----------------
Net Asset Value at Beginning of Period ...................... $ 15.00
--------
Net Investment Income ....................................... .06
Net Realized & Unrealized Investment Gain (Loss) ............ .43
--------
Total from Investment Operations ............................ .49
--------
Net Asset Value at End of Period ............................ $ 15.49
--------
Total Return % (a) .......................................... 3.27 (c)
Net Assets End of Period ($ millions) ....................... 78
Ratio of Operating Expenses to Average Net Assets % ......... 1.7(d)
Ratio of Operating Expenses to Average Net Assets Before
Expense Reductions% ........................................ 2.31(d)
Ratio of Net Investment Income to Average Net Assets % ...... 1.03(d)
Portfolio Turnover Rate % ................................... 12.56(d)
Average Commission Rate Paid (b) ............................ $ .0150
(a) Total returns would have been lower had certain expenses not been reduced.
(b) Average commission rate paid per share is calculated for fiscal years
beginning on or after September 1, 1995.
(c) Not Annualized.
(d) Annualized.
PROSPECTUS
13
<PAGE>
<TABLE>
<CAPTION>
AARP Capital Growth Fund For the Years Ended September 30
---------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period ... $ 38.36 $ 31.74 $ 36.20 $ 30.30 $ 30.23 $ 23.32 $ 34.17 $ 23.88 $ 27.55 $ 21.13
----------------------------------------------------------------------------------------------------------
Net Investment
Income ...... .42 .36 .00 .06 .15 .24 .54(b) .21 .10 .11
Net Realized
& Unrealized
Investment
Gain (Loss) . 5.59 6.91 (1.51) 7.19 1.09 9.05 (9.27) 10.17 (1.97) 7.40
----------------------------------------------------------------------------------------------------------
Total from
Investment
Operations .. 6.01 7.27 (1.51) 7.25 1.24 9.29 (8.73) 10.38 (1.87) 7.51
----------------------------------------------------------------------------------------------------------
Distributions
from Net
Investment
Income ...... (.39) (.01) (.05) (.14) (.23) (.59) (.19) (.09) (.15) (.19)
Distributions
from Net
Realized
Gains ....... (.51) (.64) (2.90) (1.21) (.94) (1.79) (1.93) -- (1.65) (.90)
----------------------------------------------------------------------------------------------------------
Total
Distributions (.90) (.65) (2.95) (1.35) (1.17) (2.38) (2.12) (.09) (1.80) (1.09)
----------------------------------------------------------------------------------------------------------
Net Asset Value
at End of
Period ...... $ 43.47 $ 38.36 $ 31.74 $ 36.20 $ 30.30 $ 30.23 $ 23.32 $ 34.17 $ 23.88 $ 27.55
----------------------------------------------------------------------------------------------------------
Total Return
% (c) ....... 15.97 23.47 (4.70) 24.53 3.94 42.81 (26.94) 43.62 (5.44) 37.02
Net Assets
End of
Period ($
millions) ... 826 692 683 607 424 242 160 180 91 116
Ratio of
Operating
Expenses to
Average Net
Assets % .... .90 .95 .97 1.05 1.13 1.17 1.11 1.16 1.23 1.24
Ratio of
Operating
Expenses
Before
Expense
Reductions
to Average
Net Assets % .90 .95 .97 1.05 1.13 1.17 1.14 1.16 1.40 1.38
Ratio of Net
Investment
Income to
Average Net
Assets % .... 1.05 1.00 .02 .22 .61 .90 2.00 .89 .37 .62
Portfolio
Turnover
Rate % ...... 64.84 98.44 79.65 100.63 89.20 99.62 83.28 63.51 45.37 53.61
Average
Commission
Rate Paid
(a) ......... $ .0614 -- -- -- -- -- -- -- -- --
<FN>
(a) Average commission rate paid per share is calculated for fiscal years
beginning on or after September 1, 1995.
(b) Net Investment Income per share includes a non-recurring dividend amounting
to $.18 per share.
(c) Total return would have been lower had certain expenses not been reduced.
</FN>
</TABLE>
PROSPECTUS
14
<PAGE>
AN OVERVIEW OF THE AARP INVESTMENT PROGRAM
AARP is a nonprofit organization dedicated to addressing the needs and interests
of persons aged 50 and older. It seeks through education, advocacy, and service
to enhance the quality of life for all by promoting independence, dignity, and
purpose. In the early 1980s, research conducted by AARP indicated that many
members were not taking steps to invest adequately for their future. To
encourage members to plan for their retirement and beyond, AARP decided to make
available a family of mutual funds. The family of funds would provide members
with a limited number of distinct investment choices that were managed by an
experienced investment adviser. AARP sought an investment management firm to
develop and manage the funds. After interviewing a number of investment
managers, AARP selected Scudder, Stevens & Clark, Inc., who will be referred to
in this prospectus as Scudder or the Fund Manager.
Who is Scudder, Stevens & Clark?
Scudder, Stevens & Clark is America's oldest independent investment counsel
firm. Its founder, Theodore T. Scudder, established the profession of long-term,
fee-based investment counsel in 1919 at a time when investment firms were
focused on short-term, commission-based trading. In the more than 75 years that
have passed since then, Scudder has grown to be one of America's largest
independent investment managers. Today, Scudder manages more than $100 billion
in assets for clients around the world. Scudder manages corporate funds, pension
plans, and endowments for institutions, and provides an array of investment
products and services for individual clients and other investors. These include
the Scudder Funds, a family of no-load mutual funds; a no-load variable annuity;
401(k) Plans; and several closed-end funds.
Scudder brings decades of experience and innovation to mutual fund investing. In
1928, Scudder offered America's first no-load mutual fund. Over 40 years ago,
Scudder was the first company to offer an international mutual fund to U.S.
investors. In 1984, Scudder was selected by AARP to develop and manage the AARP
Mutual Funds.
What are the roles of AARP and Scudder?
The AARP Investment Program from Scudder was established in accordance with
criteria set by AARP. Specifically, these criteria include providing members
with competitive investment performance, allowing easy access to investments,
offering easy-to-understand information concerning investing, and delivering
superior service. Fulfilling this mandate is the mission of AARP and Scudder.
Both organizations work closely to ensure these criteria are met. Scudder
provides investment management and administrative services for the AARP Funds
and brings to the Program more than 75 years of investment counseling and
management experience. AARP provides insight into the diversity and changing
character of AARP members. Association staff closely monitor Program services
and review all Program materials to ensure conformity to AARP's high standards.
Members of AARP leadership also serve as Trustees for the AARP Funds.
PROSPECTUS
15
<PAGE>
WHAT DOES THE AARP INVESTMENT PROGRAM OFFER?
The Program was created to address the investment concerns of AARP members and
to help you make informed investment decisions. It features several benefits
that may make investing advantageous and give you greater confidence that you've
made decisions appropriate for your needs:
o A Unique Family of Funds: The Program offers a range of mutual funds which
recognize the needs of AARP members. Each of the AARP Funds is
conservatively managed, seeking to moderate share price volatility, while
seeking competitive returns. This makes the AARP Funds distinct from other
mutual funds, which may seek higher returns but do not focus on reducing
share price volatility.
o No Sales Fees or Commissions: Unlike most other mutual funds, the AARP
Funds are pure no-load, so you don't pay any sales fees or commissions to
purchase, exchange or sell (redeem) shares. In addition, the Funds do not
charge 12b-1 fees, which are a form of a sales charge that covers marketing
and distribution expenses.
o No Fees to open and maintain an AARP IRA or AARP Keogh Plan account: You'll
pay no separate fees to open or maintain your retirement plan account. All
your money goes to work for your retirement.
o Low initial investment: Open an account for just $500 for AARP GNMA and
U.S. Treasury Fund, AARP Balanced Stock and Bond Fund and AARP Growth and
Income Fund, and for $2000 for all other AARP Mutual Funds. You can open an
AARP IRA or AARP UGMA/UTMA with an initial investment of only $250 per fund
account. So it's easy to get started. See page 67 of this prospectus for
more information on minimum investments.
o Professional investment management by Scudder, Stevens & Clark: Scudder
brings over 75 years of investment management experience to the AARP Funds.
o Responsive Service from AARP Mutual Fund Representatives: Our knowledgeable
representatives are ready to answer your questions, initiate transactions
or help you select the AARP Fund which meets your needs--call them
toll-free Monday through Friday, from 8 a.m. to 8 p.m. Eastern time.
o Access to your investment when you need it: You'll be able to redeem your
investment at no charge by simply calling toll-free or writing--your
investment is not locked in. See page 71 of this prospectus for more
information.
You'll also benefit from:
o Informative Communications, such as newsletters and free guides;
o Consolidated Monthly Statements or Quarterly AARP IRA or AARP Keogh Plan
Statements;
o Prompt transaction confirmations;
o Special Services designed to make investing simple and convenient; and
o AARP's commitment to represent your interests.
WHAT DO THE AARP MUTUAL FUNDS OFFER?
The 15 AARP Mutual Funds offer members a choice of conservatively managed
investments which vary in the potential returns and risk they offer. The Funds
PROSPECTUS
16
<PAGE>
address four major investment needs: stability of principal, income, tax-free
income and growth. Each of the AARP Mutual Funds is managed to offer you returns
competitive with comparable funds or securities. In addition, each AARP Fund
follows a conservative investment approach which seeks to moderate share price
volatility relative to funds investing in these same markets or asset classes,
so you can feel confident when you invest. The AARP Funds are managed with the
needs of AARP investors always in mind. Other mutual funds not designed and
managed for AARP investors may have higher share price volatility and have
higher returns. None of the AARP Funds invest in securities issued by companies
whose primary business involves tobacco products.
While the AARP Funds are conservatively managed, it is important to realize that
your principal is never insured or guaranteed, and the value of your investment
and your return will move up and down as market conditions change. The share
price of a mutual fund, other than a money market fund, typically moves up and
down on a day-to-day basis. Share price volatility reflects the level of
fluctuation in the value of a Fund's shares over relatively short time periods.
A mutual fund that experiences large changes in its share price on a daily basis
would be considered to have high share price volatility. The AARP Funds will be
managed to seek to reduce share price volatility as compared to other mutual
funds or securities described in a Fund's investment objective and policies.
This does not mean a Fund's share price will not be affected by market forces,
such as shifts in the stock market, interest rates or foreign currencies. The
result will be upward or downward movements in the Fund's share price. For more
details on each AARP Fund, please read the "Investment Objectives and Policies"
section on page 19.
Information on each AARP Fund is included in this Prospectus, focusing on how
the AARP Funds differ in their potential return and risk. Before investing, you
should determine your investment objectives and time horizons. This will help
you decide which of the AARP Funds fits your needs.
The following is a brief summary of the investment needs the AARP Funds seek to
meet. The nature of each Fund will affect the length of time you should plan to
invest.
If you are investing for stability of principal and income:
Consider the AARP High Quality Money Fund or the AARP High Quality Tax Free
Money Fund. Each provides opportunities to meet short-term needs (1 year or
less) while providing a modest level of income. Both seek to provide
stability of principal through a constant $1.00 share price, although this
may not always be achieved. The AARP Money Funds invest in short-term
securities whose yields tend to follow changes in short-term interest
rates. If short-term interest rates rise or fall dramatically, so could the
yields of the AARP Money Funds in relatively short periods of time. Keep in
mind the income paid by the AARP High Quality Money Fund is taxable,
whereas the income paid by the AARP High Quality Tax Free Money Fund is
normally free from federal income taxes.
PROSPECTUS
17
<PAGE>
If you are investing for the longer term and are interested in monthly
income:
Consider the AARP GNMA and U.S. Treasury Fund, the AARP High Quality Bond
Fund, the AARP Bond Fund for Income, the AARP Insured Tax Free General Bond
Fund or the AARP Diversified Income Portfolio. When you choose one of these
conservatively managed funds, remember that both the value of shares and
the yield will change daily, generally in reaction to shifting interest
rates. In most cases, as interest rates rise, the value of investments in
these Funds tends to fall. As interest rates fall, the value of investments
in these Funds tends to rise. Investing in these Funds offers the
opportunity for gain through the monthly income that the Funds seek to
provide, and also by possible growth in the value of shares. While each of
these Funds is managed to moderate share price volatility, the value of
your investment can decline. That's why you should be prepared to tolerate
fluctuation in both the value of your investment and the income you earn
and to invest for the longer term (3 to 5 years or more for the AARP
Diversified Income Portfolio, 3 years or more for the other funds listed
above).
If you are investing for the long term and you are interested in growth:
Consider the AARP Balanced Stock and Bond Fund, the AARP Growth and Income
Fund, the AARP U.S. Stock Index Fund, the AARP Global Growth Fund, the AARP
Capital Growth Fund, the AARP International Stock Fund, the AARP Small
Company Stock Fund or the AARP Diversified Growth Portfolio. When you
invest in one of these Funds, remember that any investment in stocks
involves risk and that the value of your shares will fluctuate daily. The
share price of these AARP Funds will tend to rise when the stock market
rises and decline when the stock market declines. Investing in these Funds
offers the opportunity for gain through potential appreciation in the value
of your investment as well as from any income that the investment earns.
While each of these Funds is managed to moderate share price volatility,
the value of your investment can decline. That's why you should consider
your investment as one that you can afford to let work for you over
time--generally for a period of 3 to 5 years or more for the AARP Balanced
Stock and Bond Fund and 5 years or more for the other equity funds listed
above.
How is my investment managed?
The AARP Mutual Funds are managed to seek competitive returns and to moderate
share price volatility. Each of the AARP Mutual Funds is managed by a team of
investment professionals at Scudder. Professional portfolio managers develop
investment strategies and select securities for each AARP Fund's portfolio. They
are supported by Scudder's dedicated staff of economists, research analysts,
traders, and other investment specialists who work in offices across the United
States and abroad. At Scudder, there has always been a strong partnership
between research analysts and portfolio managers. Scudder's large staff of
independent researchers help the portfolio managers assess economic and industry
trends and security valuations as they make investment decisions. Generally, the
portfolio managers do not take a short-term approach to investing. Instead, they
PROSPECTUS
18
<PAGE>
seek to add value over the long term, carefully selecting investments they
believe have superior potential for achieving each Fund's objectives.
INVESTMENT OBJECTIVES AND POLICIES
The following pages provide detail on the investment objectives and policies of
the AARP Mutual Funds. Included are each Fund's objectives, whom it is designed
for, what it offers investors, what it can invest in, the risks involved, when
distributions are paid and who at Scudder manages the Fund. As with any
investment, there is no guarantee that the AARP Funds will successfully meet
their investment objectives. Be sure to read the section titled "Other
Investment Policies and Risk Factors" on page 54.
The Trustees can modify a Fund's objectives without the approval of a majority
of that Fund's shareholders. If there is a change in investment objective,
shareholders should consider whether the Fund is still an appropriate investment
for their situation.
AARP HIGH QUALITY MONEY FUND
Fund Objective:
From investments in high quality securities, the Fund is designed to
provide current income. The Fund also seeks to maintain stability and
safety of principal while offering liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share. There may be circumstances
under which this goal cannot be achieved.
For whom is the Fund designed?
The Fund may be appropriate for investors with short-term needs or who do
not want the risk of investing in stocks or bonds. These include:
o Investors creating a diversified portfolio who want a portion of their
assets in an investment designed to offer safety and stability.
o Investors seeking a short-term investment prior to making longer-term
investment choices.
o Investors seeking money market income to meet regular needs.
o Investors who need immediate access to their money through free
checkwriting.
The Fund is also available for AARP IRA and other retirement plan accounts.
What does the Fund offer to investors?
The Fund is designed to offer current income, while maintaining stability
and safety of principal. In addition, it provides a convenient way to
easily access your money through free checkwriting.
What does the Fund invest in?
The Fund invests in high quality short-term securities. These securities
will have remaining maturities of 397 calendar days or less, except for
U.S. Government securities, which may have maturities up to 762 calendar
PROSPECTUS
19
<PAGE>
days. The average dollar-weighted maturity of the Fund's investments is 90
days or less. All of the securities purchased are U.S. dollar-denominated.
Amendments have been proposed to the federal rules regulating quality,
maturity and diversification requirements of money market funds, like the
Fund. If the amendments are adopted the Fund intends to comply with such
new requirements.
These money market securities consist 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.
All of the securities that the Fund purchases, or that underlie its
repurchase agreements, are considered to be high quality. Generally, the
Fund may purchase only securities rated, or issued by an entity with
comparable securities rated, within the two highest quality rating
categories of one or more rating agencies such as: Moody's Investors
Service, Inc. (Moody's), Standard & Poor's (S&P), and Fitch Investors
Service, Inc. (Fitch). Securities rated by only one agency may be purchased
if the rating falls within the categories above. Unrated securities may be
purchased if the Fund Manager judges them to be comparable in quality to
securities described above. Generally, the Fund will invest in securities
rated in the highest quality rating by at least two of these rating
agencies. If a security ceases to be rated or is reduced below the Fund's
standards, it will be sold unless the Trustees determine that disposing of
the security would not be in the best interests of the Fund.
The Fund has certain nonfundamental policies designed to maintain
diversification. These policies may be changed without shareholder
approval. The amount of total assets of the Fund that may be invested in
the securities of a single issuer is limited in accordance with federal
law.
What are the risks?
The risk to your principal is low, since the Fund seeks to maintain a
stable share price of $1.00. While the Fund has maintained a stable share
price since it began in June 1985, there may be situations under which this
goal cannot be achieved. The level of income you receive will be affected
by movements up and down in short-term interest rates. By investing
generally in highest-quality securities, the Fund may offer less income
PROSPECTUS
20
<PAGE>
than a money market fund investing in other high-quality money market
securities. See "Other Investment Policies and Risk Factors" on page 54.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors.
Generally, net realized capital gain or loss is included in the daily
declaration of income. See page 61 for additional information on
distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager David Wines assumed responsibility for setting the
Fund's investment strategy and for overseeing the Fund's day-to-day
management in February 1997. Mr. Wines has eight years of investment
industry experience and joined Scudder in 1996. Stephen L. Akers, Portfolio
Manager, focuses on securities selection and assists with the creation and
implementation of investment strategy for the Fund. Mr. Akers has been a
member of the AARP High Quality Money Fund team since 1995 and has managed
several other fixed-income portfolios since joining Scudder in 1984. Debra
A. Hanson, Portfolio Manager, assists with the development and execution of
investment strategy and has been with Scudder since 1983. K. Sue Cote,
Portfolio Manager, joined Scudder in 1983 and has 13 years of experience in
the investment industry.
AARP HIGH QUALITY TAX FREE MONEY FUND
Fund Objective:
From investments in high quality municipal securities, the Fund is designed
to provide current income free from federal income taxes. The Fund also
seeks to maintain stability and safety of principal, while offering
liquidity. The Fund seeks to maintain a constant net asset value of $1.00
per share. There may be circumstances under which this goal cannot be
achieved.
For whom is the Fund designed?
The Fund may be appropriate for investors in high tax brackets who have
short-term investment needs or who do not want the risk of investing in
stocks or bonds. These include:
o Investors creating a diversified portfolio who want a portion of their
assets in an investment designed to offer safety and stability.
o Investors seeking a short-term investment prior to making longer-term
investment choices.
PROSPECTUS
21
<PAGE>
o Investors seeking tax free money market income to meet regular
day-to-day expenses.
o Investors who need immediate access to their money through free
checkwriting.
This Fund is not available for AARP IRA or other retirement plan accounts.
What does the Fund offer to investors?
The Fund is designed to offer current income free from federal income tax,
while providing stability and safety of principal. Depending on your tax
bracket, the after-tax income from the Fund may be higher than from a
taxable investment of comparable quality and risk. In addition, it provides
a convenient way to easily access your money through checkwriting.
What does the Fund invest in?
The Fund invests in high-quality, short-term municipal securities. These
securities will have remaining maturities of 397 calendar days or less. The
average dollar-weighted maturity of its investments is 90 days or less.
These municipal securities may include obligations issued by or on behalf
of states, territories and possessions of the United States and the
District of Columbia. Interest from these securities is, in the opinion of
the issuer's bond counsel, exempt from federal income taxes. The Fund has
no current intention to invest in securities whose income is subject to
federal income tax, including the individual alternative minimum tax (AMT).
Amendments have been proposed to the federal rules regulating quality,
maturity and diversification requirements of money market funds, like the
Fund. If the amendments are adopted the Fund intends to comply with such
new requirements.
Municipal securities may include municipal notes such as tax anticipation
notes, revenue anticipation notes, bond anticipation notes and construction
loan notes; municipal bonds, which include general obligation bonds secured
by the issuer's pledge of its faith, credit and taxing power for payment of
principal and interest; and revenue bonds (including private activity
bonds), which are generally paid from the revenues of a particular
facility, a specific excise tax, or other source. The Fund's municipal
investments may also include participation interests in bank holdings of
municipal securities, municipal lease obligations, securities with variable
or floating interest rates, demand obligations, and tax-exempt commercial
paper. The Fund may also purchase securities on a "when-issued" or "forward
delivery" basis, and may enter into stand-by commitments, which are
securities that may be sold back to the seller at the Fund's option.
All of the securities that the Fund purchases, or that underlie its
repurchase agreements, are considered to be high quality. These securities
are generally rated or issued by an issuer rated within the two highest
quality ratings of two or more rating agencies such as: Moody's (Aaa and
Aa, M1G1 and M1G2, and P1), S&P (AAA and AA, SP1+ and SP1, A1+ and A1) and
Fitch (AAA and AA, F1 and F2). The Fund may purchase a security rated by
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only one rating agency if it meets the above rating standards. An unrated
security may be purchased if the Fund Manager judges it to be of comparable
quality to securities described above. Generally, the Fund will invest in
securities rated in the highest quality rating by at least two of these
rating agencies.
Ordinarily, the Fund expects that 100% of its portfolio securities will be
in federally tax-exempt securities.
As a fundamental policy, under normal circumstances, at least 80% of the
Fund's net assets will be invested in tax-exempt securities. Up to 20% of
the Fund's net assets may be invested in taxable securities. For defensive
purposes, or if unusual circumstances make it advisable, the Fund may
purchase U.S. Government securities and repurchase agreements
collateralized by such securities. For temporary defensive purposes, the
Fund's investment in taxable securities may exceed 20% when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
All of the securities purchased are U.S. dollar-denominated. The securities
must meet credit standards applied by the Fund Manager, following
procedures established by the Trustees. If a security ceases to be rated,
or its rating is reduced below the Fund's standard, it will be sold unless
the Trustees determine that disposing of the security would not be in the
best interests of the Fund. As a matter of nonfundamental policy, which may
be changed without a shareholder vote, the Fund, with respect to 75% of its
total assets, may not invest more than 5% of its total assets in securities
subject to puts from any one issuer.
What are the risks?
The risk to your principal is low, since the Fund seeks to maintain a
stable share price of $1.00. While the Fund has maintained a stable share
price since it began operating as a tax-free money fund in August 1991,
there may be situations under which this goal cannot be achieved. The level
of income you receive will be affected by movements up and down in
short-term interest rates. By investing generally in highest-quality
securities, the Fund may offer less income than a money market fund
investing in other high-quality money market securities. See "Other
Investment Policies and Risk Factors" on page 54.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP UGMA/UTMA with an initial investment of only $250.
Will I be subject to taxes on this fund?
All income distributed by the Fund is expected to be exempt from federal
income taxes. Income may be subject to state and local income taxes. Each
year you will be provided with a breakdown of the Fund's investments by
state so that you can determine your state and local income tax liability.
Your state or local Department of Revenue or tax advisor can answer
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questions regarding taxability of distributions. Should there be any income
from taxable securities, it would not be exempt from federal income taxes.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after
September 30 and is usually taxable. See page 61 for additional information
on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager K. Sue Cote has been responsible for setting
investment strategy and overseeing the Fund's day-to-day management since
1991. Ms. Cote joined Scudder in 1983 and has 13 years of experience in the
investment industry. Donald C. Carleton, Portfolio Manager, focuses on
securities selection and assists with the creation and implementation of
investment strategy for the Fund. Mr. Carleton has over 20 years of
experience in tax-free investing and has been at Scudder since 1983.
AARP GNMA AND U.S. TREASURY FUND
Fund Objective:
To produce a high level of current income and to keep the value of its
shares more stable than that of a long-term bond. The Fund pursues this
objective by investing principally in U.S. Government-guaranteed GNMA
securities and U.S. Treasury obligations.
For whom is the Fund designed?
The Fund is suitable for conservative investors who want high current
income but want a degree of protection from bond market price risk.
Investors should be seeking to invest for the longer term (3 years or more)
and be comfortable with fluctuation in the value of their principal. The
Fund is also available for AARP IRA or other retirement plan accounts.
What does the Fund offer to investors?
The Fund is designed to offer current income from a portfolio of
high-quality securities. The level of income should generally be higher
than that available from fixed-price money market mutual funds,
government-insured bank accounts and fixed-rate, government-insured CDs. By
including short-term U.S. Treasury securities in its portfolio, the Fund
seeks to offer less share price volatility than long-term bonds or many
other GNMA mutual funds, although its yield may be lower.
What does the Fund invest in?
The Fund invests principally in U.S. Treasury bills, notes, and bonds, and
other securities issued or backed by the full faith and credit of the U.S.
Government. These include Government National Mortgage Association (GNMA)
securities. GNMA securities represent part ownership of a pool of U.S.
Government- guaranteed mortgage loans each of which is insured by the
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Federal Housing Administration or guaranteed by the Veterans
Administration. Each pool of mortgages is also guaranteed by GNMA as to the
timely payment of principal and interest (regardless of whether the
mortgagors actually make their payments). This guarantee by GNMA represents
the full faith and credit of the U.S. Government. However, this guarantee
is not related to the Fund's yield or the value of shareholders'
investments, which will fluctuate daily.
The maturities and types of securities held by the Fund may vary with
current market conditions. At any time, the Fund may invest a substantial
portion of its assets in securities of a particular maturity. With GNMA
securities, principal is paid back to the Fund over the life of the bond,
rather than at maturity. The Fund will receive monthly scheduled payments
of principal and interest and may receive unscheduled principal payments
resulting from prepayments of the underlying mortgages. The Fund may
realize a gain or loss upon receiving principal payments. The Fund
typically reinvests all payments and prepayments of principal in additional
GNMA securities or other U.S. Government-guaranteed securities. The Fund
may also purchase "when-issued" securities and invest in repurchase
agreements.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares
will fluctuate up and down with changes in interest rates and other market
conditions. The level of income you receive will also be affected by
movements up or down in interest rates. Like bonds, the value of
mortgage-backed securities decreases when interest rates rise. However,
when interest rates fall their value may not rise as much as does the value
of bonds because of the anticipation of prepayment of the underlying
mortgages. This prepayment may expose the Fund to a lower rate of return
upon reinvestment. Thus, the prepayment rate may also tend to limit any
increase in net asset value. See "Other Investment Policies and Risk
Factors" on page 54.
How does the Fund seek to manage risk?
The Fund actively seeks to reduce share price volatility, by investing in a
combination of short-, intermediate-, and long-term securities. The Fund
may also, on occasion, use portfolio management techniques to seek to
reduce volatility. These techniques, which are subject to applicable
regulatory guidelines, may include limited transactions in financial
futures contracts and related option transactions which are unrated (see
"Other Investment Policies and Risk Factors" on page 54). The Fund may
write (sell) covered call options to enhance investment returns. These
techniques will be entered into to reduce risk, but such techniques involve
risks themselves and could reduce current income.
What is the minimum initial investment?
The minimum initial investment is $500.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
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When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after
September 30. See page 61 for additional information on distributions and
taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager David H. Glen has been responsible for investment
strategy and overseeing security selection since the Fund's inception in
1985. Mr. Glen joined Scudder in 1982 and has over 15 years' experience in
finance and investing. Mark S. Boyadjian, Portfolio Manager, focuses on
securities selection and assists with investment strategy for the Fund. Mr.
Boyadjian joined the Fund's team in 1995 and has been involved in
investment management since joining Scudder in 1989. Thomas M. Poor,
Portfolio Manager, joined the Fund in 1997 and Scudder in 1970. Scott E.
Dolan, Portfolio Manager, also joined the team in 1997. Mr. Dolan, who
joined Scudder in 1989, has four years of experience in compliance analysis
and account administration and has worked as a portfolio manager since
1993.
AARP HIGH QUALITY BOND FUND
Fund Objective:
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.
For whom is the Fund designed?
The Fund is suitable for investors who want high current income with
moderate risk from a high quality portfolio. Investors should be seeking to
invest for the intermediate term or longer (at least 3 years or more) and
be comfortable with fluctuation in the value of their principal. The Fund
is also available for AARP IRA and other retirement plan accounts.
What does the Fund offer to investors?
The Fund is designed to offer a high level of current income from a
portfolio comprised primarily of high-quality securities. The level of
total investment return (i.e., income plus any capital appreciation) should
typically be higher than available from the AARP GNMA and U.S. Treasury
Fund, with greater fluctuation in the value of your principal.
By including short- and medium-term bonds in its portfolio, the Fund seeks
to offer less share price volatility than long-term bonds or many long-term
bond funds, although its yield and total return may be lower.
What does the Fund invest in?
Under normal circumstances, the Fund will invest substantially all, and no
less than 65%, of its assets in U.S. Government, corporate and other
fixed-income securities. All the Fund's securities will be rated or judged
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by the Fund Manager to be the equivalent of those rated investment-grade or
higher by Moody's (Aaa, Aa, A, and Baa) or S&P (AAA, AA, A and BBB), and at
least 65% of the Fund's assets must be in securities rated in the two
highest rating categories by Moody's or S&P. 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.
The Fund may invest in any investment eligible for the AARP GNMA and U.S.
Treasury Fund. It may also purchase corporate notes and bonds, including
convertible issues, and obligations of federal agencies that are not backed
by the full faith and credit of the U.S. Government. Additionally, the Fund
may purchase obligations of international agencies, U.S. dollar-denominated
foreign debt securities, trust preferred securities, mortgage-backed and
other asset-backed securities, and money market instruments such as
commercial paper, bankers' acceptances, and certificates of deposit issued
by domestic and foreign branches of U.S. banks. The Fund may invest up to
20% of total assets in foreign debt securities denominated in currencies
other than the U.S. dollar, but no more than 5% of the Fund's total assets
will be represented by a given foreign currency. The Fund may also purchase
"when-issued" securities and invest in repurchase agreements.
The Fund will invest in a broad range of short-, intermediate- and
long-term securities. The maturities and types of securities held by the
Fund will vary with current market conditions. The Fund may have a
substantial portion of its assets in securities of a particular maturity.
The non-governmental investments of the Fund will be spread among a variety
of companies and will not be concentrated in any one industry.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares
will fluctuate up and down with changes in interest rates and other market
conditions. Due to the greater market price risk of the securities in which
it invests, the Fund will usually have more share price volatility than the
AARP GNMA and U.S. Treasury Fund. See "Other Investment Policies and Risk
Factors" on page 54.
The level of income provided will be affected by movements up and down in
interest rates. Also, income from the high-quality and other
investment-grade securities the Fund purchases may be lower than income
from lower-quality securities.
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How does the Fund seek to manage risk?
The Fund actively seeks to reduce share price volatility by investing in
securities with varying maturities, including short- and medium-term bonds.
Also, the Fund may use approved portfolio management techniques, if
appropriate, such as limited transactions in financial futures contracts
and related option transactions which are unrated (see "Other Investment
Policies and Risk Factors" on page 54). The Fund may write (sell) covered
call options to enhance investment returns. These techniques will be
entered into to reduce risk, but such techniques involve risks themselves
and could reduce current income.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after
September 30. See page 61 for additional information on distributions and
taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager David H. Glen has set the Fund's investment strategy
and overseen its day-to-day operations since 1995. Mr. Glen, who started at
Scudder in 1982 and has been a portfolio manager since 1985, has over 15
years' experience in finance and investing. William M. Hutchinson,
Portfolio Manager, who is also responsible for implementing the Fund's
strategy, has been involved with the Fund since 1987. Mr. Hutchinson joined
Scudder in 1986 as a portfolio manager and has over 20 years of investment
experience. Scott E. Dolan, Portfolio Manager, joined the team in 1997. Mr.
Dolan, who joined Scudder in 1989, has four years of experience in
compliance analysis and account administration and has worked as a
portfolio manager since 1993.
AARP BOND FUND FOR INCOME
Fund Objective:
The Fund seeks to provide a high level of current income consistent with
investments primarily in investment-grade debt securities, and to keep the
value of its shares more stable than that of a long-term bond.
For whom is the Fund designed?
This new Fund, which commenced operations on February 1, 1997, is suitable
for investors who want high current income, but are willing to accept
interest rate, credit, and other risks associated with a portfolio of
investment-grade and, to a lesser extent, below investment-grade bonds (up
to 35% of total assets). Investors should be seeking to invest for the
longer term (at least 3 years or more) and be comfortable with fluctuation
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in the value of their principal. The Fund is also available for AARP IRA
and other retirement plan accounts.
What does the Fund offer to investors?
The Fund is designed to offer investors a convenient way to enjoy high
monthly income through a professionally managed, diversified portfolio of
largely investment-grade bonds. The Fund should offer higher income than
any other AARP income fund, although its share price volatility will
normally be higher. The Fund also can help add balance to a portfolio
holding stocks or stock mutual funds.
By including short- and medium-term bonds in its portfolio, the Fund seeks
to offer less share price volatility than long-term bonds or many long-term
bond funds, although its yield may be lower.
What does the Fund invest in?
In pursuit of its investment objectives, under normal market conditions,
the Fund invests at least 65% of its assets in investment-grade debt
securities. Investment-grade securities are securities that are rated
Aaa,Aa,A, or Baa by Moody's or AAA, AA, A, or BBB by S&P, or, if unrated,
are of equivalent quality as determined by the Fund Manager. In addition,
the Fund may invest up to 35% of its assets in securities rated Ba or B by
Moody's or BB or B by S&P. No more than 10% of the Fund's assets may be
invested in securities rated B by Moody's or S&P. These two grades of
securities are considered to be below investment grade. Below
investment-grade securities are considered predominantly speculative with
respect to their capacity to pay interest and repay principal. They
generally involve a greater risk of default and, at times, can have more
price volatility than higher rated securities. See "Other Investment
Policies and Risk Factors" on page 54.
The Fund may invest in U.S. Treasury and Agency securities, corporate bonds
and notes, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies
or investment-grade foreign institutions, and money market instruments such
as commercial paper, bankers' acceptances, and certificates of deposit
issued by domestic and foreign branches of U.S. banks. The Fund may invest
up to 20% of total assets in foreign debt securities denominated in
currencies other than the U.S. dollar, but no more than 5% of the Fund's
total assets will be represented by a given foreign currency. The Fund may
also invest in "when-issued" securities and repurchase agreements.
For temporary defensive purposes, the Fund may invest without limit in
money market and short-term instruments or invest all or a substantial
portion of its assets in high quality domestic debt securities when the
Fund Manager deems such a position advisable in light of economic or market
conditions.
What are the risks?
While the Fund is designed to provide monthly income, it is not a fixed
price money market fund. The value of its shares and the level of income
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provided will fluctuate up and down with changes in interest rates and
other market conditions. Due to the greater overall interest rate and
credit risk of the securities in which it invests, the Fund should offer
higher income but have a more variable share price over time than the AARP
GNMA and U.S. Treasury Fund or the AARP High Quality Bond Fund. See "Other
Investment Policies and Risk Factors" on page 54.
The Fund can invest a limited portion of its assets in below
investment-grade securities, sometimes referred to as "junk" bonds.
Investing in high yielding, lower-quality bonds involves various types of
risks including the risk that issuers of bonds held in the portfolio will
not make timely payment of either interest or principal, or may default
entirely. This risk of default can increase with changes in the financial
condition of a company or with changes in the U.S. economy, such as a
recession. Compared to investing in higher quality issues, investors may be
rewarded for the additional risk of high yield bonds through higher
interest payments and the opportunity for greater capital appreciation.
How does the Fund seek to manage risk?
The Fund seeks to reduce share price volatility through active portfolio
management and diversification. The Fund Manager will invest in a broad
number of securities with varying maturities, quality and industry
representation. Also, the Fund may use approved portfolio management
techniques, if appropriate, such as limited transactions in financial
futures contracts and related option transactions which are unrated (see
"Other Investment Policies and Risk Factors" on page 54). The Fund may
write (sell) covered call options to enhance investment returns. These
techniques will be entered into to reduce risk, but such techniques involve
risks themselves and may reduce current income.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after
September 30. See page 61 for additional information on distributions and
taxes.
Who at Scudder manages my investment?
William M. Hutchinson, Lead Portfolio Manager, has over 20 years of
investment experience. Mr. Hutchinson joined Scudder in 1986 and is a
member of Scudder's Global Bond Group. Kelly D. Babson, Portfolio Manager,
is a portfolio manager in Scudder's Global Bond Group, with 15 years of
experience in fixed-income investing including ten years of high yield
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portfolio management prior to joining Scudder. Ms. Babson joined Scudder in
1994. Portfolio Manager David H. Glen, also a member of Scudder's Global
Bond Group, has over 15 years of experience in finance and investing. Mr.
Glen joined Scudder in 1982.
AARP INSURED TAX FREE GENERAL BOND FUND
Fund Objective:
From a portfolio consisting primarily of municipal securities covered by
insurance, the Fund seeks to provide high income free from federal income
taxes and to keep the value of its shares more stable than that of a
long-term municipal bond.
For whom is the Fund designed?
The Fund is suitable for investors in higher tax brackets who want high
income free from federal income taxes. Investors should invest for the
longer term (at least 3 years or more) and be comfortable with fluctuation
in the value of their principal. The Fund is not available for AARP IRA or
other retirement plan accounts.
What does the Fund offer to investors?
The Fund is designed to offer high income free from federal tax. Depending
on an investor's tax bracket, the after-tax income from the Fund may be
higher than that from a taxable investment of comparable quality and risk.
The Fund will typically pay higher income than the AARP High Quality Tax
Free Money Fund, although yield and principal value will fluctuate up and
down with market conditions. By including short- and medium-term bonds in
its portfolio, the Fund seeks to offer less share price volatility than
long-term municipal bonds or many long-term municipal bond funds, although
its yield may be lower.
The Fund is one of a distinct group of tax-free mutual funds with insurance
on the majority of its investments. Insurance on its securities protects
the Fund against loss from default by the municipal issuer. However, it
does not protect the investor from fluctuation in yield or share price.
What does the Fund invest in?
The Fund invests primarily in a mix of short-, intermediate-, and long-term
municipal securities that are insured against default by private insurers.
The municipal securities purchased by the Fund will be only high-grade
securities or repurchase agreements on such securities. These may include
obligations issued by or on behalf of states, territories and possessions
of the United States and the District of Columbia to raise money for public
purposes. Interest from these securities is, in the opinion of the issuer's
bond counsel, exempt from federal income taxes. The Fund has no current
intention of investing in securities whose income is subject to federal
income tax, including the individual alternative minimum tax (AMT).
However, under unusual circumstances, the Fund may invest in taxable
securities for defensive purposes or to benefit from disparities in the
financial markets.
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Municipal securities may include municipal notes, municipal bonds,
municipal lease obligations, participation interests in bank holdings of
municipal securities, securities with variable or floating interest rates,
demand obligations, and tax-exempt commercial paper. The Fund may purchase
securities on a "when-issued" or "forward delivery" basis, and may enter
into stand-by commitments in which securities may be sold back to the
seller at the Fund's option. Also, the Fund may use approved portfolio
techniques, if appropriate, such as limited use of financial futures
contracts and related options transactions. See "Other Investment Policies
and Risk Factors" on page 54.
What portion of the securities is insured?
At least 65% of the Fund's assets are fully insured by private insurers as
to payment of face value and interest to the Fund, when due. If uninsured
securities or securities not directly or indirectly backed or guaranteed by
the U.S. Government are purchased and expected to be held for 60 days or
more, insurance will be obtained within 30 days to ensure that 65% of the
Fund's assets are insured by the issuer or arranged for by the Fund. If at
least 65% of its assets are not insured securities, the Fund will obtain
insurance for a portion of its U.S. Government guaranteed or backed
securities so that the 65% standard is achieved.
What are the risks?
The Fund is not a fixed price money market fund, so the value of its shares
will move up and down as interest rates and other market conditions change.
The level of income you receive will be affected by movements up and down
in interest rates. Income from the high-quality securities which the Fund
purchases may be lower than the income from lower-quality securities. See
"Other Investment Policies and Risk Factors" on page 54.
How does the Fund seek to manage risk?
The Fund actively seeks to manage share price volatility by investing in
securities of varying maturities. The Fund may also use approved portfolio
management techniques.
Insurance on the securities held by the Fund protects the Fund as to
default by the municipal issuer. It does not protect an investor from
fluctuation in the Fund's yield or value per share, which change daily.
Insurance also involves a cost to the Fund which will reduce yield.
Historically, the yields on insured securities have been attractive in
comparison to the yields on uninsured securities of comparable quality.
There can be no assurance, however, that this relationship will continue.
Moreover, to the extent the Fund must purchase insurance on U.S. Government
securities, this will involve a cost to the Fund while not increasing the
quality rating since U.S. Government-guaranteed or backed securities are
already high quality. Although the financial condition of each insurer of
its securities is periodically reviewed by the Fund, there can be no
guarantee that insurers can honor their obligations under all
circumstances. See "Other Investment Policies and Risk Factors" on page 54.
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What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP UGMA/UTMA with an initial investment of only $250.
Will I be subject to taxes on this fund?
All income distributed by the Fund is expected to be exempt from federal
income taxes. Income may be subject to state and local income taxes.
Ordinarily, the Fund expects that 100% of its portfolio securities will be
in federally tax-exempt securities. As a fundamental policy, under normal
circumstances, at least 80% of the Fund's net assets will be invested in
federally tax-exempt securities. Up to 20% of the Fund's net assets may be
invested in federally taxable securities. For defensive purposes, or if
unusual circumstances make it advisable, the Fund may purchase U.S.
Government securities and repurchase agreements collateralized by such
securities. For temporary defensive purposes, the Fund's investment in
federally taxable securities may exceed 20%. Each year you will be provided
with a breakdown of the Fund's investments by state so that you can
determine your state and local income tax liability. Your state or local
Department of Revenue or tax advisor can answer questions regarding the
taxability of distributions.
In the event there is income from taxable securities, it would not be
exempt from federal income taxes. In addition, any capital gains earned by
the Fund are usually taxable.
When are distributions paid?
Dividends are declared daily and distributed monthly to investors. Any net
realized capital gain typically will be distributed annually after
September 30 and is usually taxable. See page 61 for additional information
on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Donald C. Carleton has been responsible for
investment strategy and overseeing the Fund's day-to-day management since
1990. Mr. Carleton has over 20 years' experience in tax-free investing and
joined Scudder in 1983. Philip G. Condon, Portfolio Manager, focuses on
securities selection and assists with the creation and implementation of
investment strategy for the Fund. Mr. Condon has been with Scudder since
1983 and has more than 18 years of investment experience.
AARP BALANCED STOCK AND BOND FUND
Fund Objective:
To seek to provide long-term growth of capital and income while attempting
to keep the value of its shares more stable than other balanced mutual
funds. The Fund pursues these objectives by investing in a combination of
stocks, bonds, and cash reserves.
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For whom is the Fund designed?
This Fund is suitable for conservative investors who are seeking long-term
growth of their assets, but want less risk than an investment solely in
stocks. Investors should invest for the longer term (at least 3 to 5 years
or more) and be comfortable with the value of their principal fluctuating
up and down. The Fund is also available for AARP IRA and other retirement
plan accounts.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal through a
single investment combining stocks, bonds, and cash reserves. Growth will
come from possible appreciation in the value of common stocks and other
equity investments. Bonds and other fixed-income investments provide
current income and may help reduce fluctuation in the Fund's share price.
Through a broadly diversified portfolio consisting primarily of stocks with
above average dividend yields and investment-grade bonds, the Fund seeks to
offer less share price volatility than many balanced mutual funds. The Fund
should typically have less risk and a lower return than the other AARP
growth funds.
The Fund does not take extreme investment positions as part of an effort to
"time the market." Shifts between stocks and fixed-income investments are
expected to occur in generally small increments. On occasion, the Fund will
adjust its investment mix. The Fund Manager will do so after analyzing
factors such as the level and direction of interest rates, capital flows,
inflationary expectations, and the financial climate worldwide.
What does the Fund invest in?
The Fund seeks to manage fluctuation by investing in a broadly diversified
mix of equity securities, bonds, and cash reserves. The Fund may invest up
to 70% of its assets in equity securities (stocks). At least 30% of the
Fund will be in investment-grade fixed-income securities and cash reserves.
For temporary defensive purposes, the Fund may invest without limit in
money market and short-term instruments when the Fund Manager deems such a
position advisable in light of economic or market conditions. These include
commercial paper, bankers' acceptances, certificates of deposit issued by
domestic and foreign branches of U.S. banks, and repurchase agreements.
Equity securities consist of common stocks, securities convertible into
common stocks, and preferred stocks. A research-oriented approach to
investing is used by the Fund, taking advantage of Scudder's large research
department. The Fund emphasizes securities of companies that offer the
opportunity for capital growth and growth of earnings while providing
dividends. The Fund will generally invest in companies domiciled in the
U.S., but may invest in foreign securities without limit.
All of the Fund's debt securities will be investment-grade, i.e., rated at
the time of purchase, Baa or higher by Moody's or BBB or higher by S&P, or
deemed of comparable quality by the Fund's Manager. At least 75% of these
will be securities rated within the three highest quality ratings of
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Moody's (Aaa, Aa and A) or S&P (AAA, AA, and A) or those the Fund Manager
judges are of equivalent quality (high-grade). Securities rated BBB by S&P
or Baa by Moody's are neither highly protected nor poorly secured. These
securities normally pay higher yields but involve potentially greater price
variability than higher-quality securities and are regarded as having
adequate capacity to repay principal and pay interest. Moody's considers
bonds it rates Baa to have speculative elements as well as investment-grade
characteristics. If the rating agencies downgrade a security, the Fund
Manager will determine whether to keep it or eliminate it based on the best
interests of the Fund. The Fund does not purchase securities rated below
investment-grade, commonly known as "junk" bonds.
The Fund can invest in a broad range of corporate bonds and notes,
convertible bonds, preferred and convertible preferred securities and trust
preferred securities. The Fund may also invest in U.S. Government
securities, obligations of federal agencies, and instruments not backed by
the full faith and credit of the U.S. Government. The latter include
obligations of the Federal Home Loan Banks, Farm Credit Banks, and the
Federal Home Loan Mortgage Corporation. The Fund may invest in obligations
of international agencies, U.S. and non-U.S. dollar denominated foreign
debt securities, mortgage-backed and other asset-backed securities,
municipal obligations, zero-coupon securities, and restricted securities
issued in private placements.
The Fund may make limited use of financial futures contracts and related
options and may also invest in forward foreign currency exchange contracts.
The Fund may write (sell) covered call options to enhance investment
returns and may purchase and sell options on stock indices for hedging
purposes. It may also invest in securities on a "when-issued" or forward
delivery basis.
What are the risks?
The risk to principal is consistent with an investment primarily in stocks
and bonds. The value of shares will fluctuate up and down with changes in
interest rates and other market conditions. Investors should focus on the
longer-term and be comfortable with fluctuation in the value of their
principal.
The level of income will be affected by movements up and down in interest
rates and by dividends paid on the stocks held by the Fund. See "Other
Investment Policies and Risk Factors" on page 54.
What is the minimum initial investment?
The minimum initial investment is $500.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain
typically will be distributed annually after September 30. See page 61 for
additional information on distributions and taxes.
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Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman is responsible for managing the
stock portion of the Fund. Mr. Hoffman, who joined Scudder in 1990, has 11
years of experience in the investment industry. William M. Hutchinson,
Portfolio Manager, is responsible for the bond portion of the Fund. Mr.
Hutchinson joined Scudder in 1986 and has over 20 years of investment
experience. Messrs. Hutchinson and Hoffman have been Portfolio Managers for
the Fund since it commenced operations on February 1, 1994. Benjamin W.
Thorndike, Portfolio Manager, focuses on asset allocation strategy and
stock selection. Mr. Thorndike has more than 15 years of investment
experience and joined Scudder in 1986.
AARP GROWTH AND INCOME FUND
Fund Objective:
From investments primarily in common stocks and securities convertible into
common stocks, the Fund seeks to provide long-term capital growth and
income, and to keep the value of its shares more stable than other growth
and income mutual funds.
For whom is the Fund designed?
The Fund is suitable for investors who are seeking long-term growth of
their assets to keep ahead of inflation. Investors should invest for the
longer-term (at least 5 years or more) and be comfortable with fluctuation
of their principal that is associated with investing in stocks. The Fund is
also available for AARP IRA and other retirement plan accounts.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal with some
income. This growth will come from possible appreciation in the value of
shares, as well as quarterly dividend distributions if they are reinvested
in additional shares of the Fund. Dividends can also produce current income
for investors. Through a broadly diversified portfolio consisting primarily
of stocks with above average dividend yields, the Fund seeks to offer less
share price volatility than many growth and income funds. The Fund should
offer a greater opportunity for share price appreciation, with greater
share price fluctuation than the AARP Balanced Stock and Bond Fund.
What does the Fund invest in?
The Fund invests primarily in common stocks and securities convertible into
common stocks. The Fund may also invest in preferred stocks. The Fund
emphasizes securities of companies that offer the opportunity for capital
growth and growth of earnings while providing dividends. A
research-oriented approach to investing is used by the Fund, taking
advantage of Scudder's large research department.
The Fund will invest in a variety of industries and companies. Generally,
the Fund will invest in companies domiciled in the United States, but it
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may invest in foreign securities without limit. Also, the Fund may write
(sell) covered call options to enhance investment return, and may purchase
and sell options on stock indices for hedging purposes. See "Other
Investment Policies and Risk Factors" on page 54.
The Fund's policy is to remain substantially invested in stocks and
securities convertible into stocks. However, for temporary defensive
purposes, the Fund may invest without limit in high quality money market
securities when the Fund Manager deems such a position advisable in light
of economic or market conditions. These securities include U.S. Treasury
bills, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and repurchase
agreements.
What are the risks?
The risk to principal is consistent with an investment in stocks. The stock
market doesn't go up every year, and can rise and fall--sometimes quite
dramatically over a short period of time. Investors should focus on the
longer term (at least 5 years or more) and be comfortable with fluctuation
in the value of their principal. See "Other Investment Policies and Risk
Factors" on page 54.
The level of income you receive will be affected by dividends paid on the
securities held by the Fund.
What is the minimum initial investment?
The minimum initial investment is $500.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain
typically will be distributed annually after September 30. See page 61 for
additional information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Robert T. Hoffman has had responsibility for setting
investment strategy and overseeing the Fund's day-to-day management since
1991. Mr. Hoffman, who joined Scudder in 1990, has 11 years of experience
in the investment industry. Benjamin W. Thorndike, Portfolio Manager, is
the Fund's chief analyst and strategist for convertible securities. Mr.
Thorndike, who has more than 15 years of investment experience, joined
Scudder and the Fund in 1986. Kathleen T. Millard, Portfolio Manager,
focuses on stock investing strategy and stock selection. Ms. Millard has
worked in the investment industry since 1983 and at Scudder since 1991.
Lori Ensinger, Portfolio Manager, joined the Fund in 1996 and focuses on
stock selection and investment strategy. Ms. Ensinger has worked in the
investment industry since 1983 and at Scudder since 1993. Deborah Chaplin,
Portfolio Manager, joined the Fund in 1997 and Scudder in 1996. Ms. Chaplin
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has five years of investment experience as a securities analyst and
institutional investment portfolio manager.
AARP U.S. STOCK INDEX FUND
Fund Objective:
Taking an indexing approach to investing in common stocks, the Fund seeks
to provide long-term capital growth and income, and to keep the value of
its shares more stable than a S&P 500 Index fund. The Fund seeks these dual
objectives by emphasizing higher dividend stocks while maintaining
investment characteristics otherwise similar to the S&P 500 Index.
For whom is the Fund designed?
This new Fund, which commenced operations on February 1, 1997, is suitable
for investors seeking a "passive" investment approach to stock market
investing. The Fund may be appropriate for more conservative investors who
are seeking higher dividend income and somewhat lower average volatility
than a S&P 500 Index fund. Investors should invest for the longer term (at
least 5 years or more) and be comfortable with the value of their principal
fluctuating up and down with changing U.S. stock market conditions. The
Fund is also available for AARP IRA and other retirement plan accounts.
What does the Fund offer to investors?
The Fund offers the potential for long-term growth of principal and current
income. Through a broadly-diversified portfolio consisting of S&P 500
companies, the Fund's performance is expected to track the overall
performance of the U.S. stock market, as characterized by the S&P 500
Composite Stock Price Index. The Fund, however, is designed to have less
share price volatility due to its focus on companies in the S&P 500 Index
that pay higher dividends.
What does the Fund invest in?
The Fund attempts to remain fully invested in common stocks of S&P 500
companies. Under normal circumstances, the Fund will invest at least 95% of
its assets in common stocks and futures contracts and options, primarily on
the S&P 500 Index. The Fund, using a proprietary computer model, selects
common stocks of S&P 500 companies that are expected to, on average, pay
higher dividends than S&P 500 companies in the aggregate. In managing the
Fund this way, the Fund Manager expects performance will be somewhat less
volatile than that of the S&P 500 over time, and the total return will
generally track the S&P 500 within 1% on an annualized basis. A tracking
error of 0% would indicate perfect correlation to the Index. After the
Fund's start-up phase, the portfolio will typically consist of common
stocks of between 400 and 470 of the S&P 500 companies. The Fund expects to
come close to the capitalization weights of the S&P 500. Nonetheless, to
enhance the yield and liquidity characteristics of the Fund and reduce
transaction costs, the Fund will not exactly replicate the portfolio
weights of the S&P 500 and will not hold all 500 stocks within that Index.
The investment approach is "passive" in that after the dividend screening
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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. See "Other
Investment Policies and Risk Factors" on page 54. Unlike most non-index
funds, the Fund will not invest in cash reserves, futures contracts or
options as part of a temporary defensive strategy, such as lowering the
Fund's investment in common stocks to protect against potential stock
market declines. Thus, the Fund will not take specific steps to minimize
losses that reflect a decline in the S&P 500. In the event that the Fund
does not track within an annualized 1% total return of the S&P 500 for an
extended period, the Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
What are the risks?
The risk to principal is consistent with the Fund's investment approach,
which should result in a performance pattern similar to the U.S. stock
market as measured by the S&P 500 Index. The stock market doesn't go up
every year, and can rise and fall--sometimes quite dramatically over a
short period of time. The U.S. stock market tends to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline. Investors should focus on the longer term (at least 5 years or
more) and be comfortable with fluctuation in the value of their principal.
See "Other Investment Policies and Risk Factors" on page 54.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Dividends from the Fund's net ordinary income are distributed quarterly in
March, June, September and December. Any net realized capital gain
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typically will be distributed annually after September 30. See page 61 for
additional information on distributions and taxes.
Who manages my investment?
Lead Portfolio Manager Philip S. Fortuna joined Scudder in 1986 as manager
of institutional equity accounts. He became director of quantitative
research in 1987 and served as director of investment operations from 1993
to 1994. James M. Eysenbach, Portfolio Manager, joined Scudder in 1991 as a
senior quantitative analyst and is currently director of quantitative
research for Scudder. Mr. Eysenbach has more than ten years of investment
research and management experience.
The Fund Manager has retained Bankers Trust Company as Subadviser to the
Fund. The Subadviser will handle day-to-day investment and trading
functions. The Portfolio Managers will be in regular contact with the
Subadviser, receive records of daily transactions, monitor returns and
relative risk, and scrutinize portfolio activity.
Bankers Trust has a long and successful history of equity index management
dating back to 1977 and is currently one of the largest passive managers in
the U.S.
AARP GLOBAL GROWTH FUND
Fund Objective:
From investments primarily in equity securities of corporations worldwide,
the Fund seeks to offer long-term capital growth in a globally diversified
portfolio, and to keep the value of its shares more stable than other
global equity funds.
For whom is the Fund designed?
This Fund is suitable for investors who want to add both U.S. and foreign
equity opportunities to their portfolio through a single investment. The
Fund is designed for investors seeking long-term growth of their principal.
Investors should invest for the longer term (at least 5 years or more) and
be comfortable with the value of their principal fluctuating up and down.
The Fund is also available for AARP IRA and other retirement plan accounts.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal from a
professionally managed portfolio of securities selected from the U.S. and
foreign equity markets. It also offers the opportunity for investors to
further diversify their portfolios which could help to lower their overall
risk.
Global investing takes advantage of the investment opportunities created by
the growing integration of economies around the world. The world has become
highly integrated in economic, industrial and financial terms. Companies
increasingly operate globally as they purchase raw materials, produce and
sell their products and raise capital. The Fund affords investors access to
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opportunities wherever they arise, without being constrained by the
location of a company's headquarters or the trading market for its shares.
Because the Fund's portfolio invests globally, it provides the potential to
augment returns available from the U.S. stock market. In addition, since
U.S. and foreign markets do not always move in step with each other, a
global portfolio will be more diversified than one invested solely in U.S.
securities.
Investing directly in foreign securities is usually impractical for most
investors because it presents complications and extra costs. Investors
often find it difficult to arrange purchases and sales, to obtain current
information, to hold securities in safekeeping and to convert the value of
their investments from foreign currencies into dollars. The Fund manages
these problems for the investor. With a single investment, the investor has
a diversified worldwide investment portfolio which is managed actively by
experienced professionals. Scudder has had many years of experience
investing globally and dealing with trading, custody and currency
transactions around the world. Scudder has the benefit of information it
receives from worldwide research and believes the Fund affords investors an
efficient and cost-effective method of investing worldwide.
Through a broadly diversified portfolio consisting primarily of stocks of
established companies which are incorporated in the U.S. or in foreign
countries, and applying a strategy of relatively low portfolio turnover,
the Fund seeks to offer less share price volatility than many global growth
funds. However, in pursuing long-term growth, the Fund typically will have
more share price fluctuation than other AARP Funds, except the AARP Capital
Growth Fund, the AARP International Stock Fund and the AARP Small Company
Stock Fund. See "What are the risks?" below. Growth will come primarily
from possible appreciation in the value of shares. The Fund is not expected
to provide regular income.
What does the Fund invest in?
The Fund will invest in securities of companies that the Fund Manager
believes will benefit from global economic trends, promising technologies
or products and changing geopolitical, currency or economic relationships.
The Fund will normally invest at least 65% of its total assets in
securities of at least three different countries. Typically it is expected
that the Fund will invest in a wide variety of regions and countries,
including both foreign and U.S. issues. However, the Fund may be invested
100% in non-U.S. issues, and for temporary defensive purposes may be
invested 100% in U.S. issues. For temporary defensive purposes, the Fund
may invest without limit in high quality money market securities, including
U.S. Treasury bills, repurchase agreements, commercial paper, certificates
of deposit issued by domestic and foreign branches of U.S. banks, bankers'
acceptances and other debt securities, such as U.S. Government obligations
and corporate debt instruments when the Fund Manager deems such a position
advisable in light of economic or market conditions.
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The Fund generally invests in equity securities of established companies
listed on U.S. or foreign securities exchanges, but also may invest in
securities traded over-the-counter. It also may invest in debt securities
convertible into common stock, and convertible and non-convertible
preferred stocks. Fixed-income securities of governments, government
agencies, supranational agencies and companies may also be used when the
Fund Manager believes the potential for appreciation for these investments
will equal or exceed that available from investments in equity securities.
These debt and fixed-income securities will be exclusively investment-grade
securities, that is, those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A
or BBB by S&P or those of equivalent quality as determined by Scudder.
Securities rated BBB by S&P or Baa by Moody's are neither highly protected
nor poorly secured. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics.
The Fund may invest in zero coupon securities and closed-end investment
companies holding foreign securities. The Fund may make limited use of
financial futures contracts and related options and may also invest in
forward foreign currency exchange contracts. The Fund may write (sell)
covered call options to enhance investment return, and may purchase and
sell options on stock indices for hedging purposes. See "Other Investment
Policies and Risk Factors" on page 54.
What is Scudder's international investing experience?
Scudder has been a leader in international investment management for over
40 years. In 1953, Scudder introduced the first mutual fund available in
the U.S. investing internationally in securities of issuers in several
foreign countries, and in 1987, introduced the first no-load global equity
fund. Today, Scudder manages over $22 billion in assets invested in foreign
markets.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term growth through global investing. Global investing involves
economic and political considerations not typically found in investments
restricted solely to U.S. markets.
The Fund is designed for long-term investors who can accept international
investment risk. Since the Fund normally will be invested in both U.S. and
foreign securities markets, changes in the Fund's share price may have a
low correlation with movements in the U.S. markets. The Fund's share price
will reflect the movements of the different markets in which it is invested
and the currencies in which the investments are denominated. The strength
or weakness of the U.S. dollar against foreign currencies may account for
part of the Fund's investment performance. Investors should focus on the
longer term (at least 5 years or more) and be comfortable with fluctuation
to the value of their principal. Because of the Fund's global investment
policies and the investment considerations discussed above, investment in
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shares of the Fund should be considered as part of a broadly diversified
portfolio. See "Other Investment Policies and Risk Factors" on page 54.
How does the Fund seek to manage risk?
While the Fund involves above-average equity risk, it is designed to lessen
the volatility of its share price relative to other global stock funds. It
does this by diversifying widely among stocks issued in developed markets
worldwide.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30. See
page 61 for additional information on distributions and taxes.
Who at Scudder manages my investment?
William E. Holzer is the Lead Portfolio Manager for the Fund. Mr. Holzer
has day-to-day responsibility for setting the Fund's worldwide strategy and
investment themes. Mr. Holzer has over 20 years' experience in global
investing and joined Scudder in 1980. Nicholas Bratt, Portfolio Manager,
directs Scudder's overall global equity investment strategies. Mr. Bratt
joined Scudder in 1976. Alice Ho, Portfolio Manager, is also responsible
for implementing the Fund's strategy. Ms. Ho, who joined Scudder in 1986 as
a member of the institutional and private investment counsel area, has
worked as a portfolio manager since 1989.
AARP CAPITAL GROWTH FUND
Fund Objective:
From investments primarily in common stocks and securities convertible into
common stocks, the Fund seeks to provide long-term capital growth, and to
keep the value of its shares more stable than other capital growth funds.
For whom is the Fund designed?
The Fund is suitable for investors seeking high long-term growth of their
principal. Investors should invest for the longer term (at least 5 years or
more) and be comfortable with the value of their principal fluctuating up
and down. The Fund is also available for AARP IRA and other retirement plan
accounts.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal. This
growth will come primarily from possible appreciation in the value of
shares. The Fund is not expected to provide regular income.
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In pursuing long-term growth, the Fund will typically have more share price
fluctuation than the AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, AARP U.S. Stock Index Fund and AARP Global Growth Fund, but
less share price fluctuation than AARP International Stock Fund and AARP
Small Company Stock Fund.
By diversifying among securities of high quality, medium- to large-sized
companies with strong competitive positions in their industries, the Fund
seeks to have less share price volatility than many growth funds.
What does the Fund invest in?
The Fund invests primarily in common stocks and securities convertible into
common stocks. The Fund may also invest in preferred stocks. The Fund's
policy is to remain substantially invested in these securities.
In seeking capital growth, the Fund will invest in stocks which will offer
above-average potential for long-term growth of market value as represented
by the Standard & Poor's 500 Composite Stock Price Index. A
research-oriented approach to investing is used by the Fund, taking
advantage of Scudder's large research department. The Fund will invest in a
variety of industries and companies. Generally, the Fund will invest in
companies domiciled in the U.S., but it may invest in foreign securities
without limit. Also, the Fund may write (sell) covered call options to
enhance investment return, and may purchase and sell options on stock
indices for hedging purposes. See "Other Investment Policies and Risk
Factors" on page 54.
For temporary defensive purposes, the Fund may invest without limit in high
quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic
and foreign branches of U.S. banks, bankers' acceptances, and other debt
securities, such as U.S. Government obligations and corporate debt
instruments when the Fund Manager deems such a position advisable in light
of economic or market conditions.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term growth. The Fund generally has greater share price fluctuation
and potential for return than the AARP Balanced Stock and Bond Fund, AARP
Growth and Income Fund, AARP U.S. Stock Index Fund, and AARP Global Growth
Fund. The stock market doesn't go up every year, and can rise and
fall--sometimes quite dramatically--over a short period of time. Some of
the securities selected may have above-average stock market risk. Investors
should focus on the longer term (at least 5 years or more) and be
comfortable with fluctuation to the value of their principal. See "Other
Investment Policies and Risk Factors" on page 54.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
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You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30. See
page 61 for additional information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager William F. Gadsden has set the Fund's overall
investment strategy since 1994 and has been part of the Fund's day-to-day
management since 1989. He has 15 years of investment industry experience
and joined Scudder in 1983. Bruce F. Beaty, Portfolio Manager, focuses on
securities selection and assists with the creation and implementation of
investment strategy for the Fund. He has 16 years of investment industry
experience and joined Scudder in 1991.
AARP INTERNATIONAL STOCK FUND
Fund Objective:
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.
For whom is the Fund designed?
This new Fund, which commenced operations on February 1, 1997, is suitable
for investors who want to add international stock market opportunities to
their portfolio in a convenient, low-cost way. The Fund is designed for
investors seeking long-term growth of their principal. Investors should
invest for the longer term (at least 5 years or more) and be comfortable
with the value of their principal fluctuating up and down. The Fund is also
available for AARP IRA and other retirement plan accounts.
What does the Fund offer to investors?
The Fund offers the opportunity for long-term growth of principal from a
professionally managed portfolio of securities selected from developed
foreign stock markets. It also offers the opportunity for investors to
further diversify their investment portfolios, which could help to lower
their overall risk. Unlike the AARP Global Growth Fund, which invests in
both U.S. and foreign markets, the AARP International Stock Fund will
invest solely in foreign markets.
One reason that some investors may wish to invest overseas is that certain
foreign economies may grow more rapidly than the U.S. economy and may offer
opportunities for achieving investment returns superior to those available
from investing in a fund which invests primarily in domestic equity
securities. Another reason is that foreign markets do not always move in
step with each other or with the U.S. market. A portfolio invested in a
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number of markets worldwide will be better diversified than a portfolio
that is restricted to a single market.
Another benefit of the Fund is that it eliminates the complications and
extra costs associated with direct investment in individual foreign
securities. Individuals investing directly in foreign stocks may find it
difficult to make purchases and sales, to obtain current information, to
hold securities in safekeeping, and to convert the value of their
investments from foreign currencies into U.S. dollars. The Fund manages
these tasks for the investor. With a single investment, the investor has a
diversified international investment portfolio, which is actively managed
by experienced professionals. The Fund Manager has had long experience in
dealing in foreign markets and with brokers and custodian banks around the
world. The Fund Manager also has the benefit of an established information
network and believes the Fund affords a convenient and cost-effective
method of investing internationally.
In pursuing long-term growth, the Fund typically will have more share price
fluctuation than most other AARP Funds. See "What are the risks?" below.
Growth will come primarily from possible appreciation in the value of
shares.
What does the Fund invest in?
The Fund generally invests in equity securities of established
dividend-paying companies listed on foreign exchanges within developed
foreign markets. The Fund does not invest in emerging markets, but instead,
focuses its investments on the 21 developed foreign countries included in
the Morgan Stanley Capital International World ex-US Index. The Fund will
normally invest at least 65% of its total assets in securities of at least
three different countries.
When the Fund Manager believes that it is appropriate, the Fund may invest
up to 20% of its total assets in investment-grade foreign debt securities.
Such debt securities include debt of foreign governments, supranational
organizations and private issuers, including bonds denominated in the
European Currency Unit (ECU). Debt investments will be selected on yield,
credit quality, and the outlooks for currency and interest rates in
different parts of the globe, taking into account the ability to hedge a
degree of currency or local bond price risk. The Fund may purchase
investment-grade bonds, which are those rated Aaa, Aa, A or Baa by Moody's
or AAA, AA, A or BBB by S&P or, if unrated, judged by the Fund Manager to
be of equivalent quality. Securities rated Baa by Moody's or BBB by S&P are
neither highly protected nor poorly secured. Moody's considers bonds it
rates Baa to have speculative elements as well as investment-grade
characteristics.
For temporary defensive purposes, the Fund may invest without limit in high
quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic
and foreign branches of U.S. banks, bankers' acceptances, and other debt
securities, such as Canadian or U.S. government obligations or currencies,
corporate debt instruments, and securities of companies incorporated in and
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having their principal activities in Canada or the U.S. when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
The Fund may make limited use of financial futures contracts and related
options and may also invest in foreign currency exchange contracts. The
Fund may write (sell) covered call options to enhance investment return,
and may purchase and sell options on stock indices for hedging purposes.
See "Other Investment Policies and Risk Factors" on page 54.
What is Scudder's international investing experience?
Scudder has been a leader in international investment management for over
40 years. In 1953, Scudder introduced the first mutual fund available in
the U.S. investing internationally in securities of issuers in several
foreign countries. Today, Scudder manages over $22 billion in assets
invested in foreign markets.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term capital growth through international investing. International
investing involves economic and political considerations not typically
found in U.S. financial markets.
Foreign securities. Investments in foreign securities involve special
considerations, due to more limited information, higher brokerage costs and
different accounting standards. They may also entail certain risks, such as
possible imposition of dividend or interest withholding or confiscatory
taxes, possible currency blockages or transfer restrictions, expropriation,
nationalization or other adverse political or economic developments and the
difficulty of enforcing obligations in other countries. Foreign securities
may be less liquid and more volatile than comparable domestic securities,
and there is less government regulation of stock exchanges, brokers, listed
companies and banks than in the U.S. Purchases of foreign securities are
usually made in foreign currencies and, as a result, the Fund may incur
currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar.
The Fund is designed for long-term investors who can accept international
investment risk. Since the Fund normally will be invested in foreign
stocks, changes in the Fund's share value may be quite different than
movements in the U.S. stock markets. The Fund's share price will reflect
the movements of the different markets in which it is invested and the
currencies in which the investments are denominated. The strength or
weakness of the U.S. dollar against foreign currencies may account for part
of the Fund's investment performance. Investors should focus on the longer
term (at least 5 years or more) and be comfortable with fluctuation in the
value of their principal. Because of the Fund's international approach and
its associated risks, investment in shares of the Fund should be considered
as part of a broadly-diversified portfolio. See "Other Investment Policies
and Risk Factors" on page 54.
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How does the Fund seek to manage risk?
While the Fund involves above-average equity risk, it is designed to lessen
volatility of its share price relative to other international stock funds.
It normally does this by diversifying widely among relatively high
dividend-paying stocks issued in developed foreign markets.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
capital gain typically will be distributed annually after September 30. See
page 61 for additional information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Sheridan Reilly joined Scudder in 1995. He has
worked in Scudder's Global Equity Group and has over 10 years of investment
industry experience. Portfolio Manager Irene Cheng joined Scudder in 1993.
In addition to her 13 years of investment experience, Ms. Cheng has worked
on Scudder's institutional international equity accounts.
AARP SMALL COMPANY STOCK FUND
Fund Objective:
From investments primarily in the stocks of small U.S. companies, the Fund
seeks to provide long-term capital growth, and to keep the value of its
shares more stable than other small company stock funds.
For whom is the Fund designed?
This new Fund, which commenced operations on February 1, 1997, is suitable
for investors seeking high long-term growth of their principal. Investors
should invest for the longer term (at least 5 years or more) and be
comfortable with the value of their principal fluctuating up and down. The
Fund is also available for AARP IRA and other retirement plan accounts.
What does the Fund offer to investors?
AARP Small Company Stock Fund combines the long-term capital appreciation
potential of small company stocks with the conservative nature of a
value-oriented, growth and income approach to investing. The Fund focuses
primarily on U.S. small capitalization stocks. The stocks held by the Fund
will have a higher average dividend yield than the small capitalization
stock segment of the market as a whole. These securities may be out of
favor or not closely followed by investors, yet, in the opinion of the Fund
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Manager, may reward investors with substantial returns over time. U.S.
small capitalization stocks have outperformed large capitalization stocks
over time, although with greater volatility in returns. Since the Fund
involves both above-average performance opportunity and risk, it is
suitable for those individuals who are investing for a long-term goal, such
as accumulating assets for retirement. The Fund should be considered as
part of a diversified portfolio, since it is not, by itself, a complete
investment program. Nonetheless, it can help round out an investment
portfolio already holding other types of stock and fixed-income
investments.
The Fund offers low-cost, convenient access to a part of the U.S. stock
market in which investors might otherwise find it difficult to participate.
On their own, individual investors might find it a challenge to analyze
data on small companies, receive complete, up-to-date financial
information, and buy and sell securities at favorable prices. The Fund's
management team assumes these responsibilities for investors.
What does the Fund invest in?
In pursuing its objective of long-term capital growth, the Fund normally
remains substantially invested in the common stocks of small U.S.
companies. Using a quantitative investment approach developed by the Fund
Manager, the Fund focuses on equity securities of companies with market
capitalizations below $1 billion that, as a group, have a dividend yield
higher than the average of those in the Russell 2000 IndexR and that the
Fund Manager believes are undervalued relative to the stocks in the Russell
2000 IndexR. The Russell 2000 IndexR 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 smaller companies.
The Fund takes a diversified approach to investing in small capitalization
stocks. After the Fund's start-up phase, it will not be unusual for it to
hold stocks of more than one hundred small companies, representing a
variety of U.S.
industries.
While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (either
convertible or nonconvertible), rights and warrants. Securities may be
listed on national exchanges or traded over-the-counter. The Fund may
invest up to 20% of its assets in U.S. Treasury, agency and instrumentality
obligations, may enter into repurchase agreements and may make use of
financial futures contracts and related options. The Fund may purchase and
sell options or futures on stock indices for hedging purposes or as a
temporary investment to accommodate cash flows. See "Other Investment
Policies and Risk Factors" on page 54.
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
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instruments when the Fund Manager deems such a position advisable in light
of economic or market conditions.
What are the risks?
The risk to principal is consistent with the Fund's objective of seeking
long-term capital growth through investing in small company stocks.
Investors should focus on the longer term (at least 5 years or more) and be
comfortable with fluctuation in the value of their principal which may be
considerable at times. See "Other Investment Policies and Risk Factors" on
page 54.
How does the Fund seek to manage risk?
While the Fund involves above-average stock market risk, the Fund is
designed to lessen volatility of its share price relative to other small
company stock funds. It does this by using a highly systematic
value-oriented investment style that focuses on small capitalization issues
which, grouped together, normally provide higher than average dividend
income. Risk is further managed by diversifying among a large number of
stocks, and by using specialized portfolio management techniques.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as
little as $500, if you establish an Automatic Investment Plan for at least
$100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of
only $250.
When are distributions paid?
Any dividends typically will be distributed in December. Any net realized
gain typically will be distributed annually after September 30. See page 61
for additional information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager James M. Eysenbach has responsibility for setting
the Fund's investment strategy and for overseeing the Fund's day-to-day
management. Mr. Eysenbach joined Scudder in 1991 as a senior quantitative
analyst and is currently director of quantitative research for Scudder. Mr.
Eysenbach has more than ten years investment research and management
experience. Philip S. Fortuna, Portfolio Manager, joined Scudder in 1986 as
manager of institutional equity accounts. He became director of
quantitative research in 1987 and served as director of investment
operations from 1993 to 1994.
AARP MANAGED INVESTMENT PORTFOLIOS:
AARP DIVERSIFIED INCOME PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
The AARP Managed Investment Portfolios are two professionally managed,
diversified portfolios of the AARP Managed Investment Portfolios Trust (the
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"Trust"). In pursuit of its investment objective, each Portfolio invests in a
select mix of the conservatively managed AARP mutual funds ("underlying AARP
mutual funds"). Each portfolio is designed to serve as a complete investment
program or as a core part of a larger portfolio, while keeping the value of its
shares more stable than a similar mix of stock and bond investments.
Portfolio Objectives:
o The Diversified Income Portfolio seeks to provide current income with
modest long-term appreciation by investing primarily in AARP bond
mutual funds.
o The Diversified Growth Portfolio seeks long-term growth of capital by
investing primarily in AARP stock mutual funds.
For whom are the Portfolios designed?
The AARP Managed Investment Portfolios are designed for individuals who prefer
to have asset allocation decisions made by professional money managers and
appreciate the advantages of broad diversification through a single investment.
o The Diversified Income Portfolio may be appropriate for conservative
investors nearing retirement or investors enjoying retirement, who are
looking for income with some appreciation potential. Investors should
be prepared to invest for 3 to 5 years or more.
o The Diversified Growth Portfolio may be appropriate for long-term
investors planning for retirement or more aggressive retired investors
with an investment time horizon of at least 5 years or more.
What do the Portfolios offer to investors?
Both Portfolios offer investors a simple means to allocate their assets to
pursue a certain goal. Each Portfolio can serve as a complete investment
program, or as a core part of a larger portfolio.
o The Diversified Income Portfolio offers investors the opportunity for
income and some share price appreciation by investing in a diversified
portfolio consisting primarily of AARP bond mutual funds, and
secondarily, AARP stock and AARP money market mutual funds.
o The Diversified Growth Portfolio offers investors the opportunity for
long-term growth of principal by investing in a diversified portfolio
comprised primarily of AARP stock mutual funds, and secondarily, AARP
bond and AARP money market mutual funds.
o Both portfolios offer shareholders an investment choice that is
broadly diversified.
o Both portfolios are managed by investment professionals at Scudder.
o No additional management fees or expenses are charged for allocation
among the AARP mutual funds.
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What does each Portfolio invest in?
Each Portfolio may invest in any of the AARP mutual funds, except for those
designed to provide tax-free income. Both Portfolios will avoid taking extreme
investment positions in an effort to "time the market." Rather, shifts among
AARP stock and bond mutual funds are expected to occur only periodically and in
generally small increments.
Under normal market conditions, each of the AARP Managed Investment Portfolios
will invest within the investment ranges described below:
o The Diversified Income Portfolio will normally invest 60-80% of total
assets in AARP bond mutual funds; and 20-40% of total assets in AARP
stock mutual funds; and 0-20% of total assets in cash or cash
equivalents.
o The Diversified Growth Portfolio will normally invest 60-80% of total
assets in AARP stock mutual funds; 20-40% of total assets in AARP bond
mutual funds; and 0-20% of total assets in cash or cash equivalents.
If, as a result of appreciation or depreciation, the percentage of the
Portfolios' assets invested in the above categories exceeds or is less than the
applicable range, the Fund Manager will consider whether to reallocate the
assets of the Portfolio to comply with the stated ranges.
Each Portfolio will purchase or sell shares of underlying AARP mutual funds to:
(a) accommodate purchases and sales of each Portfolio's shares, (b) change the
percentages of each Portfolio's assets invested in each of the underlying AARP
mutual funds in response to changing market conditions, and (c) maintain or
modify the allocation of each Portfolio's assets in accordance with the
investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including AARP money market funds, repurchase agreements,
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks.
What are the risks?
Each Portfolio's risks are determined by the nature of the securities held by
the underlying AARP mutual funds as well as the proportion of investment in each
underlying AARP mutual fund that, in turn, reflects the portfolio management
strategies used by the Fund Manager. The following are descriptions of certain
risks related to investments in each Portfolio.
o As the investments in each Portfolio are represented by a group of
underlying AARP mutual funds, the performance of a Portfolio is
directly related to the investment performance of these underlying
AARP mutual funds. The ability of a Portfolio to meet its investment
objective is directly related to the ability of the underlying AARP
mutual funds to meet their objectives as well as the allocation among
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those underlying AARP mutual funds by the portfolio management team.
o Each Portfolio's share price and yield will fluctuate in response to
various market and economic factors related to both the stock and bond
markets. Certain of the underlying AARP mutual funds invest in debt
securities making them subject to credit risk, interest rate risk and
pre-payment risk. Other underlying AARP mutual funds invest in equity
securities that will fluctuate in value with changing stock market
conditions and related factors. Also, each Portfolio can invest in
underlying AARP mutual funds that are, in turn, invested in
international securities and thus are subject to additional risks of
these investments including changes in foreign currency exchange rates
and political risk.
For information about the investment techniques and the risks involved in the
underlying AARP mutual funds, please refer to each underlying Fund's description
elsewhere in this prospectus and "Other Investment Policies and Risk Factors" on
page 54.
How do the Portfolios seek to manage risk?
The Portfolios seek to manage risk through active portfolio management and
diversification. Each Portfolio will invest in at least five underlying AARP
mutual funds, all of which are managed for reduced share price volatility.
What is the minimum initial investment?
The minimum initial investment is $2,000. You may open an account with as little
as $500, if you establish an Automatic Investment Plan for at least $100/month.
You can open an AARP IRA or AARP UGMA/UTMA with an initial investment of only
$250.
When are distributions paid?
Dividends on the Diversified Income Portfolio will be declared and distributed
monthly to investors. Any dividends on the Diversified Growth Portfolio will be
distributed in December. Any net realized capital gain for the Portfolios
typically will be distributed after September 30. See page 61 for additional
information on distributions and taxes.
Who at Scudder manages my investment?
Lead Portfolio Manager Philip S. Fortuna joined Scudder in 1986 as manager of
institutional equity accounts. He became director of quantitative research in
1987 and served as director of investment operations from 1993 to 1994.
Portfolio Manager Salvatore J. Bruno joined Scudder in 1991 and serves as a
quantitative analyst in Scudder's Quantitative Services Group. Mr. Bruno has
over 5 years of investment experience and is responsible for the strategic
decision making and periodic reallocation of the funds. Shahram Tajbakhsh,
Portfolio Manager, joined Scudder in 1996 and is also responsible for the
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strategic decision making and allocation of the funds. Mr. Tajbakhsh has over 5
years of industry experience, which includes work in developing analytical
investment tools.
Description of the Underlying AARP Mutual Funds
Details on the investment objectives and policies of the underlying AARP mutual
funds are included in this prospectus. As with any investment, there is no
guarantee that the AARP Investment Portfolios or the underlying AARP mutual
funds will successfully meet their investment objectives.
The Portfolios may invest in the following AARP money market mutual fund which
is designed to provide stability of principal and income:
AARP High Quality Money Fund see page 19
The Portfolios may invest in the following AARP mutual funds which are designed
to provide current income:
AARP GNMA and U.S. Treasury Fund see page 24
AARP High Quality Bond Fund see page 26
AARP Bond Fund for Income see page 28
The Portfolios may invest in the following AARP mutual funds designed to provide
long-term growth of capital:
AARP Balanced Stock and Bond Fund see page 33
AARP Growth and Income Fund see page 36
AARP U.S. Stock Index Fund see page 38
AARP Global Growth Fund see page 40
AARP Capital Growth Fund see page 43
AARP International Stock Fund see page 45
AARP Small Company Stock Fund see page 48
OTHER INVESTMENT POLICIES AND RISK FACTORS
Below are some detailed descriptions of several types of securities and
investment techniques referred to in this prospectus.
Maintaining $1.00 Constant Share Price in Money Funds
The AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund
attempt to maintain a constant net asset value per share. To do so, they operate
in accordance with a rule of the Securities and Exchange Commission (SEC) that
requires all assets to be cash, cash items, and high-quality U.S.
dollar-denominated investments having a remaining maturity of generally not more
than 397 calendar days from the date of purchase. The AARP High Quality Money
Fund, however, may invest in U.S. Government securities having maturities of up
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to 762 calendar days. The SEC also requires that the average dollar-weighted
maturity of these Funds not exceed 90 days.
When-Issued Securities
All AARP Mutual Funds, except the AARP Growth and Income Fund, the AARP U.S.
Stock Index Fund, the AARP Global Growth Fund, the AARP Capital Growth Fund, the
AARP International Stock Fund, and the AARP Small Company Stock Fund, may
purchase securities on a when-issued or forward delivery basis. That means
payment and delivery of the security will be at a later date. The price and
yield are generally fixed on the date of commitment to purchase. The Fund does
not earn interest before delivery of the security. At the time of settlement,
the market value of the security may be more or less than the purchase price.
Repurchase Agreements
This is an agreement under which a Fund may buy one or more U.S. Government
obligations which the seller simultaneously agrees to repurchase at a specified
time and price. The Fund can earn income for periods as short as overnight. Such
an agreement may enhance liquidity since it is normally a short-term commitment.
If the seller under a repurchase agreement becomes insolvent, the Fund's right
to sell the securities may be restricted. Also, the value of such securities may
decline before the Fund can sell them. The Fund might also incur transaction
costs by selling the securities.
Each of the AARP Mutual Funds may enter into repurchase agreements only with
Federal Reserve member banks or broker-dealers recognized as reporting
government securities dealers.
Mortgage and other asset-backed securities
The AARP GNMA and U.S. Treasury Fund, the AARP High Quality Bond Fund, the AARP
Bond Fund for Income, and the AARP Balanced Stock and Bond Fund may invest in
mortgage-backed securities, which are securities representing interests in pools
of mortgage loans. These securities provide shareholders with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of a Fund's shares. When interest
rates rise, mortgage prepayment rates decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares. Also, GNMA and other
mortgage-backed securities may be purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs. In addition, the AARP High Quality Bond Fund, the AARP
Balanced Stock and Bond Fund and the AARP Bond Fund for Income may invest in
mortgage-backed securities issued by other issuers, such as the Federal National
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Mortgage Association (FNMA), which are not guaranteed by the U.S. Government.
Moreover, the Funds may invest in debt securities which are secured with
collateral consisting of mortgage-backed securities and in other types of
mortgage-related securities.
The AARP High Quality Bond Fund, the AARP Bond Fund for Income, and the AARP
Balanced Stock and Bond Fund may also invest in securities representing
interests in pools of certain other consumer loans, such as automobile loans or
credit card receivables. In some cases, principal and interest payments are
partially guaranteed by a letter of credit from a financial institution.
Zero Coupon Securities
The AARP Balanced Stock and Bond Fund, AARP Bond Fund for Income and the AARP
Global Growth Fund may invest in zero coupon securities which pay no cash income
and are issued at substantial discounts from their value at maturity. Zero
coupon securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
cash distributions of interest.
High Yield/High Risk Securities
AARP Bond Fund for Income may invest a limited amount of assets in debt
securities which are rated below investment-grade (hereinafter referred to as
"lower rated securities") or which are unrated, but deemed equivalent to those
rated below investment-grade by the Fund Manager. The lower the ratings of such
debt securities, the greater their risks. These debt instruments generally offer
a higher current yield than that available from higher grade issues, but
typically involve greater risk. The yields on high yield/high risk bonds will
fluctuate over time. In general, prices of all bonds rise when interest rates
fall and fall when interest rates rise. While less sensitive to changing
interest rates than investment-grade debt, lower rated securities are especially
subject to adverse changes in general economic conditions and to changes in the
financial condition of their issuers. During periods of economic downturn or
rising interest rates, issuers of these instruments may experience financial
stress that could adversely affect their ability to make payments of principal
and interest and increase the possibility of default.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of these securities
especially in a market characterized by only a small amount of trading and with
relatively few participants. These factors can also limit the Fund's ability to
obtain accurate market quotations for these securities, making it more difficult
to determine the Funds' net asset value.
In cases where market quotations are not available, lower rated securities are
valued using guidelines established by the Funds' Board of Trustees. Perceived
credit quality in this market can change suddenly and unexpectedly, and may not
fully reflect the actual risk posed by a particular lower rated or unrated
security.
Foreign Securities
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Bond Fund
and the AARP Bond Fund for Income may invest without limit in foreign
securities.
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Investments in foreign securities may benefit a Fund by providing access to
different markets and opportunities. It may also help to reduce risk by
increasing diversification. However, foreign securities involve special
considerations. Brokerage costs are higher. Information about foreign securities
is more limited. Foreign companies or securities often have different and less
stringent government regulations, different accounting standards, slower
settlement of transactions, and more limited and volatile trading markets.
Investments in foreign securities may also involve other risks. These include
possible imposition of withholding, confiscatory and other taxes; possible
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; and the difficulty of
enforcing obligations in other countries. A Fund may incur currency conversion
costs of purchases made in foreign currencies. There may also be favorable or
unfavorable consequences from the changes in the value of foreign currencies
against the U.S. dollar.
Derivatives
The following descriptions of Forward Foreign Currency Exchange Contracts,
Options Transactions, Futures Contracts and Related Options discuss the types of
derivatives in which certain of the AARP Mutual Funds may invest.
Forward Foreign Currency Exchange Contracts
Each of the Funds in the AARP Growth Trust, and the AARP High Quality Bond Fund
and the AARP Bond Fund for Income may enter into forward foreign currency
exchange contracts. These contracts, which involve costs, permit the Funds to
purchase or sell a specific amount of a particular currency at a specified price
on a specified future date. They may be used by a Fund only to hedge against
possible variations in exchange rates of currencies in countries in which it may
invest.
A Fund will realize a benefit only to the extent that the relevant currencies
move as anticipated. If the currencies do not move as anticipated, the use of
these contracts may result in losses greater than if they had not been used.
Options Transactions
In an attempt to enhance investment returns, Funds in the AARP Growth Trust and
the AARP Income Trust may each write covered call options. These are agreements
to sell a particular security in the Fund's portfolio at a specified price on or
before the expiration date of the option. Covered call options may be written on
portfolio securities worth up to 25% of the Fund's net assets.
There are risks associated with writing covered options. These include the
possible inability to make closing transactions at favorable prices or because
an exercise notice has been received. The Funds also risk giving up appreciation
on the underlying security in excess of the exercise price.
Each of the Funds in the AARP Growth Trust may purchase and sell exchange-traded
options on stock indices. In addition, these Funds may engage in
over-the-counter options transactions with broker-dealers who make markets in
these options. Over-the-counter options may be more difficult to terminate than
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exchange-traded options. They are frequently illiquid, and involve counterparty
credit risk. The Fund Manager will engage in such transactions to hedge against
unfavorable price movements which can adversely affect the value of the Fund's
securities or securities the Fund intends to buy. These transactions involve
risk, including the risk that market prices may move in unanticipated directions
or will not correlate well with a Fund's portfolio, causing a Fund to lose the
value of the option premium and to fail to realize any benefit from the
transaction. Further, a closing transaction may not be available when a Fund
wishes to close out a transaction.
Futures Contracts and Related Options
To a limited extent, the Funds in the AARP Income Trust and the AARP Insured Tax
Free General Bond Fund, the AARP Balanced Stock and Bond Fund, the AARP Global
Growth Fund, the AARP International Stock Fund, AARP U.S. Stock Index Fund, and
the AARP Small Company Stock Fund may enter into financial futures contracts
including futures contracts on securities indices, may purchase and write
related put and call options, and may engage in related closing transactions.
These techniques are used to attempt to protect against adverse effects of
interest rates changes or currency changes in the case of the AARP High Quality
Bond Fund, the AARP Bond Fund for Income, the AARP Global Growth Fund, and the
AARP International Stock Fund. For example, a particular index-based futures
contract may be used when the Fund Manager believes that correlation exists
between price movements in an index-based futures contract and securities in a
Fund's portfolio. Such correlation is not likely to be perfect. That is because
a Fund's portfolio is not likely to contain the same securities used in the
index.
The margin deposits for futures contracts and premiums paid for related options
may not be more than 5% of a Fund's total assets. These transactions require a
Fund to segregate assets (such as liquid securities and cash) to cover contracts
that would require it to purchase securities. These transactions also result in
brokerage costs.
These techniques involve some risk. A Fund may be precluded from realizing a
benefit from favorable price movements in the related portfolio position of the
Fund and could lose the expected benefit of the transactions if interest rates
or currency changes in the case of AARP High Quality Bond Fund, AARP Bond Fund
for Income, AARP Global Growth Fund, or AARP International Stock Fund, move in
an unanticipated manner. To the extent that the Fund Manager's view of market
movements is incorrect, the use of such instruments may result in losses greater
than if they had not been used. In addition, if the AARP Insured Tax Free
General Bond Fund purchases futures contracts on taxable securities or indices
of such securities, their value may not fluctuate in proportion to the value of
the Fund's securities. This would limit that Fund's ability to hedge effectively
against interest rate risk. Further, while a Fund buys a futures contract only
if there appears to be a liquid secondary market for such contracts, there can
be no assurance that a Fund will be able to close out any particular futures
contract.
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Segregated Accounts
Each Fund may be required to segregate assets (such as cash, U.S. Government
securities and other high grade debt obligations) or otherwise provide coverage
consistent with applicable regulatory policies. This would be in respect to the
Fund's permissible obligations under the call and put options it writes, the
forward foreign currency exchange contracts it enters into and the futures
contracts it enters into.
Convertible Securities
Each Fund in the AARP Growth Trust, AARP High Quality Bond Fund, and AARP Bond
Fund for Income may invest in convertible securities. Convertible securities
include convertible bonds, notes and debentures, convertible preferred stocks,
and other securities that give the holder the right to exchange the security for
a specific number of shares of common stock. Convertible securities entail less
credit risk than the issuer's common stock because they are considered to be
"senior" to common stock. Convertible securities generally offer lower interest
or dividend yields than non-convertible debt securities of similar quality. They
may also reflect changes in value of the underlying common stock.
Demand Obligations
Each of the AARP Mutual Funds may purchase demand obligations. Demand
obligations permit the holder to demand payment of a specified amount prior to
maturity. The holder's right to payment depends upon the issuer's ability to pay
principal and interest on demand. A Fund will purchase demand notes only to
enhance liquidity. The Fund Manager will continuously monitor the
creditworthiness of issuers of such obligations.
Stand-by Commitments
The AARP Tax Free Funds may enter into stand-by commitments (also known as puts)
to facilitate liquidity. Stand-by commitments permit a Fund to resell municipal
securities to the original seller at a specified price and generally involve no
cost. Costs, in any event, are limited to .5% of a Fund's total assets. To
minimize the risk that the seller may not be able to repurchase the security,
the Fund Manager will monitor the creditworthiness of the seller.
"Put" Bonds
The AARP Tax Free Funds may also purchase long-term fixed rate bonds that have
been coupled with an option granted by a third party financial institution. This
allows the Funds to tender (or "put") bonds to the institution at specified
intervals and receive the face value of them. For the AARP High Quality Tax Free
Money Fund, an interval can not exceed 397 calendar days. These third party puts
are available in several different forms. They may be custodial receipts or
trust certificates, and may be combined with other features such as interest
rate swaps.
Tax-exempt Participation Interests
The AARP Tax Free Funds may purchase tax-exempt participation interests from a
bank representing a fully-insured portion of the bank's holdings of municipal
securities. The Fund will obtain an irrevocable letter of credit or guarantee
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from the bank and will have, under certain circumstances, the right to resell
the participation to the bank on 7 days' notice. To the extent any participation
interest is illiquid, it is subject to the Fund's limit on restricted and not
readily marketable securities.
Municipal Lease Obligations
The AARP Tax Free Funds may also invest in municipal lease obligations generally
as a participation interest in a municipal obligation from a bank or other
financial intermediary. Municipal lease obligations are issued by state and
local governments to acquire land, equipment or facilities. Unlike general
obligation or revenue bonds, these contracts are not secured by the issuer's
credit, and if the issuing state or local government does not appropriate
payments, the lease may terminate, leaving the funds with property that may
prove costly to dispose of. In deciding which contracts to invest in, the Fund
Manager evaluates the likelihood of the governmental issuer discontinuing
appropriation for the leased property.
Portfolio Turnover
Each of the AARP Funds may buy and sell securities to take advantage of
investment opportunities. The Fund Manager will do so to improve overall
investment return consistent with that Fund's objectives. These transactions
involve transaction costs in the form of spreads or brokerage commissions.
Recent economic and market conditions have necessitated more active trading,
resulting in a higher portfolio turnover rate for the AARP High Quality Bond
Fund. A higher rate involves greater transaction costs to the Fund and may
result in the realization of net capital gains, which would be taxable to
shareholders when distributed.
In the case of AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund and AARP Small Company Stock Fund, it is anticipated,
under normal investment conditions, that the Fund's portfolio turnover rate will
not exceed 75% for the initial fiscal year. In the case of AARP Diversified
Income Portfolio and AARP Diversified Growth Portfolio, it is anticipated, under
normal investment conditions, that each Fund's portfolio turnover rate will not
exceed 50% for the initial fiscal year. However, economic and market conditions
may necessitate more active trading, resulting in a higher portfolio turnover
rate.
INVESTMENT RESTRICTIONS
To help reduce investment risk, each of the AARP Mutual Funds has adopted
certain investment policies. Only the shareholders can approve changes to the
following policies:
o A Fund may not make loans. (A purchase of a debt security is not a
loan for this purpose.) However, the Fund may lend its portfolio
securities and enter into repurchase agreements.
o A Fund may borrow money only for temporary or emergency purposes.
A complete description of these and other policies and restrictions is contained
in the Statement of Additional Information.
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ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES
Are taxes withheld?
Generally, taxes are not withheld on purchases, redemptions, or distributions.
However, federal tax law requires the AARP Mutual Funds to withhold 31% of
taxable dividends, capital gain distributions and redemption or exchange
proceeds for accounts without a certified social security or tax identification
number, or other certified information. To avoid this withholding, make sure you
complete and sign the Signature and Investor Information Section of your
Enrollment Form. AARP IRA, AARP SEP-IRA and AARP Keogh Plan accounts are exempt
from withholding regulations.
The AARP Mutual Funds reserve the right to reject Enrollment Forms or close
accounts without a certified Social Security or tax identification number. In
such cases, Enrollment Forms received without this information will be returned
to the investor with a check for the amount invested.
What else should I know about distributions and taxes?
o You can receive your dividend and capital gain distributions in one of
three ways:
1. You can have a check sent to your address or to your bank;
2. You can reinvest them in additional shares of an AARP Mutual
Fund; or
3. You can invest them in shares of another AARP Mutual Fund.
o If your investment is in the form of an AARP IRA, AARP SEP-IRA or AARP
Keogh Plan account, all distributions are automatically reinvested.
o If you reinvest your dividends and capital gains, you will be
purchasing shares at the current share price.
o All taxable dividends from net investment income are taxable to you as
ordinary income. This is so whether you receive dividends as cash or
additional shares.
o Capital gains distributions are also currently taxable, whether
received in cash or reinvested.
o Distributions of short-term capital gains by all the AARP Mutual Funds
are taxable as ordinary income.
o Distributions of long-term capital gains are taxable for federal
income tax purposes as long-term capital gains regardless of the
length of time you have owned shares. Any capital gain distributed by
the AARP Tax Free Funds are generally taxable in the same manner as
distributions by other Funds.
o The AARP Tax Free Funds are managed to pay you dividends free from
federal income taxes, including the Alternative Minimum Tax (AMT).
However, these dividends may be subject to state and local income
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taxes. Also, these dividends are taken into account in determining
whether your income is large enough to subject a portion of your
Social Security benefits and certain Railroad Retirement benefits, if
any, to federal income taxes.
o If you are a shareholder in the AARP Global Growth Fund or the AARP
International Stock Fund, you may be able to claim a credit or
deduction on your income tax return for your pro rata portion of
qualified taxes paid by the Fund to foreign countries.
o Each AARP Mutual Fund annually sends you detailed tax information
about the amount and type of its distributions.
o A redemption involves a sale of shares and may result in a capital
gain or loss for federal income tax purposes. Exchanges are treated as
redemptions for federal income tax purposes. Exchanges occur when you
sell shares in one AARP Mutual Fund and purchase shares in another
AARP Mutual Fund.
o The AARP Mutual Funds reserve the right to make extra distributions
for tax purposes.
FUND ORGANIZATION
The AARP Investment Program Trusts
The 15 mutual fund portfolios described in this prospectus are organized as five
Massachusetts business trusts--AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust and AARP Managed Investment
Portfolios Trust. Each trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940. The AARP Cash
Investment Funds was organized in January 1983, and the AARP Income Trust, the
AARP Tax Free Income Trust and the AARP Growth Trust were organized in June
1984. The AARP Tax Free Income Trust (formerly the AARP Insured Tax Free Income
Trust) was renamed effective August 1, 1991. The AARP Managed Investment
Portfolios Trust was organized in October 1996.
General Management
The Trustees have overall responsibility for the management of the Trusts under
Massachusetts law. Under their direction, the Fund Manager--Scudder, Stevens &
Clark, Inc.--provides general investment management of the AARP Mutual Funds.
The Trustees supervise each Trust's activities. The shareholders elect the
Trustees and may remove them. Shareholders have one vote per share held on
matters on which they are entitled to vote.
The Trusts are not required to hold annual shareholder meetings and have no
current intention to do so. There may be special meetings for purposes such as
electing or removing Trustees, changing fundamental policies or approving an
investment advisory contract. The Fund Manager will help shareholders to
communicate with other shareholders in connection with removing a Trustee as if
Section 16(c) of the Investment Company Act of 1940 applied.
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Since the Trusts use a combined prospectus, it is possible that one Trust or
AARP Mutual Fund might become liable for a misstatement in this prospectus
regarding another Trust or AARP Mutual Fund. The Trustees of each Trust
considered this risk when approving the use of a combined prospectus.
The right of the Trusts and AARP Mutual Funds to use the AARP name will end upon
termination of the member services agreement with the Fund Manager unless AARP
otherwise agrees to let the AARP Mutual Funds continue to use the AARP name.
Management Fees
Each AARP Mutual Fund, except for the AARP Managed Investment Portfolios, pays
the Fund Manager a fee for management and administrative services. The
management fee consists of two elements: a Base Fee and an Individual Fund Fee.
The Base Fee is calculated as a percentage of the combined net assets of all of
the AARP Mutual Funds. Each AARP Mutual Fund, except for the AARP Managed
Investment Portfolios, pays, as its portion of the Base Fee, an amount equal to
the ratio of its daily net assets to the daily net assets of all of the AARP
Mutual Funds. The table below shows the annual Base Fee Rate at specified levels
of Program assets:
Annual Base Fee Rate Program Assets
---------------------------------------------------
.350% First $2 billion
.330% Next $2 billion
.300% Next $2 billion
.280% Next $2 billion
.260% Next $3 billion
.250% Next $3 billion
.240% Thereafter
In addition to the Base Fee Rate, each AARP Mutual Fund, except for the AARP
U.S. Stock Index Fund and the AARP Managed Investment Portfolios, pays a flat
Individual Fund Fee based on the net assets of that Fund. This fee rate is not
linked to the total assets of the Program. The Individual Fee Rate recognizes
the different characteristics of each AARP Mutual Fund, the varying levels of
complexity of investment research and securities trading required to manage each
Fund, as well as the relative value that can be, and has been, added by the Fund
Manager. The table below shows the Individual Fund Fee Rate for each of the AARP
Mutual Funds:
Fund Individual Fee Rate
-------------------------------------------------------------
AARP High Quality Money Fund .10%
AARP High Quality Tax Free Money Fund .10%
AARP GNMA and U.S. Treasury Fund .12%
AARP High Quality Bond Fund .19%
AARP Bond Fund for Income .28%
AARP Insured Tax Free General Bond Fund .19%
AARP Balanced Stock and Bond Fund .19%
AARP Growth and Income Fund .19%
AARP U.S. Stock Index Fund 0%
AARP Global Growth Fund .55%
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AARP Capital Growth Fund .32%
AARP International Stock Fund .60%
AARP Small Company Stock Fund .55%
Under this fee structure, the combined Base Fee and the Individual Fund Fee,
called the "Effective Management Fee Rate," would be reduced if total Program
assets increase to certain levels, regardless of whether an individual AARP
Mutual Fund's assets increase or decrease. The converse is also true--if assets
decrease to certain levels, the Effective Management Fee Rate increases,
regardless of any increase or decrease in assets of an individual AARP Fund. For
the fiscal year ended September 30, 1996, fees paid to the Fund Manager totaled
.39 of 1% of the average daily net assets of the AARP High Quality Money Fund,
.46 of 1% of the AARP High Quality Tax Free Money Fund, .41 of 1% of the AARP
GNMA and U.S. Treasury Fund, .62 of 1% of the AARP Capital Growth Fund, .48 of
1% of the AARP High Quality Bond Fund, .49 of 1% of the AARP Insured Tax Free
General Bond Fund and AARP Growth and Income Fund, .48 of 1% of the AARP
Balanced Stock and Bond Fund and .29 of 1% of the AARP Global Growth Fund.
The Fund Manager pays a portion of the management fee to AARP Financial Services
Corporation (AFSC). AFSC provides the Fund Manager with advice and other
services relating to AARP Fund investment by AARP members.
The fee paid to AFSC is calculated on a daily basis and depends on the level of
total assets of the AARP Investment Program. The fee rate decreases as the level
of total assets increases. The fee rate for each level of assets is .07 of 1%
for the first $6 billion, .06 of 1% for the next $10 billion and .05 of 1%
thereafter.
The fee paid to the Subadviser is calculated on a quarterly basis and depends on
the level of total assets in the AARP U.S. Stock Index Fund. The fee rate
decreases as the level of total assets for the Fund increases. The fee rate for
each level of assets is: .07% of the first $100 million of average daily net
assets, .03% of such assets in excess of $100 million, and .01% of such assets
in excess of $200 million, with a minimum annual fee of $75,000. For the first
12 months of management, the Subadviser has agreed to waive a portion of its
fee. After the first year, the full fee will be charged.
Under the Investment Management Agreements with the Fund Manager, the Funds are
responsible for all of their expenses, including fees and expenses incurred in
connection with membership in investment company organizations; brokers'
commissions; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the expenses of and the fees
for registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and executive employees of the Trusts who are not affiliated
with the Fund Manager; the cost of printing and distributing reports and notices
to shareholders; and the fees and disbursements of custodians.
Special Servicing Agreement for the AARP Managed Investment Portfolios
All the expenses of the AARP Managed Investment Portfolios will be paid for in
accordance with a Special Servicing Agreement (the "Agreement") entered into by
the Fund Manager, the underlying AARP mutual funds, Scudder Service Corporation,
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Scudder Fund Accounting Corporation, Scudder Investor Services, Inc. and each
Portfolio. Under each Agreement, the Fund Manager will arrange for all services
pertaining to each operation of each Portfolio including the services of Scudder
Service Corporation and Scudder Fund Accounting Corporation as the Shareholder
Servicing Agent and the Accounting Agent, respectively, for the Portfolio. If
the Trustees determine that the aggregate expenses of a Portfolio are less than
the estimated savings to the underlying AARP mutual fund from the operation of
the Portfolio, the underlying AARP mutual fund will bear those expenses in
proportion to the average daily value of its shares owned by the Portfolio.
Consequently, no underlying AARP fund will be expected to carry expenses that
are in excess of the estimate of savings to it. The estimated savings are
expected to result from the reduction of shareholder servicing costs due to the
elimination of separate shareholder accounts which either currently are or have
potential to be invested in the underlying AARP mutual funds. The estimated
savings produced by the operation of a Portfolio will most likely suffice to
offset most, if not all, the expenses incurred by the Portfolio.
In the event that the aggregate financial benefits to the underlying AARP mutual
funds do not exceed the costs of a Portfolio, the Fund Manager will pay, on
behalf of the Portfolio, that portion of costs determined to be greater than the
benefits.
All expenses of each Portfolio, excluding certain non-recurring and
extraordinary expenses, will be paid for in accordance with the Agreement,
including fees and expenses incurred in connection with membership in investment
company organizations; fees and expenses of the Portfolio's accounting agent;
brokers' commissions; legal, auditing and accounting expenses; taxes and
governmental fees; the fees and expenses of the transfer agent; the expenses of
and the fees for registering or qualifying securities for sale; the fees and
expenses of Trustees, officers and employees of the Portfolio who are not
affiliated with the Fund Manager; the cost of printing and distributing reports
and notices to shareholders; and the fees and disbursements of custodians.
UNDERSTANDING FUND PERFORMANCE
Performance of an AARP Mutual Fund may be included in advertisements, sales
literature or shareholder reports. Important components of performance are
yield, total return and cumulative total return. These components vary based on
changes in market conditions, the level of interest rates and the level of the
Fund's expenses. Yield, total return, and cumulative total return are based on
historical earnings and are not intended to indicate future performance.
What is Yield?
For the AARP High Quality Money Fund, the AARP Income Funds, AARP Tax Free Funds
and AARP Diversified Income Portfolio, yield is a measure of income. Yield
refers to the net investment income generated over a specific period of time. It
is always calculated using a standard industry formula so it is a useful way to
compare the income produced by different mutual funds. For non-money market
funds, the "SEC yield" is an annualized expression of net investment income
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generated by the investments in the fund over a specified 30-day period. This
income is then annualized and then expressed as a percentage. This yield is
calculated according to methods required by the SEC, and may not equate to the
level of income paid to shareholders. For money market funds, yield refers to
the net investment income generated by the fund over a specified 7-day period.
This income is then annualized and expressed as a percentage. For the money
market funds, effective yield is expressed similarly but, when annualized, the
income earned by an investment in the fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
For GNMA securities, net investment income includes realized gains or losses
based on historic cost for principal repayments received. For other securities,
net investment income includes the amortization of market premium or market
discount.
What is Total Return?
The total return of a mutual fund refers to the average annual percentage change
in value of an investment in the fund assuming that the investment has been held
for the stated period. Total return quotations are expressed in terms of average
annual compound rates of return for all periods quoted and assume that all
dividends and capital gain distributions during the period were reinvested in
shares of the fund.
What is Cumulative Total Return?
Cumulative total return of a mutual fund represents the cumulative change in
value of an investment in a fund for various periods. It assumes that all
dividends and capital gain distributions during the period were reinvested in
shares of the fund.
What is meant by Tax-Equivalent Yield and how is it calculated?
To determine if tax-free investing is right for you, it is helpful to convert a
yield from a tax-free mutual fund to its equivalent taxable yield. The
tax-equivalent yields of the AARP Tax Free Funds, which may be quoted from time
to time, let you determine the yield you would have to receive from a fully
taxable investment to produce an after-tax yield equivalent to a tax-free fund.
The calculation is as follows:
Tax-Free Yield = Tax-Equivalent Yield
--------------------
100% - your tax rate
Example: If a tax-free mutual fund has a 30-day average annualized yield of
5.30% and you are in the 31% tax bracket, the calculation would be:
5.30% = 7.68%
----------
100% - 31%
You would need to earn 7.68% with a taxable investment to equal the 5.30% yield
of a tax-free fund. The tax-equivalent yield will vary depending upon your
income tax bracket.
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UNDERSTANDING SHARE PRICE
How is a Fund's share price determined?
Share price is based on a Fund's net assets. It is calculated by dividing the
current market value (amortized cost in the case of the AARP High Quality Tax
Free Money Fund) of total fund assets, less all liabilities, by the total number
of shares outstanding. Scudder Fund Accounting Corporation, a subsidiary of the
Fund Manager, determines net asset value per share of each Fund as of the close
of regular trading on the New York Stock Exchange, normally 4:00 p.m. Eastern
time on each day the Exchange is open for trading. For AARP High Quality Money
Fund and AARP High Quality Tax Free Money Fund, Scudder Fund Accounting
Corporation also determines net asset value per share as of noon Eastern time on
each day the Exchange is open for trading. The Trusts reserve the right to
suspend the sale of Fund shares after appropriate notice to shareholders if the
Trustees determine that it is in the best interest of shareholders.
OPENING AN ACCOUNT
How do I get started?
Decide on the AARP Mutual Fund or Funds which meets your needs. Then fill out,
sign and return your Enrollment Form with your check in the postage paid
envelope provided. Once your Enrollment Form is received, an account number will
be assigned to you. Your check should only be drawn on a U.S. bank and be
payable to the AARP Investment Program.
If you don't want to send your check through the mail, you can send a bank wire.
Simply fill out and return your Enrollment Form in the mail. Then, before you
send the wire, call an AARP Mutual Fund Representative. The Representative will
set up the account and contact you to provide you with your account number and
further wiring instructions. To complete the wire transfer, follow the special
wire transfer instructions below. Please note you cannot open AARP IRA or AARP
Keogh Plan accounts by wire.
What is the minimum investment?
The minimum initial investment for the AARP GNMA and U.S. Treasury Fund, the
AARP Balanced Stock and Bond Fund, and the AARP Growth and Income Fund is $500.
All other AARP Mutual Funds have a minimum initial investment of $2,000:
AARP High Quality Money Fund AARP U.S. Stock Index Fund
AARP High Quality Bond Fund AARP Global Growth Fund
AARP Bond Fund for Income AARP Capital Growth Fund
AARP High Quality Tax Free Money Fund AARP International Stock Fund
AARP Insured Tax Free General Bond Fund AARP Small Company Stock Fund
AARP Diversified Income Portfolio AARP Diversified Growth Portfolio
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You may open an account in one of the mutual funds listed above with as little
as $500, if you establish an Automatic Investment Plan for at least $100/month.
Please call an AARP Mutual Fund Representative at 1-800-253-2277 for more
information.
You can open an AARP IRA in any of the AARP Mutual Funds, except AARP High
Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund, or an
AARP UGMA/UTMA in any of the AARP Mutual Funds with an initial investment of
only $250 per fund account.
What happens if my investment falls below its minimum balance?
The Funds reserve the right to redeem accounts below the minimum balance and
return the proceeds to you if you do not increase an account above the minimum
within 60 days after notice. However, if your account falls below the minimum
solely as a result of market activity, your account will not be closed.
What is the normal processing time of checks when purchasing shares?
If checks are drawn on a U.S. bank, the Program will normally execute checks
(and wire transfers) received in good order on the same business day that they
are received. Accepted purchases for shares in all the AARP Funds will be filled
at the net asset value next computed after receipt of payment by check.
When do I start earning income on this purchase?
For AARP Funds paying daily dividends (AARP Income Funds and AARP Insured Tax
Free General Bond Fund), income begins to accrue on the business day following
actual execution of the order.
For the AARP Money Funds, purchases made by wire and received in good order
before noon on any business day are executed at noon and begin earning income
the same day.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
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WIRE TRANSFER INSTRUCTIONS
o To open an account (mail Enrollment Form first and make sure to call a
Representative to obtain an account number--AARP IRA and AARP Keogh Plan
accounts cannot be opened by wire)
o To add to your account
Contact your bank with the following information:
1) the name(s) on your account;
2) your AARP Fund account number;
3) the name of the Fund(s) you want to invest in;
4) the following name and address: State Street Bank and Trust Company,
Boston, MA 02101;
5) the routing numbers ABA Number 011000028 and AC-99035420.
- --------------------------------------------------------------------------------
Can I add another AARP Mutual Fund to my account?
You can open another AARP Mutual Fund at any time. The new investment must meet
the minimum initial investment described above. Your new AARP Mutual Fund will
have the same account number and registration as your existing one(s). You can
open a new AARP Mutual Fund in a number of ways:
- --------------------------------------------------------------------------------
Mail your request Send a letter stating your request and naming the new
AARP Fund. Include a check made payable to the AARP
Investment Program.
- --------------------------------------------------------------------------------
Wire the money Have your account number ready and follow the wire
instructions above.
- --------------------------------------------------------------------------------
Exchange from See instructions on how to exchange--page 70.
an AARP Fund
- --------------------------------------------------------------------------------
Telephone Transactions
When you open an account you automatically become eligible to exchange shares by
telephone and to redeem by telephone up to $100,000 to your registered address.
You may also request by telephone that redemption proceeds be wired to a bank
account you select. When exchange or redemption requests are made over the
telephone, procedures are in place 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 Mutual Fund does not follow such procedures, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. The Trusts and their
agents each reserve the right to modify, interrupt, suspend, or terminate any of
the telephone services at any time, without notice.
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ADDING TO YOUR INVESTMENT
How do I add to my investment?
After your account is opened, you can add to your AARP Fund investment in any
amount in the following ways:
- --------------------------------------------------------------------------------
Mail your request Send your check with a personalized investment slip or
with a letter naming your account number and AARP
Mutual Fund.
- --------------------------------------------------------------------------------
Call Toll-Free If you selected the Transact By Phone service, you'll
be able to call and have money transferred from your
checking account to cover the purchase. See page 73.
- --------------------------------------------------------------------------------
Wire the purchase Have your account number ready and follow the wire
instructions on page 69.
- --------------------------------------------------------------------------------
Exchange from an See Exchanging below.
AARP Fund
- --------------------------------------------------------------------------------
Invest See page 74 for information on the Automatic Investment
Automatically Plan.
- --------------------------------------------------------------------------------
EXCHANGING
What is an exchange?
You make an exchange when you sell shares in one AARP Mutual Fund to purchase
shares in another. This is technically two transactions, a sale and a purchase
of shares. If the value of the shares sold in the exchange was higher or lower
than your original purchase price, you may have a capital gain or loss. This is
important to note for tax planning purposes. You may exchange all or part of
your shares in one AARP Mutual Fund for shares in another AARP Mutual Fund.
Exchanges between existing AARP Mutual Funds can be for any amount. Exchanges
that open a new AARP Mutual Fund must meet the minimum balance.
How can I exchange shares?
There are several ways to exchange, including:
- --------------------------------------------------------------------------------
Mail or fax your Tell us the AARP Mutual Fund from which to take the
request money and the AARP Mutual Fund to exchange to. Include
your account number, registered name(s) and address,
and either the dollar amount or number of shares you
want to exchange. Be sure to sign your name(s) exactly
as it appears on the account statement.
- --------------------------------------------------------------------------------
Call Toll-Free Call us before 4:00 p.m. Eastern time to exchange by
close of business the same day.
- --------------------------------------------------------------------------------
Call the You can exchange shares through this automated
Easy-Access Line toll-free line. It is available 24 hours a day, 7 days
a week. Simply call toll-free and follow the recorded
voice instructions.
- --------------------------------------------------------------------------------
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ACCESS TO YOUR INVESTMENT
How do I redeem?
You can sell (redeem) fund shares in a number of ways. The share price may be
more or less than your original purchase price. Therefore, you may have either a
taxable capital gain or loss. Keep in mind that you can redeem shares of your
AARP IRA or AARP Keogh Plan account only by sending your request in writing.
- --------------------------------------------------------------------------------
Mail or Fax your Tell us the name of the AARP Mutual Fund and the number
request of shares or dollar amount you wish to sell. Make sure
to give us your account number, registered name(s) and
where you want the proceeds sent. If you want the
proceeds to go to an address other than your registered
address, to your bank, or to someone else, please
provide complete details. Under certain circumstances,
this may require a special type of authorization called
a Signature Guarantee (see page 72). Sign the letter
exactly as it appears on your account statement. If
your request requires a Signature Guarantee, you must
mail the request instead of faxing it.
- --------------------------------------------------------------------------------
Call Toll-Free Call before 4:00 p.m. Eastern time business days and
redeem up to $100,000 per AARP Fund. The proceeds will
be mailed to your registered address or to your bank
(unless you declined the Telephone Redemption to your
Bank feature on your Enrollment Form). The proceeds can
also be wired to your bank if it is a member of the
Federal Reserve System. A $5.00 fee will be charged for
each wire to your bank. Your bank may also charge you
for receiving a wire. In the event that you are unable
to reach us by telephone, you should write to the AARP
Investment Program; see "Service Information" for the
address. If you elected the Transact by Phone option on
your Enrollment Form, you can have the proceeds sent
electronically to your checking account. See page 73
for more information on Transact By Phone.
- --------------------------------------------------------------------------------
Call the You can redeem shares through this automated toll-free
Easy-Access Line line. Initiate redemptions any time--24 hours a day.
Simply call toll-free and follow the recorded voice
instructions.
- --------------------------------------------------------------------------------
Sell See page 75 for information on the Automatic Withdrawal
Automatically Plan or Systematic Retirement Withdrawal Plan for AARP
IRA or AARP Keogh Plan accounts.
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PROSPECTUS
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<PAGE>
When are redemptions processed?
Any redemption request received in good order prior to 4:00 p.m. Eastern time
during normal business operations will be processed on that day. The request
will be processed at that night's closing share price. Normally, requests
received in good order after 4:00 p.m. Eastern time will be processed on the
next business day. Shares redeemed from Funds in the AARP Income Trust, AARP Tax
Free Income Trust and from AARP High Quality Money Fund will earn a dividend on
the day of redemption. However, for AARP High Quality Money Fund and AARP High
Quality Tax Free Money Fund, for redemption requests received in good order by
noon, proceeds will normally be wired that day, if requested by the shareholder,
but no dividend will be earned on the redeemed shares on that day.
Normally, proceeds of your redemption will be sent on the business day following
a redemption request in good order. In any event, the AARP Mutual Funds may take
no more than 7 calendar days to send your redemption proceeds.
When can I expect to receive my money?
We will mail your redemption proceeds promptly. If you purchase shares by check
or by telephone and then redeem them by letter within 7 business days of the
purchase, the redemption proceeds may be held until the purchase check has
cleared the banking system. When the check has cleared, we will mail your
redemption proceeds promptly.
We will not accept redemption requests by telephone or by checkwriting prior to
the expiration of the 7 business day period. You may avoid this delay by
purchasing shares by wire.
- --------------------------------------------------------------------------------
Purchase Restrictions
You should make purchases and sales for long-term investment purposes only. The
AARP Mutual Funds do not permit a pattern of frequent purchases and sales in
response to short-term changes in share price.
The AARP Mutual Funds and Scudder Investor Services, Inc. each reserve the right
to reject purchases or exchanges for any reason, including when such a pattern
occurs. This restriction does not apply to the AARP money funds. This right
extends to individual purchasers or groups of related purchasers.
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEES
What is a "Signature Guarantee"?
A "Signature Guarantee" is a certification of your signature. We require this
for your protection and to prevent fraudulent redemptions. In effect, the
appropriate institution (see below) guarantees that you are authorized to make
certain requests.
When do I need one?
A "Signature Guarantee" from each person on the account registration is needed
for the following redemption requests:
1) Redemptions of more than $100,000;
PROSPECTUS
72
<PAGE>
2) When redemption proceeds are payable to someone other than the
registered shareholder(s);
3) When redemption proceeds are to be sent to an address other than the
registered address; or
4) If the account's registered address has changed during the last 15
days.
Transactions requiring signature guarantees cannot be faxed.
Where can I get one?
You can get your signature guaranteed through 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 Securities and
Exchange Commission. Signature Guarantees by notaries public are not acceptable.
INVESTOR SERVICES
To make investing simpler and more convenient there are many free investor
services available to you.
Easy-Access Line
- --------------------------------------------------------------------------------
o Exchange between AARP Mutual Funds
CALL TOLL-FREE
o Exchange to open a new AARP Mutual Fund 1-800-631-4636
o Redeem money to your registered address 24 HOURS A DAY
o Get current performance information 7 DAYS A WEEK
o Get current account balance information
o Confirm your last transaction
- --------------------------------------------------------------------------------
With the Easy-Access Line you can get performance, and account information. If
you have a touch-tone phone, you can also exchange or redeem shares worth up to
$100,000. Simply call toll-free 1-800-631-4636 using a touch-tone phone and
follow the easy pre-recorded voice instructions.
Transact By Phone
- --------------------------------------------------------------------------------
o Add to an AARP Mutual Fund by
transfer from your bank checking or
NOW account CALL TOLL-FREE
1-800-253-2277
o Redeem and send the proceeds to
your checking or NOW account
- --------------------------------------------------------------------------------
Transact By Phone allows you to call toll-free to purchase and redeem shares.
The money will be automatically transferred to or from your bank checking
account. Your bank must be a member of the Automated Clearing House for you to
take advantage of this service.
PROSPECTUS
73
<PAGE>
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Buying Shares Call us before 4:00 p.m. Eastern time, business days,
through Transact when you want to buy additional shares, and money will
By Phone: be transferred from your bank account to your AARP
Mutual Fund account to cover the purchase. Purchases
must be for at least $250 but not more than $250,000.
Your purchase will generally be completed in 2 business
days at the closing share price on the day of your
call. Requests received after 4:00 p.m. will be
purchased at the next business day's closing price.
Shares purchased in this manner will not be redeemable
for a period of up to 7 business days.
- --------------------------------------------------------------------------------
Selling Shares Call us before 4:00 p.m. Eastern time, business days,
through Transact when you want to sell shares. We'll sell your shares
By Phone: and transfer the proceeds to your bank
account--generally within 2 business days from the day
of your request. You can redeem any amount greater than
$250. Shares will be sold at that night's closing price
on the day of your request. Requests received after
4:00 p.m. will be sold at the next business day's
closing price.
- --------------------------------------------------------------------------------
Free Checkwriting
Shareholders in the AARP High Quality Money Fund or the AARP High Quality Tax
Free Money Fund have free checkwriting privileges. There is no charge to
shareholders for this service, but the AARP Mutual Funds reserve the right to
impose a charge in the future. To enroll, you must fill out a signature card on
the Enrollment Form. If shares were purchased by your personal check, you may
only write checks against your purchase 7 business days from the day that the
purchase took place. Keep in mind that you cannot close your account by writing
a check. This service may be suspended or terminated at any time upon notice to
shareholders.
Distributions Direct
You may choose to have dividend and capital gain distributions automatically
deposited into your bank checking or NOW account. To enroll in this service,
your bank must be a member of the Automated Clearing House (ACH) network. Once
you enroll, your dividends and capital gains will be automatically deposited
into your personal bank account within 3 business days of the distribution date.
You'll receive a statement confirming the amount. There is no charge to
shareholders for the service.
Systematic Plans
Several other investor services are available. These include:
o Automatic Investment Plan: Arrange for regular investments into your
AARP Mutual Fund through automatic deductions from your bank checking
account. The Automatic Investment Plan may be discontinued at any time
PROSPECTUS
74
<PAGE>
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.
o Direct Deposit: At your direction, your Social Security, U.S.
Government or any regular income checks (pension, dividend, interest
or payroll) will be automatically deposited into your AARP Mutual
Fund.
o Automatic Withdrawal Plan: At your direction, we will automatically
send a monthly redemption of $50 or more directly to you when you have
at least $10,000 or more in an AARP Mutual Fund.
o Direct Payment of Fixed Bills: With $10,000 or more in an AARP Mutual
Fund, you can arrange for us to automatically pay regular bills of a
fixed amount. Pay your rent, mortgage or other payments of $50 or
more.
o Systematic Retirement Withdrawal Plan: You can receive periodic
distributions from an AARP IRA or AARP Keogh Plan account.
STATEMENTS AND REPORTS
What kinds of statements do I receive?
You will receive a prompt confirmation statement for your transactions. You will
also receive a monthly Consolidated Statement. AARP IRA or AARP Keogh Plan
accounts will receive a quarterly Consolidated Statement.
The Consolidated Statement details the market value of all the AARP Mutual Funds
in your account. It also includes a listing of recent transactions. You should
keep these statements for your records.
What other reports do I get?
Each year, you will receive a current prospectus, mid year report and annual
report. To reduce the volume of mail, we will only send one copy of most reports
to a household (same surname, same address). Please contact us if you wish to
receive additional reports.
SERVICE PROVIDERS OF THE AARP FUNDS
Legal Counsel
Dechert Price & Rhoads,
Washington, D.C.
Independent Accountants
Price Waterhouse LLP, Boston, MA
Underwriter
Scudder Investor Services, Inc., Two International Place, Boston, MA (a
subsidiary of Scudder) is principal underwriter of the AARP Mutual Funds.
Scudder Investor Services, Inc. offers for sale and confirms as agent all
purchases of shares of the AARP Mutual Funds.
PROSPECTUS
75
<PAGE>
Custodians
Brown Brothers Harriman & Co., Boston, MA
State Street Bank and Trust Company, Boston, MA
Fund Accounting Agent
Scudder Fund Accounting Corporation, Two International Place, Boston, MA (a
subsidiary of Scudder) is responsible for determining the daily net asset value
per share and maintaining the general accounting records of the AARP Mutual
Funds.
Transfer and Dividend-Disbursing Agent
Scudder Service Corporation, P.O. Box 2540, Boston, MA 02208-2540 (a subsidiary
of Scudder)
Investment Adviser
Scudder, Stevens & Clark, Inc., Two International Place, Boston, MA is
investment adviser for the AARP Funds.
Subadviser
Bankers Trust Company, One Bankers Trust Plaza, New York, NY, is Subadviser for
the AARP U.S. Stock Index Fund.
TRUSTEES AND OFFICERS
CAROLE LEWIS ANDERSON, Trustee, President, MASDUN Capital Advisors; Formerly
Principal, Suburban Capital Markets, Inc.; Director, VICORP Restaurants, Inc.;
Member of the Board, Association for Corporate Growth of Washington, D.C.;
Trustee, Hasbro Children's Foundation and Mary Baldwin College.
ADELAIDE ATTARD, Trustee, Consultant, Gerontology; Commissioner, County of
Nassau, New York, Department of Senior Citizen Affairs (1971-1991); Chairperson,
Federal Council on Aging (1981-1986).
CYRIL F. BRICKFIELD, Trustee, Honorary President and Special Counsel, American
Association of Retired Persons.
ROBERT N. BUTLER, M.D., Trustee, Director, International Longevity Center and
Professor of Geriatrics and Adult Development; Chairman, Henry L. Schwartz
Department of Geriatrics and Adult Development, Mount Sinai Medical Center;
Formerly Director, National Institute on Aging, National Institute of Health.
ESTHER CANJA, Trustee, Vice President, American Association of Retired Persons;
Trustee and Chair, AARP Group Health Insurance Plan; Board Liaison, National
Volunteer Leadership Network Advisory Committee; Chair, Board Operations
Committee; AARP State Director of Florida (1990-1992).
LINDA C. COUGHLIN*, Chairman and Trustee, Managing Director, Scudder, Stevens &
Clark, Inc., Director and Senior Vice President, Scudder Investor Services, Inc.
HORACE B. DEETS, Vice Chairman and Trustee, Executive Director, American
Association of Retired Persons; Member, Board of Councilors, Andrus Gerontology
Center; Member of the Board, HelpAge International.
EDGAR R. FIEDLER, Trustee, Vice President and Economic Counselor, The Conference
Board, Inc.
PROSPECTUS
76
<PAGE>
CUYLER W. FINDLAY*, Trustee, Advisory Managing Director of Scudder, Stevens &
Clark, Inc.
EUGENE P. FORRESTER, Trustee, Lt. General (Retired) U.S. Army; International
Trade Counselor; Consultant.
WAYNE F. HAEFER, Trustee, Director, Membership Division of AARP; Formerly
Secretary, Employee's Pension and Welfare Trusts of AARP and Retired Persons
Services, Inc.; Formerly Director, Administration and Data Management Division
of AARP.
GEORGE L. MADDOX, JR., Trustee, Professor Emeritus and Director, Long Term Care
Resources Program, Duke University Medical Center; Professor Emeritus of
Sociology, Departments of Sociology and Psychiatry, Duke University.
ROBERT J. MYERS, Trustee, Actuarial Consultant; Formerly Executive Director,
National Commission on Social Security Reform; Formerly Chairman, Commission on
Railroad Retirement Reform.
JAMES H. SCHULZ, Trustee, Professor of Economics and Kirstein Professor of Aging
Policy, Policy Center on Aging, Florence Heller School, Brandeis University.
GORDON SHILLINGLAW, Trustee, Professor Emeritus of Accounting, Columbia
University Graduate School of Business.
THOMAS W. JOSEPH*, Vice President
DAVID S. LEE*, Vice President and Assistant Treasurer
THOMAS F. McDONOUGH*, Vice President and Assistant Secretary
PAMELA A. McGRATH*, Vice President and Treasurer
EDWARD J. O'CONNELL*, Vice President and Assistant Treasurer
JAMES W. PASMAN*, Vice President
KATHRYN L. QUIRK*, Vice President and Secretary
HOWARD SCHNEIDER*, Vice President
CORNELIA M. SMALL*, President
*Scudder, Stevens & Clark, Inc.
PROSPECTUS
77
<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
AARP Cash Investment Funds:
AARP HIGH QUALITY MONEY FUND
AARP Income Trust:
AARP GNMA and U.S. TREASURY FUND
AARP HIGH QUALITY BOND FUND
AARP BOND FUND FOR INCOME
AARP Tax Free Income Trust:
AARP HIGH QUALITY TAX FREE MONEY FUND
AARP INSURED TAX FREE GENERAL BOND FUND
AARP Growth Trust:
AARP BALANCED STOCK AND BOND FUND
AARP GROWTH AND INCOME FUND
AARP U.S. STOCK INDEX FUND
AARP GLOBAL GROWTH FUND
AARP CAPITAL GROWTH FUND
AARP INTERNATIONAL STOCK FUND
AARP SMALL COMPANY STOCK FUND
AARP Managed Investment Portfolios Trust:
AARP DIVERSIFIED INCOME PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the combined Prospectus for all fifteen of the above
Funds, dated February 1, 1997, as amended from time to time, copies of which may
be obtained without charge by writing to the AARP INVESTMENT PROGRAM FROM
SCUDDER, P.O. Box 2540, Boston, Massachusetts 02208-2540 or by calling
1-800-253-2277.
<PAGE>
TABLE OF CONTENTS
Page
AARP INVESTMENT PROGRAM FROM SCUDDER...........................................1
Summary of Advantages and Benefits....................................1
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES..................................3
AARP Money Funds......................................................3
AARP Income Funds.....................................................4
AARP Insured Tax Free Income Fund.....................................7
AARP Growth Funds....................................................12
AARP Managed Investment Portfolios...................................16
Special Investment Policies of the AARP Funds........................16
General Investment Policies of the AARP Funds........................31
Investment Restrictions..............................................32
PURCHASES.....................................................................38
General Information..................................................38
Checks...............................................................38
Share Price..........................................................38
Share Certificates...................................................38
Direct Deposit Program...............................................38
Wire Transfers.......................................................38
Holidays.............................................................39
Other Information....................................................39
REDEMPTIONS...................................................................39
General Information..................................................39
Redemption by Telephone..............................................40
Redemption by Mail or Fax............................................41
Redemption by Checkwriting...........................................41
Redemption-in-Kind...................................................41
Other Information....................................................42
EXCHANGES.....................................................................42
TRANSACT BY PHONE.............................................................43
Purchasing Shares by Transact by Phone...............................43
Redeeming Shares by Transact by Phone................................43
FEATURES AND SERVICES OFFERED BY THE FUNDS....................................44
Automatic Dividend Reinvestment......................................44
Distributions Direct.................................................44
Reports to Shareholders..............................................44
Consolidated Statements..............................................44
RETIREMENT PLANS..............................................................44
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")........45
AARP Keogh Plan......................................................46
OTHER PLANS...................................................................46
Automatic Investment.................................................46
Automatic Withdrawal Plan............................................47
Direct Payment of Regular Fixed Bills................................47
DIVIDENDS AND YIELD...........................................................47
Performance Information: Computation of Yields and Total Return......48
Taking a Global Approach.............................................54
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
TRUST ORGANIZATION............................................................54
MANAGEMENT OF THE FUNDS.......................................................56
Personal Investments by Employees of Scudder.........................61
TRUSTEES AND OFFICERS.........................................................62
REMUNERATION..................................................................65
DISTRIBUTOR...................................................................66
TAXES........................................................................ 67
BROKERAGE AND PORTFOLIO TURNOVER..............................................71
Brokerage Commissions................................................71
Portfolio Turnover...................................................73
NET ASSET VALUE...............................................................73
AARP Money Funds.....................................................73
AARP Non-Money Market Funds..........................................73
ADDITIONAL INFORMATION........................................................74
Experts..............................................................74
Shareholder Indemnification..........................................74
Ratings of Corporate Bonds...........................................75
Ratings of Commercial Paper..........................................75
Ratings of Municipal Bonds...........................................75
Other Information....................................................76
Tax-Exempt Income vs. Taxable Income.................................78
FINANCIAL STATEMENTS..........................................................79
ii
<PAGE>
AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Investment Program from Scudder (the "Program") was developed
by the American Association of Retired Persons ("AARP") to provide an array of
conservatively managed investment options for its members. Today's financial
markets present an enormous, ever-changing selection of investments suited for
investors with varying needs. AARP, a non-profit organization dedicated to
improving the quality of life, independence and dignity of older people, has
undertaken to help its members by designing an investment program which attempts
to satisfy the investment and retirement planning needs of most of its members,
whether they be experienced investors or savers who have never invested at all.
As with any program with the "AARP" name, the Program includes special benefits
as described in the combined prospectus for five Trusts -- AARP Cash Investment
Funds, AARP Income Trust, AARP Tax Free Income Trust, AARP Growth Trust, and
AARP Managed Investment Portfolios Trust (the "Trusts"), dated February 1, 1997
(the "Prospectus"). AARP endorses this program which was developed with the
assistance of Scudder, Stevens & Clark, Inc. ("the Fund Manager" or "Scudder"),
a firm with over 75 years of investment counseling and management experience.
Scudder, Stevens & Clark, Inc. was selected after an extensive search among
qualified candidates, and provides the Program with continuous and conservative
professional investment management. (See "MANAGEMENT OF THE FUNDS.")
Each of the Trusts is an open-end, management investment company
authorized to issue its shares of beneficial interest in separate series ("the
AARP Funds"). A total of 15 Funds are currently offered by the five Trusts. The
differing investment objectives of the 15 Funds in the Program provide AARP
members with a variety of sensible investment alternatives, and by matching
their own objectives with those of the different AARP Funds, AARP members may
design an investment program to meet their personal needs. Not all your money is
the same. There is short-term money, for example money needed for your regular
budgeting and for emergencies, and there is money which can be invested for the
longer term. It is generally thought that three months of income/expenses should
be set aside in a savings account or money market fund to cover short-term
needs. The Program is designed to offer alternatives to keeping all of your
money in short-term fixed price investments like money market funds, insured
short-term savings accounts and insured six-month certificates of deposit. The
AARP Money Funds provide a taxable and a tax free alternative for short-term
monies and the AARP Income Funds, the AARP Insured Tax Free General Bond Fund,
the AARP Growth Funds provide a range of choices for longer term investment
dollars and the AARP Managed Investment Portfolios provide diversification of
investment by investing in a select mix of AARP Funds.
The Program includes functions performed by AARP Member Services; the
AARP Funds; Scudder Investor Services, Inc., the AARP Funds' "underwriter";
Scudder Service Corporation ("SSC"), the AARP Funds' "transfer agent"; and Brown
Brothers Harriman & Co. and State Street Bank and Trust Company, the AARP Funds'
"custodians."
Summary of Advantages and Benefits
o Experienced Professional Management: Scudder, Stevens & Clark, Inc.,
investment counsel since 1919 and mutual Fund managers since 1928, provides
investment advice to the Funds.
o AARP's Commitment: the Program was designed with AARP's active
participation to provide strong ongoing representation of the members'
interests and to help ensure a high level of service.
o Wide Selection of Investment Objectives: you can emphasize money market
returns and liquidity, income, tax-free income, growth, or any combination.
o Diversification: you benefit from investing in one or more large portfolios
of carefully selected securities.
o $2000 Minimum Starting Investment for 12 of the Funds ($500 Minimum
Starting Investment for AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund and AARP GNMA and U.S. Treasury Fund): you may make additional
investments in any amount at any time.
o No Sales Commissions: the AARP Funds are pure no-load(TM), so you pay no
sales charges to purchase, transfer or redeem shares nor do you pay Rule
12b-1 fees.
<PAGE>
o Investment Flexibility and Exchange: you may exchange among the 15 AARP
Funds in the Program at any time without charge.
o Dividends: the AARP Money Funds, the AARP Income Funds, the AARP Insured
Tax Free Income Fund and the AARP Diversified Income Portfolio all pay
dividends monthly, the AARP Balanced Stock and Bond Fund, the AARP Growth
and Income Fund and the AARP U.S. Stock Index Fund are expected to pay
dividends quarterly and the AARP Global Growth Fund, the AARP Capital
Growth Fund, the AARP International Stock Fund, the AARP Small Company
Stock Fund and the AARP Diversified Growth Portfolio pay dividends, if any,
annually.
o Automatic Dividend Reinvestment: you may receive dividends by check or
arrange to have them automatically reinvested.
o Readily Available Account, Price, Yield and Total Return Information: the
yield for the AARP Money Funds is quoted weekly and the net asset value of
each other Fund is quoted daily in the financial pages of leading
newspapers. You may also dial our automated Easy-Access Line, toll-free,
1-800-631-4636 for recorded account information, share price, yield and
total return information, 7 days a week.
o Convenience and Efficiency: simplified investment procedures save you time
and help your money work harder for you.
o Liquidity: on any business day (subject to a 7 day waiting period for
investment checks to clear), you may request redemption of your shares at
the next determined net asset value, and, in the case of the AARP Money
Funds, you may elect free Checkwriting and write checks for $100 or more on
your account to make payments to any person or business.
o Direct Deposit Program: you may have your Social Security or other checks
from the U.S. Government or any other regular income checks, such as
pension, dividend, interest, and even payroll checks automatically
deposited directly to your account.
o Automatic Withdrawal Plan: with a minimum qualifying balance of $10,000 in
one AARP Fund, you may arrange to receive monthly, quarterly or periodic
checks from your account for any designated amount of $50 or more.
o Direct Payment of Regular Fixed Bills: with a minimum qualifying balance of
$10,000 in one AARP Fund, you may arrange to have your regular fixed bills
that are of fixed amounts, such as rent, mortgage, or other payments of $50
or more sent directly from your account at the end of the month.
o Personal Service and Information: professionally trained service
representatives help you whenever you have questions through our toll-free
number, 1-800-253-2277.
o Consolidated Statements: in addition to receiving a confirmation statement
of each transaction in your account, you receive, without extra charge, a
convenient monthly consolidated statement. (Retirement Plan statements are
mailed quarterly.) This statement contains the market value of all your
holdings and a complete listing of your transactions for the statement
period.
o Shareholder Handbook: the Shareholder Handbook was created to help answer
many of the questions you may have about investing in the Program.
o IRA Shareholder Handbook: The IRA Shareholder Handbook was created to help
answer many of the questions you may have about investing in the no-fee
AARP IRA.
o A Glossary of Investment Terms: the Glossary defines commonly used
financial and investment terms.
2
<PAGE>
o Newsletter: every month, shareholders receive our newsletter, Financial
Focus (retirement plan shareholders receive a special edition of Financial
Focus on a quarterly basis) which is designed to help keep you up to date
on economic and investment developments, and any new financial services and
features of the Program.
This Statement of Additional Information supplements the Prospectus,
and provides more detailed information about the Trusts and the Funds.
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
AARP Money Fund
(See "AARP High Quality Money Fund," "INVESTMENT OBJECTIVES AND
POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.)
The AARP Funds offer a choice of a taxable and a tax free money fund
for small savers, big savers and people looking for a way to invest. People who
earn a relatively low interest rate in an insured bank savings account, who have
to make withdrawals or deposits in person or whose money isn't easily accessible
may find that the AARP Money Funds can help.
AARP High Quality Money Fund. The AARP High Quality Money Fund is a
separate series of AARP Cash Investment Funds and is the only Fund currently
offered by that Trust. Additional series of the Trust may be offered in the
future. From investments in high quality securities, the Fund is designed to
provide current income. The Fund also seeks to maintain stability and safety of
principal while offering liquidity. The Fund seeks to maintain a constant net
asset value of $1.00 per share. There may be circumstances under which this goal
cannot be achieved. The Fund invests in securities with remaining maturities of
397 calendar days or less, except in the case of U.S. Government securities
which may have maturities of up to 762 calendar days. The average
dollar-weighted maturity of its investments is 90 days or less. The investment
policies and restrictions of the Fund are described as follows:
To provide safety and liquidity, the investments of the AARP High
Quality Money Fund are limited to those that at the time of purchase are rated,
or judged by the Fund Manager to be the equivalent of those rated, within the
two highest credit ratings ("high quality instruments") by one or more rating
agencies such as: Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
("S&P") or Fitch Investors Service ("Fitch"). In addition, the Fund Manager
seeks through its own credit analysis to limit investments to high-quality
instruments presenting minimal credit risks. If a security ceases to be rated or
is downgraded below the second highest quality rating indicated above, the Fund
will promptly dispose of the security, unless the Trustees determine that
continuing to hold such security is in the best interests of the Fund.
Generally, the Fund will invest in securities rated in the highest quality
rating by at least two of these rating agencies. Amendments have been proposed
to the federal rules regulating quality, maturity and diversification
requirements of money market funds, like the Fund. If the amendments are adopted
the Fund intends to comply with such new requirements.
Securities eligible for investment by the Fund include "first tier
securities" and "second tier securities." "First tier securities" are those
securities which are generally rated (or issued by an issuer with comparable
securities rated) in the highest category by at least two rating services (or by
one rating service, if no other rating service has issued a rating with respect
to that security). Securities generally rated (or issued by an issuer with
comparable securities rated) in the top two categories by at least two rating
agencies (or one, if only one rating agency has rated the security) which do not
qualify as first tier securities are known as "second tier securities." To
ensure diversity of the Fund's investments, as a matter of non-fundamental
policy the Fund will not invest more than 5% of its total assets in the
securities of a single issuer, other than the U.S. Government. The Fund may,
however, invest more than 5% of its total assets in the first tier securities of
a single issuer for a period of up to three business days after purchase,
although the Fund may not make more than one such investment at any time. The
Fund may not invest more than 5% of its total assets in securities which were
second tier securities when acquired by the Fund. Further, the Fund may not
invest more than the greater of (1) 1% of its total assets, or (2) one million
dollars, in the securities of a single issuer which were second tier securities
when acquired by the Fund.
The Fund purchases high quality short-term securities consisting of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of supranational organizations such as the
International Bank for Reconstruction and Development (the World Bank);
3
<PAGE>
obligations of domestic banks and their foreign branches, including bankers'
acceptances, certificates of deposit, deposit notes and time deposits;
obligations of savings and loan institutions; instruments whose credit has been
enhanced by: banks (letters of credit), insurance companies (surety bonds), or
other corporate entities (corporate guarantees); corporate obligations,
including commercial paper, notes, bonds, loans and loan participations;
securities with variable or floating interest rates; asset-backed securities,
including certificates, participations and notes; municipal securities including
notes, bonds and participation interests, either taxable or tax-free, as
described in more detail for the AARP High Quality Tax Free Money Fund;
securities with put features; and repurchase agreements. The Fund may hold cash,
which does not earn interest, to facilitate stabilizing its net asset value per
share and for liquidity purposes.
Commercial paper at the time of purchase will be rated, or judged by
the Fund Manager under the supervision of the Trustees, to be the equivalent of
securities rated, A-1 or higher by S&P, Prime-1 or higher by Moody's or F-1 or
higher by Fitch. Investments in other corporate obligations, such as bonds or
notes, will be limited to securities rated, or judged by the Fund Manager to be
the equivalent of securities rated, AA or higher by S&P or Fitch or Aa or higher
by Moody's. Obligations which are the subject of repurchase agreements will be
limited to those of the type described above. Shares of this Fund are not
insured or guaranteed by the U.S. Government.
The Fund may invest in certificates of deposit and bankers' acceptances
of large domestic banks (i.e., banks which at the time of their most recent
annual financial statements show total assets in excess of $1 billion) and their
foreign branches and of smaller banks as described below. These as well as all
other investments of the Fund must be U.S. dollar denominated. The Fund will not
invest in certificates of deposit or bankers' acceptances of foreign banks
without additional consideration by and the approval of the Trustees of the
Trust. Although the Fund recognizes that the size of a bank is important, this
fact alone is not necessarily indicative of its creditworthiness.
Investment in certificates of deposit and bankers' acceptances issued
by foreign branches of domestic banks involves investment risks that are
different in some respects from those associated with investment in obligations
issued by domestic banks. Such investment risks include the possible imposition
of withholding taxes on interest income, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations, or other adverse political or economic
developments. In addition, it might be more difficult to obtain and enforce a
judgment against a foreign branch of a domestic bank.
The Fund may also invest in certificates of deposit issued by banks
which had, at the time of their most recent annual financial statements, total
assets of less than $1 billion, provided that (i) the principal amounts of such
certificates of deposit are insured by an agency of the U.S. Government, (ii) at
no time will the Fund hold more than $100,000 principal amount of certificates
of deposit of any one such bank, and (iii) at the time of acquisition, no more
than 10% of the Fund's net assets (taken at current value) are invested in
certificates of deposit and bankers' acceptances of banks having total assets
not in excess of $1 billion.
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System whose creditworthiness has been determined by the Fund
Manager to be equal to that of issuers of commercial paper rated within the two
highest grades. See "Repurchase Agreements" under "Special Investment Policies
of the AARP Funds."
AARP Income Funds
(See "AARP GNMA and U.S. Treasury Fund," "AARP High Quality Bond Fund,"
"AARP Bond Fund for Income," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER
INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.) Each of the Funds
seeks to earn a high level of income consistent with its investment policies.
AARP GNMA and U.S. Treasury Fund. AARP GNMA and U.S. Treasury Fund is
designed for investors who are seeking high current income from high quality
securities and who wish to receive a degree of protection from bond market price
risk. The Fund's investment objective is to produce a high level of current
income and to keep the price of its shares more stable than that of a long-term
bond. The Fund pursues this objective by investing principally in U.S.
Government-guaranteed GNMA securities and U.S. Treasury obligations. The Fund
has been designed with the conservative, safety-conscious investor in mind. Of
the three funds in the AARP Income Trust, the AARP GNMA and U.S. Treasury Fund
is the more conservative choice. Although past performance is no guarantee of
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future performance, historically, this Fund offers higher yields than such
short-term investments as insured savings accounts, insured six month
certificates of deposit and fixed-price money market funds.
The Fund invests in U.S. Treasury bills, notes and bonds; other
securities issued or backed by the full faith and credit of the U.S. Government,
including, but not limited to, Government National Mortgage Association ("GNMA")
mortgage-backed securities, Merchant Marine Bonds guaranteed by the Maritime
Administration and obligations of the Export-Import Bank; financial futures
contracts with respect to such securities; options on either such securities or
such financial futures contracts; and bank repurchase agreements. At least 65%
of the Fund's net assets will be directly invested in U.S. Treasury obligations,
including GNMA's. The Fund will make long-term investments but will also attempt
to dampen its price variability in comparison to that of a long-term bond by
including short-term U.S. Treasury securities in its portfolio. The Fund may
also utilize hedging techniques involving limited use of financial futures
contracts and the purchase and writing (selling) of put and call options on such
contracts. Under certain market conditions, these strategies may reduce current
income. At any time the Fund may have a substantial portion of its assets in
securities of a particular type or maturity. The Fund may also write covered
call options on portfolio securities and purchase "when-issued" securities.
GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed
securities representing part ownership of a pool of mortgage loans. These loans,
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). A "pool" or group of
such mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, a Government
corporation within the U.S. Department of Housing and Urban Development, the
timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government. This is not, however, a guarantee
related to the Fund's yield or the value of your investment principal.
As mortgage-backed securities, GNMAs differ from bonds in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. GNMAs are called "pass-through" securities
because both interest and principal payments including prepayments are passed
through to the holder of the security (in this case, the Fund).
The payment of principal on the underlying mortgages may exceed the
minimum required by the schedule of payments for the mortgages. Such prepayments
are made at the option of the mortgagors for a wide variety of reasons
reflecting their individual circumstances and may involve capital losses if the
mortgages were purchased at a premium. For example, mortgagors may speed up the
rate at which they prepay their mortgages when interest rates decline
sufficiently to encourage refinancing. The Fund, when such prepayments are
passed through to it, may be able to reinvest them only at a lower rate of
interest. The Fund Manager, in determining the attractiveness of GNMAs relative
to alternative fixed-income securities, and in choosing specific GNMA issues,
will have made assumptions as to the likely speed of prepayment. Actual
experience may vary from this assumption resulting in a higher or lower
investment return than anticipated. When interest rates rise, mortgage
prepayment rates decline, thus lengthening the life of a mortgage-related
security and increasing the price volatility of that security, affecting the
price volatility of the Fund's shares.
Some investors may view the Fund as an alternative to a bank
certificate of deposit (CD). While an investment in the Fund is not federally
insured, and there is no guarantee of price stability, an investment in the
Fund--unlike a CD--is not locked away for any period, may be redeemed at any
time without incurring early withdrawal penalties, and may provide a higher
yield.
AARP High Quality Bond Fund. Consistent with investments primarily in
high quality securities, the Fund seeks to provide a high level of income and to
keep the value of its shares more stable than that of a long-term bond. By
including short- and medium-term bonds in its portfolio, the Fund seeks to offer
less share price volatility than long-term bonds or many long-term bond funds,
although its yield may be lower. Due to the greater market price risk of its
securities, the Fund may have a more variable share price than the AARP GNMA and
U.S. Treasury Fund. It is also possible that the Fund may provide a higher level
of income than the AARP GNMA and U.S. Treasury Fund.
Under normal circumstances the Fund will invest substantially all, and
no less than 65%, of its assets invested in U.S. government, corporate and other
fixed-income securities. It may also purchase any investments eligible for the
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AARP GNMA and U.S. Treasury Fund as well as obligations of federal agencies that
are not backed by the full faith and credit of the U.S. Government, such as
obligations of Federal Home Loan Bank, Farm Credit Banks and the Federal Home
Loan Mortgage Corporation. In addition, it may purchase obligations of
international agencies such as the International Bank for Reconstruction and
Development, the Inter-American Development Bank and the Asian Development Bank.
Other eligible investments include U.S. dollar-denominated foreign debt
securities (such as U.S. dollar denominated debt securities issued by the
Dominion of Canada and its provinces), foreign government bonds denominated in
foreign currencies, trust preferred securities, mortgage-backed and other
asset-backed securities, and money market instruments such as commercial paper,
bankers' acceptances and certificates of deposit issued by domestic and foreign
branches of U.S. banks. The Fund invests in a broad range of short-,
intermediate-, and long-term securities. Proportions among maturities and types
of securities may vary depending upon the prospects for income related to the
outlook for the economy and the securities markets, the quality of available
investments, the level of interest rates, and other factors.
Except for limitations in the Fund's investment restrictions, there is
no limit as to the proportions of the Fund which may be invested in any of the
eligible investments. However, it is a policy of the Fund that its
non-governmental investments will be spread among a variety of companies and
will not be concentrated in any industry. (See "Investment Restrictions,"
herein.)
Portfolio Quality. The policies of AARP High Quality Bond Fund are
designed to provide a portfolio that combines primarily high quality securities
with investments that attempt to reduce its market price risk. In fact,
according to information provided by Morningstar, Inc., the Fund has one of the
highest quality standards of any general bond Fund currently available. No
purchase will be made if, as a result thereof, less than 65% of the Fund's net
assets would be invested in debt obligations, including money market
instruments, that (a) are issued or guaranteed by the U.S. Government, (b) are
rated at the time of purchase within the two highest grades assigned by any of
the nationally-recognized rating services including Moody's or S&P, or (c) if
not rated, are judged at the time of purchase by the Fund Manager, subject to
the Trustees' review, to be of a quality comparable to those in the two highest
ratings described in (b) above. All of the debt obligations in which the Fund
invests will, at the time of purchase, be rated investment-grade or higher by
Moody's (Aaa, Aa, A, and Baa) or S&P (AAA, AA, A, and BBB) or, if not rated,
will be judged to be of comparable quality by the Fund Manager. At least 65% of
the Fund's assets must be in securities rated in the two highest rating
categories by Moody's or S&P. The Fund may invest up to 20% of its assets in
bonds rated Baa by Moody's or rated BBB by S&P. Securities rated Baa by Moody's
or BBB by S&P are neither highly protected nor poorly secured. These securities
normally pay higher yields and are regarded as having adequate capacity to repay
principal and pay interest but involve potentially greater price variability
than higher-quality securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. The Fund does
not purchase securities rated below investment-grade, commonly known as "junk"
bonds. (See "ADDITIONAL INFORMATION--Ratings of Corporate Bonds.")
Variations of Maturity. In an attempt to capitalize on the differences
in total return from securities of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Fund
Manager's expectations of changes therein.
Foreign Securities. The AARP High Quality Bond Fund may invest, without
limit, in U.S. dollar-denominated foreign debt securities (including U.S.
dollar-denominated debt securities issued by the Dominion of Canada and its
provinces and other debt securities which meet the Fund's criteria applicable to
its domestic investments), and in certificates of deposit issued by foreign
branches of United States banks, to any extent deemed appropriate by the Fund
Manager. The Fund may invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar, but no more
than 5% of the Fund's total assets will be represented by a given foreign
currency.
AARP Bond Fund for Income. The Fund seeks to provide a high level of
current income consistent with investments primarily in investment-grade debt
securities, and to keep the price of its shares more stable than that of a
long-term bond.
In pursuit of its investment objectives, under normal market
conditions, the Fund invests at least 65% of its assets in investment-grade debt
securities. Investment-grade securities are rated Aaa, Aa, A, or Baa by Moody's
or AAA, AA, A, or BBB by S&P, or, if unrated, are of equivalent quality as
determined by the Fund Manager. The Fund may invest up to 35% of its assets in
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securities rated Ba or B by Moody's or BB or B by S&P, but no more than 10% of
the Fund's assets may be invested in securities rated B by Moody's or S&P. These
two grades of securities are considered to be below investment grade. Below
investment-grade securities are considered predominantly speculative with
respect to their capacity to pay interest and repay principal. They generally
involve a greater risk of default and have more price volatility than securities
in higher rating categories.
The Fund may invest in U.S. Treasury and Agency securities, corporate
bonds and notes, trust preferred securities, mortgage-backed and other
asset-backed securities, dollar-denominated debt of international agencies or
investment-grade foreign institutions, and money market instruments such as
commercial paper, bankers' acceptances, and certificates of deposit issued by
domestic and foreign branches of U.S. banks. The Fund may invest up to 20% of
total assets in foreign debt securities denominated in currencies other than the
U.S. dollar, but no more than 5% of the fund's total assets will be represented
by a given foreign currency. The Fund may also purchase "when-issued" securities
and invest in repurchase agreements.
For temporary defensive purposes, the Fund may invest without limit in
money market and short-term instruments or invest all or a substantial portion
of its assets in high quality domestic debt securities when the Fund Manager
deems such a position advisable in light of economic or market conditions.
Risks. The Fund can invest a limited portion of assets in below
investment-grade securities, sometimes referred to as "junk" bonds. Investing in
high yielding, lower-quality bonds involves various types of risks including the
risk that issuers of bonds held in the portfolio will not make timely payment of
either interest or principal or may default entirely. This risk of default can
increase with changes in the financial condition of a company or with changes in
the U.S. economy, such as a recession. Compared to investing in higher quality
issues, high yield bond investors may be rewarded for the additional risk of
high yield bonds through higher interest payments and the opportunity for
greater capital appreciation.
AARP Tax Free Income Funds
(See "AARP High Quality Tax Free Money Fund," "AARP Insured Tax Free
General Bond Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT
POLICIES AND RISK FACTORS" in the Prospectus.)
AARP High Quality Tax Free Money Fund. The AARP High Quality Tax Free
Money Fund is a separate series of AARP Tax Free Income Trust. From investments
in high quality municipal securities, the Fund is designed to provide current
income free from federal income taxes. The Fund also seeks to maintain stability
and safety of principal, while offering liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share. There may be circumstances under
which this goal cannot be achieved. Such securities may mature no more than 397
calendar days or less from the date the purchase is expected to be settled by
the Fund, with a weighted average maturity of 90 days or less.
The Fund will invest in municipal securities which are rated at the
time of purchase within the two highest quality ratings of rating agencies such
as: Fitch -- AAA and AA, F1 and F2, or Moody's -- Aaa and Aa, or within Moody's
short-term municipal obligations top ratings of MIG 1 and MIG 2 and P1, or S&P
- -- AAA/AA and SP1+/SP1, A1+ and A1 -- all in such proportions as management will
determine. Securities must be so rated by at least two agencies or by at least
one, if only one has rated the security. Generally, the Fund will invest in
securities rated in the highest quality rating by at least two of these rating
agencies. In some cases, short-term municipal obligations are rated using the
same categories as are used for corporate obligations. In addition, unrated
municipal securities will be considered as being within the foregoing quality
ratings if other equal or junior municipal securities of the same issuer are
rated and their ratings are within the foregoing ratings of Fitch, Moody's or
S&P. The Fund may also invest in municipal securities which are unrated if, in
the opinion of the Fund Manager, such securities possess creditworthiness
comparable to those rated securities in which the Fund may invest. For a
description of ratings, please see "Additional Information." Shares of this Fund
are not insured or guaranteed by the U.S. Government.
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
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dispose of any such security unless the Board of Trustees of the Fund determines
that such disposal would not be in the best interests of the Fund.
As a fundamental policy, under normal circumstances, at least 80% of
the net assets of AARP High Quality Tax Free Money Fund will be invested in
tax-exempt securities. Although the Fund normally intends to ensure that all
income to shareholders will be exempt from federal income tax, there can be no
assurance that this goal will be achieved or that income to shareholders which
is federally tax exempt will be exempt from state and local taxes.
From time to time on a temporary basis or for defensive purposes, the
Fund may, subject to its investment restrictions, hold cash and invest in
taxable investments consisting of: (1) other obligations issued by or on behalf
of municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances; and (5)
repurchase agreements (agreements under which the seller agrees at the time of
sale to repurchase the security at an agreed time and price) with respect to any
of the obligations which the Fund is permitted to purchase. The Fund will not
invest in instruments issued by banks or savings and loan associations unless at
the time of investment such issuers have total assets in excess of $1 billion
(as of the date of their most recently published financial statements).
Commercial paper investments will be limited to commercial paper rated A1+ and
A1 by S&P, Prime-1 by Moody's or F-1 by Fitch. The Fund may hold cash or invest
temporarily in taxable investments due, for example, to market conditions or
pending investment of proceeds of subscriptions for shares of the Fund or
proceeds from the sale of portfolio securities or in anticipation of
redemptions. However, the Fund expects to invest such proceeds in municipal
securities as soon as practicable. Interest income from temporary investments
may be taxable to shareholders as ordinary income.
Maintenance of Constant Net Asset Value Per Share. The Trustees of AARP
High Quality Money Fund and AARP High Quality Tax Free Money Fund have
determined that it is in the best interests of the Funds and their shareholders
to maintain the net asset value of the Funds' shares at a constant $1.00 per
share. In order to facilitate the maintenance of a constant $1.00 net asset
value per share, the AARP High Quality Money Fund and the AARP High Quality Tax
Free Money Fund operate in accordance with a rule of the Securities and Exchange
Commission (the "SEC"). In accordance with that rule, the assets of the Funds
consist entirely of cash, cash items, and high quality U.S. dollar-denominated
investments which have minimal credit risks and which have a remaining maturity
date of not more than 397 days from date of purchase (except that the AARP High
Quality Money Fund may invest in U.S. Government securities having maturities of
up to 762 days). The average dollar-weighted maturity of each Fund is varied
according to money market conditions, but may not exceed 90 days. The maturity
of a portfolio security shall be the period remaining until the date stated in
the security for payment of principal or such earlier date as it is called for
redemption, except that a shorter period shall be used for Variable and Floating
Rate Instruments in accordance with and subject to the conditions contained in
the Rule.
The Trustees have established procedures reasonably designed to
stabilize the price per share of the Funds at $1.00, as computed for the
purposes of sales, repurchases and redemptions, taking into account current
market conditions and each Fund's investment objectives. Such procedures, which
the Trustees review annually, include specific requirements designed to assure
that issuers of the Funds' securities continue to meet high standards of
creditworthiness. The procedures also establish certain requirements concerning
the quality and maturity of the Fund's investments. Finally, the procedures
require the determination, at such intervals as the Trustees deem appropriate
and reasonable, of the extent, if any, to which a Fund's net asset value
calculated by using available market quotations deviates from $1.00 per share.
Market quotations and market equivalents used in making such determinations may
be obtained from an independent pricing service approved by the Trustees. Such
determinations will be reviewed periodically by the Trustees.
If at any time it is determined that a deviation exists which may
result in material dilution or other unfair results to investors or existing
shareholders of a Fund, certain corrective actions may be taken, including
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding part or all of
dividends or payment of distributions from capital or capital gains; redeeming
shares in kind; or establishing a net asset value per share by using available
market quotations or equivalents. In addition, in order to stabilize the net
asset value per share at $1.00 the Trustees have the authority (1) to reduce the
number of outstanding shares of a Fund on a pro rata basis, and (2) to offset
each shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
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future dividends. The Funds may hold cash for the purpose of stabilizing their
net asset value per share. Holdings of cash, on which no return is earned, would
tend to lower the yield on the shares of the Funds.
The net income of the Funds is declared as dividends to shareholders
daily and distributed monthly in shares of the Funds unless payment is requested
in cash.
AARP Insured Tax Free General Bond Fund. The AARP Insured Tax Free
General Bond Fund is a separate series of AARP Tax Free Income Trust. From a
portfolio consisting primarily of municipal securities covered by insurance, the
Fund seeks to provide high income free from federal income taxes and to keep the
value of its shares more stable than that of a long-term municipal bond. The
Fund seeks to provide investors with the higher tax-free income that is often
available from municipal securities by investing, under normal circumstances, in
a high grade portfolio of bonds consisting primarily of municipal securities,
with no restrictions as to maturity. Securities comprising at least 65% of the
total assets held by the Fund are fully insured as to face value and interest by
private insurers. While longer-term securities such as those in which the Fund
may invest have in recent years had higher yields, they also experience greater
price fluctuation than shorter-term securities. By including short- and
medium-term bonds in its portfolio, the Fund seeks to offer less share price
volatility than long-term municipal bonds or many long-term municipal bond
funds, although its yield may be lower. Because the Fund may trade its
securities, it is also free to attempt to take advantage of opportunities in the
market to achieve higher current income. This opportunity is not available to
unit investment trusts, which hold fixed portfolios of municipal securities.
Under normal circumstances, at least 80% of the Fund's net assets are
invested in tax-exempt securities. For this purpose, private activity bonds, the
interest on which is treated as a preference item for purposes of calculating
alternative minimum tax liability, will not be treated as tax exempt securities.
The Fund does not intend to purchase any such private activity bonds. (See
"TAXES" herein.)
There can be no assurance that the objectives of the Fund will be
achieved or that all income to shareholders which is exempt from federal income
taxes will be exempt from state or local taxes. Shareholders may also be subject
to tax on long-term and short-term capital gains (see "TAXES" herein).
In addition, the market prices of municipal securities, like those of
taxable debt securities, go up and down when interest rates change. Thus, the
net asset value per share can be expected to fluctuate and shareholders may
receive more or less than their purchase price for shares they redeem. In
addition to investments in municipal obligations, as described below, the Fund
may invest in short-term taxable U.S. Government securities and repurchase
agreements backed by U.S. Government securities. The Fund also may invest in
demand notes and tax-exempt commercial paper, financial futures contracts, and
may invest in and write (sell) options related to such futures contracts. These
investments are not insured or guaranteed or backed by the U.S. Government.
Except for futures and options, which are not rated, the AARP Insured Tax Free
General Bond Fund will only purchase securities rated within the top three
ratings by Moody's and S&P, or the equivalent as determined by the Fund Manager,
or repurchase agreements on such securities. To qualify as "within the top three
ratings," a security must have such a rating due to the credit of the issuer or
due to specific insurance on the security, whether acquired at issuance or by
the Fund at the time of purchase. A security would not so qualify if its rating
was solely the result of coverage under the Fund's portfolio insurance.
Securities in which the Fund may invest may include: (a) a security
that carries at the time of issuance, whether because of the credit of the
issuer or because it is insured at issuance by an insurance company, a rating
within the top three ratings; and (b) a security not rated within the top three
ratings at the time of issuance but insured to maturity by the Fund at the time
of purchase if, upon issuance of such insurance, the Fund Manager is able to
determine that the security is now the equivalent of a security rated within the
top three ratings by a nationally recognized rating agent.
When, in the opinion of the Fund Manager, defensive considerations or
an unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term investments such
as U.S. Treasury notes, bills and bonds and repurchase agreements collateralized
by U.S. Government securities, the interest income from which may be subject to
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.
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Insurance. Insurance on at least 65% of the AARP Insured Tax Free
General Bond Fund's total assets will be obtained from nationally recognized
private insurers, including the following: Financial Guaranty Insurance Company
("FGIC") is owned by FGIC Corporation, which in turn is owned by General
Electric Credit Corporation; AMBAC Indemnity Corporation; and Municipal Bond
Investors Assurance Corporation, a wholly-owned subsidiary of MBIA Incorporated,
the principal shareholders of which are: The Aetna Life & Casualty Company,
Fireman's Fund Insurance Company, subsidiaries of the CIGNA Corporation and
affiliates of the Continental Insurance Company.
The Fund currently has portfolio insurance provided by FGIC pursuant to
which it may insure securities mutually agreed to between the Fund and FGIC so
long as the security remains in the Fund's portfolio. Pursuant to an irrevocable
commitment, FGIC also provides the Fund with the option to obtain insurance for
any security covered by the FGIC portfolio insurance, which insurance can
continue if the security were to be sold by the Fund. The Fund may procure
portfolio insurance from other insurers.
At least 65% of the Fund's assets are fully insured by private insurers
as to payment of face value and interest to the Fund, when due. If uninsured
securities or securities not directly or indirectly backed or guaranteed by the
U.S. Government are purchased and expected to be held for 60 days or more,
insurance will be obtained within 30 days to ensure that 65% of the Fund's
assets are insured by the issuer or arranged for by the Fund. If at least 65% of
its assets are not insured securities, the Fund will obtain insurance for a
portion of its U.S. Government guaranteed or backed securities so that the 65%
standard is achieved.
The Fund requires that insurance with respect to its securities provide
for the unconditional payment of scheduled principal and interest when due. In
the event of a default by the issuer, the insurer will, within 30 days of notice
of such default, provide to its agent or Trustee funds needed to make any such
payments. Such agent or Trustee will bear the responsibility of seeing that such
funds are used to make such payments to the appropriate parties. Such insurance
will not guarantee the market value of a security. Insurance on the Fund's
securities will in some cases continue in the event the securities are sold by
the Fund, while in other cases it may not.
To the extent the Fund's insured municipal securities do not equal 65%
of its total assets, the Fund will obtain insurance on such amount of its U.S.
Government guaranteed or backed securities as is necessary to have 65% of the
Fund's total assets insured at all times. This type of insurance will terminate
when the security is sold and will involve an added cost to the Fund while not
increasing the quality rating of the security.
Insurance on individual securities, whether obtained by the issuer or
the Fund, is non-cancelable and runs for the life of the security. Securities
covered under the Fund's portfolio insurance are insured only so long as they
are held by the Fund, though the Fund has the option to procure individual
secondary market insurance which would continue to cover any such security after
its sale by the Fund. Such guaranteed renewable insurance continues so long as
premiums are paid by the Fund and, in the judgment of the Fund Manager, coverage
should be continued. Non-payment of premiums on the portfolio insurance will,
under certain circumstances result in the cancellation of such insurance and
will also permit FGIC to take action against the Fund to recover premiums due
it. In the case of securities which are individually insured, default by the
issuer is not expected to affect the market value of the security relative to
other insured securities of the same maturity value and coupon and covered by
the same insurer. In the case of a security covered by the Fund's portfolio
insurance, the market value of such a security in the event of such default
might be less unless the Fund elected to purchase secondary market insurance for
it. It is the intention of the Fund Manager either to procure individual
secondary market insurance for, or retain in the Fund's portfolio, securities
which are insured by the Fund under portfolio insurance and which are in default
or significant risk of default in the payment of principal or interest. Any such
securities retained by the Fund would be held until the default has been cured
or the principal and interest have been paid by the issuer or the insurer.
Premiums for individual insurance may be payable in advance or may be
paid periodically over the term of the security by the party then owning the
security, and the costs will be reflected in the price of the security. The cost
of insurance for longer-term securities, expressed in terms of income on the
security, is likely to reduce such income by from 10 to 60 basis points. Thus, a
security yielding 10% might have a net insured yield of 9.9% to 9.4%. The impact
of the cost of the Fund's portfolio insurance on the Fund's net yield is
somewhat less. The cost of insurance for shorter-term securities, which are
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,
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while there is no assurance that this will always be the case, the Fund may
purchase lower rated securities which, when insured, will bear a higher rating,
and may pay a higher net rate of interest than other equivalently rated
securities which are not insured.
Insurers have certain eligibility standards as to municipal securities
they will insure. Such standards may be more or less strict than standards which
would be applied for purchase of a security for the Fund. To the extent the
insurers apply stricter standards, the Fund will be restricted by such standards
in the purchase and retention of municipal securities.
The Internal Revenue Service has issued revenue rulings indicating that
(a) the fact that municipal obligations are insured will not affect their
tax-exempt status and (b) insurance proceeds representing maturing interest on
defaulted municipal obligations paid to certain municipal bond funds will be
excludable from federal gross income under Section 103(a) of the Internal
Revenue Code. While operation of the Fund and the terms of the insurance
policies on the Fund's securities may differ somewhat from those addressed by
the revenue rulings, the Fund does not anticipate that any differences will be
material or change the result with respect to the Fund.
Insurers of the Fund's municipal securities are subject to regulation
by the department of insurance in each state in which they are qualified to do
business. Such regulation, however, is no guarantee that an insurer will be able
to perform on its contract of insurance in the event a claim should be made
thereunder at some time in the future. The Fund Manager reviews the financial
condition of each insurer of their securities at least annually, and in the
event of any material development, with respect to its continuing ability to
meet its commitments to any contract of bond or portfolio insurance.
Management Strategies. In pursuit of its investment objectives the Fund
purchases securities that it believes are attractive and competitive values in
terms of quality, and relationship of current price to market value. However,
recognizing the dynamics of municipal bond prices in response to changes in
general economic conditions, fiscal and monetary policies, interest levels and
market forces such as supply and demand for various bond issues, the Fund
Manager manages the Fund continuously, attempting to achieve a high level of
tax-free income. The primary strategies employed in the management of the Fund
are:
Variations of Maturity. In an attempt to capitalize on the differences
in total return from municipal securities of differing maturities, maturities
may be varied according to the structure and level of interest rates, and the
Fund Manager's expectations of changes therein.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal securities of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
temporary disparities in normal yield relationships may afford opportunities to
invest in more attractive market sectors or specific issues by trading
securities currently held by the Fund.
Market Trading Opportunities. In addition to the above, the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than 3 months) if the Fund believes that such transactions, net of
costs, would further the attainment of that Fund's objectives. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
Fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Funds will be able to take advantage of
them. The Fund will limit its voluntary short-term trading to the extent
necessary to qualify as a "regulated investment company" under the Internal
Revenue Code.
Special Considerations: Income Level and Credit Risk. To the extent
that AARP Insured Tax Free General Bond Fund holds insured municipal
obligations, the income earned on its shares will tend to be less than for an
uninsured portfolio of the same securities. The fund will amortize as income,
over the life of the respective security issues, any original issue discount on
debt obligations (even where these are acquired in the after-market), and market
discount on short-term U.S. Government securities. The Fund will elect to
amortize the premium paid on acquisition of any premium coupon obligations.
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
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gains or losses. However, a capital gain may be realized upon the sale or
maturity and payment of certain obligations purchased at a market discount.
AARP Growth Funds
(See "AARP Balanced Stock and Bond Fund," "AARP Growth and Income
Fund," "AARP U.S. Stock Index Fund," "AARP Global Growth Fund," "AARP Capital
Growth Fund," "AARP International Stock Fund," "AARP Small Company Stock Fund,"
"INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK
FACTORS" in the Prospectus.)
AARP Balanced Stock and Bond Fund. The AARP Balanced Stock and Bond
Fund's investment objective is to seek to provide long-term growth of capital
and income while attempting to keep the value of its shares more stable than
other balanced mutual funds. The Fund pursues these objectives by investing in a
combination of stocks, bonds, and cash reserves.
The Fund is intended to provide--through a single investment--access to
a wide variety of income-oriented stocks and investment-grade bond investments.
Common stocks and other equity investments provide long-term growth potential to
help offset the effect of inflation on an investor's purchasing power. Bonds and
other fixed-income investments provide current income and may, over time, help
reduce fluctuations in the Fund's share price.
In seeking a balance of growth and income, as well as long-term
preservation of capital, the Fund invests in a diversified portfolio of equity
and fixed-income securities. At least 30% of the Fund's assets will be in
fixed-income securities, with the remainder of its net assets in common stocks
and securities convertible into common stocks. For temporary defensive purposes,
the Fund may invest without limit in cash and in other money market and
short-term instruments when the Fund Manager deems such a position advisable in
light of economic or market conditions.
The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Fund
Manager weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Fund Manager analyzes, on a global basis,
the level and direction of interest rates, capital flows, inflation
expectations, anticipated growth of corporate profits, monetary and fiscal
policies around the world, and other related factors.
The Fund does not take extreme investment positions as part of an
effort to "time the market." Shifts between stocks and fixed-income investments
are expected to occur in generally small increments within the guidelines
adopted in the prospectus and this Statement of Additional Information. The Fund
is designed as a conservative long-term investment.
While the Fund emphasizes U.S. equity and debt securities, it may
invest without limit in foreign securities, including depositary receipts. The
Fund's foreign holdings will meet the criteria applicable to its domestic
investments. Foreign securities are intended to increase diversification, thus
reducing risk, while providing the opportunity for higher returns.
In addition, the Fund may invest in securities on a when-issued or
forward delivery basis and may write (sell) covered call options on the equity
securities it holds to enhance investment return and may purchase and sell
options on stock indices for hedging purposes. Subject to applicable regulatory
guidelines and solely to protect against adverse effects of changes in interest
rates, the Fund may make limited use of financial futures contracts.
Equity investments. The Fund can invest up to 70% of its net assets in
equity securities. The Fund's equity investments consist of common stocks,
preferred stocks and securities convertible into common stocks, of companies
that, in the Fund Manager's judgment, will offer the opportunity for capital
growth and growth of earnings while providing dividends. The Fund pursues these
objectives by investing primarily in common stocks and securities convertible
into common stocks. Over time, a stock which produces continued earnings growth
tends to produce higher dividends and stock values.
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.
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Fixed-income investments. To enhance income and stability, the Fund
will have at least 30% of its net assets invested in fixed-income securities.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and preferred and convertible preferred securities. It may also purchase
U.S. Government securities and obligations of federal agencies and
instrumentalities that are not backed by the full faith and credit of the U.S.
Government, such as obligations of the Federal Home Loan Banks, Farm Credit
Banks, and the Federal Home Loan Mortgage Corporation. The Fund may also invest
in obligations of international agencies, foreign debt securities (both U.S. and
non-U.S. dollar denominated), trust preferred securities, mortgage-backed and
other asset-backed securities, municipal obligations, zero coupon securities,
and restricted securities issued in private placements.
For liquidity and defensive purposes, the Fund may invest in money
market securities such as commercial paper, bankers' acceptances, and
certificates of deposit issued by domestic and foreign branches of U.S. banks.
The Fund may also enter into repurchase agreements with respect to U.S.
Government securities.
All of the Fund's debt securities will be investment grade, that is,
rated Baa or above by Moody's or BBB by S&P. Moreover, at least 75% of these
securities will be high grade, that is, rated within the three highest quality
ratings of Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or, if unrated,
judged to be of equivalent quality as determined by the Fund Manager at the time
of purchase. Securities must also meet credit standards applied by the Fund
Manager. Moreover, the Fund does not purchase debt securities rated below Baa by
Moody's or BBB by S&P. Should the rating of a portfolio security be downgraded
the Fund Manager will determine whether it is in the best interest of the Fund
to retain or dispose of the security.
AARP Growth and Income Fund. From investments primarily in common
stocks and securities convertible into common stocks, the Fund seeks to provide
long-term capital growth and income, and to keep the value of its shares more
stable than other growth and income mutual funds.
The Fund invests primarily in common stocks and securities convertible
into common stocks. It also may invest in rights to purchase common stocks of
companies offering the prospect for capital growth and growth of earnings while
paying current dividends. The Fund may also invest in preferred stocks
consistent with the Fund's objective. Over time, continued growth of earnings
tends to produce higher dividends and to enhance capital value. In addition,
since 1945, the overall performance of common stocks has exceeded the rate of
inflation. For temporary defensive purposes, the Fund may also purchase
high-quality money market securities (such as U.S. Treasury bills, commercial
paper, certificates of deposit and bankers' acceptances) and repurchase
agreements when the Fund Manager deems such a position advisable in light of
economic or market conditions.
AARP U.S. Stock Index Fund. Taking an indexing approach to investing in
common stocks, the Fund seeks to provide long-term capital growth and income,
and to keep the value of its shares more stable than a S&P 500 Index fund. The
Fund seeks these dual objectives by emphasizing higher dividend stocks while
maintaining investment characteristics otherwise similar to the S&P 500 Index.
The Fund attempts to remain fully invested in common stocks of S&P 500
companies. Under normal circumstances, the Fund will invest at least 95% of its
assets in common stocks, futures contracts and options, primarily on the S&P 500
Index. The Fund, using a proprietary computer model, selects common stocks of
S&P 500 companies that are expected to, on average, pay higher dividends than
S&P 500 companies in the aggregate. In managing the Fund this way, the Fund
Manager expects performance will be somewhat less volatile than that of the S&P
500 over time, and the total return will generally track the S&P 500 within 1%
on an annualized basis. A tracking error of 0% would indicate perfect
correlation to the Index. After the Fund's start-up phase, the portfolio will
typically consist of the common stocks of between 400 to 470 of the S&P 500
companies. The Fund expects to come close to the capitalization weights of the
S&P 500. Nonetheless, to enhance the yield and liquidity characteristics of the
Fund and reduce transaction costs, the Fund will not exactly replicate the
portfolio weights of the S&P 500 and will not hold all 500 stocks within that
Index. The investment approach is "passive" in that after the dividend screening
described above, there is no additional financial analysis regarding the
securities held in the Fund. Under normal circumstances, the Fund may invest up
to 5% of its assets in certain short-term fixed income securities including high
quality money market securities such as U.S. Treasury bills, repurchase
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
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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. The Fund will not invest in cash reserves, futures contracts
or options as part of a temporary defensive strategy, such as lowering the
Fund's investment in common stocks to protect against potential stock market
declines. Thus the Fund will not take specific steps to minimize losses that
reflect a decline in the S&P 500. In the event that the Fund does not track
within an annualized 1% total return of the S&P 500 for an extended period, the
Fund Manager will consider alternative approaches.
The Fund is neither sponsored by nor affiliated with Standard & Poor's
Corporation.
AARP Global Growth Fund. From investments primarily in equity
securities of corporations worldwide, the Fund seeks to offer long-term capital
growth in a globally diversified portfolio, and to keep the value of its shares
more stable than other global equity funds. The Fund invests on a worldwide
basis in equity securities of companies which are incorporated in the U.S. or in
foreign countries. It may also invest in the debt securities of U.S. and foreign
issuers. Income is an incidental consideration.
The management of the Fund believes that there is substantial
opportunity for long-term capital growth from a professionally managed portfolio
of securities selected from the U.S. and foreign equity markets. Global
investing takes advantage of the investment opportunities created by the growing
integration of economies around the world. The world has become highly
integrated in economic, industrial and financial terms. Companies increasingly
operate globally as they purchase raw materials, produce and sell their
products, and raise capital. As a result, international trends such as movements
in currency and trading relationships are becoming more important to many
industries than purely domestic influences. To understand a company's business,
it is frequently more important to understand how it is linked to the world
economy than whether or not it is, for example, a U.S., French or Swiss company.
Just as a company takes a global perspective in deciding where to operate, so
too may an investor benefit from looking globally in deciding which industries
are growing, which producers are efficient and which companies' shares are
undervalued. The Fund affords the investor access to opportunities wherever they
arise, without being constrained by the location of a company's headquarters or
the trading market for its shares.
The Fund invests in companies that the Fund Manager believes will
benefit from global economic trends, promising technologies or products and
specific country opportunities resulting from changing geopolitical, currency,
or economic relationships. The Fund will normally invest at least 65% of its
total assets in securities of at least three different countries. Typically, it
is expected that the Fund will invest in a wide variety of regions and
countries, including both foreign and U.S. issues. The Fund may be invested 100%
in non-U.S. issues, and for temporary defensive purposes may be invested 100% in
U.S. issues, although under normal circumstances it is expected that both
foreign and U.S. investments will be represented in the Fund's portfolio. It is
expected that investments will include companies of varying size as measured by
assets, sales, or capitalization.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
AARP Capital Growth Fund. From investments primarily in common stocks
and securities convertible into common stocks, the Fund seeks to provide
long-term capital growth, and to keep the value of its shares more stable than
other capital growth mutual funds. Through a broadly diversified portfolio
consisting primarily of high quality, medium- to large-sized companies with
strong competitive positions in their industries the Fund seeks to offer less
share price volatility than many growth funds. It may also invest in rights to
purchase common stocks, the growth prospects of which are greater than most
stocks but which may also have above-average market risk. The Fund may also
invest in preferred stocks consistent with the Fund's objective. The securities
in which the Fund may invest are described under "AARP Capital Growth Fund" in
the Prospectus.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
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the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry. However, the Fund reserves the right
to invest up to 25% of its total assets (taken at market value) in any one
industry.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
AARP International Stock Fund. The Fund seeks to offer long-term
capital growth from a diversified portfolio of foreign equity securities, and to
keep the value of its shares more stable than other international equity funds.
The Fund generally invests in equity securities of established
dividend-paying companies listed on foreign exchanges within developed foreign
markets. The Fund does not invest in emerging markets, but instead focuses its
investments on the 21 developed foreign countries included in the Morgan Stanley
Capital International World ex USA Index. The Fund will normally invest at least
65% of its total assets in securities of at least three different countries.
When the Fund Manager believes that it is appropriate, the Fund may
invest up to 20% of its total assets in investment-grade foreign debt
securities. Such debt securities include debt securities of foreign governments,
supranational organizations and private issuers, including bonds denominated in
the European Currency Unit (ECU). Debt investments will be selected on yield,
credit quality, and the outlooks for currency and interest rates trends in
different parts of the globe, taking into account the ability to hedge a degree
of currency or local bond price risk. The Fund may purchase "investment-grade"
bonds, which are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB
by S&P or, if unrated, judged by the Fund Manager to be of equivalent quality.
Securities rated Baa by Moody's or BBB by S&P are neither highly protected nor
poorly secured. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as Canadian or U.S. government obligations or currencies, corporate debt
instruments, and securities of companies incorporated in and having their
principal activities in Canada or the U.S. when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund may make limited use of financial futures contracts and
related options and may also invest in foreign currency exchange contracts. The
Fund may write (sell) covered call options to enhance investment return, and may
purchase and sell options on stock indices for hedging purposes.
AARP Small Company Stock Fund. From investments primarily in the stocks
of small U.S. companies, the Fund seeks to provide long-term capital growth, and
to keep the value of its shares more stable than other small company stock
funds.
In pursuing its objective of long-term capital growth, the Fund
normally remains substantially invested in the common stocks of small U.S.
companies. Using a quantitative investment approach developed by the Fund
Manager, the Fund focuses on equity securities of companies with market
capitalization below $1 billion that, as a group, have a dividend yield higher
than the average of those in the Russell 2000 Index(R) and that the Fund Manager
believes are undervalued relative to the stocks in Russell 2000 Index(R). The
Russell 2000 Index(R) is a widely used measure of small stock performance. The
Fund will sell securities of companies that have grown in market capitalization
above this level as necessary to keep the Fund focused on small companies.
The Fund takes a diversified approach to investing in small
capitalization stocks which overall have dividend yields above the average yield
of the Russell 2000 Index(R). After the Fund's start-up phase, it will not be
unusual for it to hold stocks of more than one hundred small companies,
representing a variety of U.S. industries.
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While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (either convertible
or nonconvertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes as a temporary investment to accommodate cash
flows.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
AARP Managed Investment Portfolios
AARP Diversified Income Portfolio. AARP Diversified Income Portfolio
seeks to provide current income with modest long-term appreciation potential by
investing primarily in underlying AARP bond mutual funds.
AARP Diversified Growth Portfolio. The Portfolio seeks long-term growth
of capital by investing primarily in underlying AARP stock mutual funds.
Each Portfolio may invest in any of the AARP Mutual Funds, except for
those designed to provide tax-free income.
Under normal market conditions, each of the AARP Investment Portfolios
will invest within the investment ranges as described below:
o The Diversified Income Portfolio will normally invest 60-80% of total
assets in AARP bond mutual funds; and 20-40% of total assets in AARP
stock mutual funds; and 0-20% of total assets in cash or cash
equivalents.
o The Diversified Growth Portfolio will normally invest 60-80% of total
assets in AARP stock mutual funds; and 20-40% of total assets in AARP
bond mutual funds and/or cash equivalents; and 0-20% of total assets in
cash or cash equivalents.
If, as a result of appreciation or depreciation, the percentage of each
Portfolio's assets invested in the above categories exceeds or is less than the
applicable range, the Fund Manager will consider, in its discretion, whether to
reallocate the assets of each Portfolio to comply with the stated ranges.
Each Portfolio will purchase or sell shares of underlying AARP mutual
funds to: (a) accommodate purchases and sales of each Portfolio's shares, (b)
change the percentages of each Portfolio's assets invested in each of the
underlying AARP mutual funds in response to changing market conditions, and (c)
maintain or modify the allocation of each Portfolio's assets in accordance with
the investment mix described above. To provide for redemptions or for temporary
defensive purposes, each Portfolio may invest without limit in cash or cash
equivalents, including repurchase agreements, commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks.
For information about the investment objectives of each of the
underlying AARP mutual funds, please refer to the description of each underlying
AARP mutual fund contained in the sections preceding this section.
Special Investment Policies of the AARP Funds
(See "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.)
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
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bills have original maturities of one year or less. Treasury notes have original
maturities of one to ten years and Treasury bonds generally have original
maturities of greater than ten years.
U.S. Government agencies and instrumentalities which issue or guarantee
securities include, for example, the Export-Import Bank of the United States,
the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, the Small Business Administration and the
Federal Farm Credit Bank. Obligations of some of these agencies and
instrumentalities, such as the Export-Import Bank, are supported by the full
faith and credit of the United States; others, such as the securities of the
Federal Home Loan Bank, by the ability of the issuer to borrow from the
Treasury; while still others, such as the securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. No assurance can be given
that the U.S. Government would provide financial support to the latter group of
U.S. Government instrumentalities, as it is not obligated to do so.
Interest rates on U.S. Government obligations which the AARP Funds may
purchase may be fixed or variable. Interest rates on variable rate obligations
are adjusted at regular intervals, at least annually, according to a formula
reflecting then current specified standard rates, such as 91-day U.S. Treasury
bill rates. These adjustments tend to reduce fluctuations in the market value of
the securities.
Municipal Obligations. Municipal obligations held by AARP High Quality
Tax Free Money Fund and AARP Insured Tax Free General Bond Fund are issued by or
on behalf of states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on these
obligations is generally exempt from federal income tax in the hands of most
investors. The two principal classifications of municipal obligations are
"notes" and "bonds." Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenue such as income, sales, use and business taxes. Bond
Anticipation Notes are sold to provide interim financing and Construction Loan
Notes are sold to provide construction financing. These notes are generally
issued in anticipation of long-term financing in the market. In most cases,
these monies provide for the repayment of the notes. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the FHA under "Fannie Mae" (the Federal National Mortgage Association)
or GNMA. There are, of course, a number of other types of notes issued for
different purposes and secured differently than those described above.
Municipal bonds, which meet longer-term capital needs and generally
have maturities of more than one year when issued, have two principal
classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully-insured, rent-subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt reserve fund.
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Lease rental bonds issued by a state or local authority for capital projects are
secured by annual lease rental payments from the state or locality to the
authority sufficient to cover debt service on the authority's obligations.
Some issues of municipal bonds are payable from United States Treasury
bonds and notes held in escrow by a Trustee, frequently a commercial bank. The
interest and principal on these U.S. Government securities are sufficient to pay
all interest and principal requirements of the municipal securities when due.
Some escrowed Treasury securities are used to retire municipal bonds at their
earliest call date, while others are used to retire municipal bonds at their
maturity.
Private activity bonds, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by an
industrial or other non-governmental user.
Securities purchased for either Fund may include variable/floating rate
instruments, variable mode instruments, put bonds, and other obligations which
have a specified maturity date but also are payable before maturity after notice
by the holder ("demand obligations"). Demand obligations are considered for the
AARP Funds' purposes to mature at the demand date.
There are, in addition, a variety of hybrid and special types of
municipal obligations as well as numerous differences in the security of
municipal obligations both within and between the two principal classifications
(i.e., notes and bonds) discussed above.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as the AARP Funds. Thus, such an
issue may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale unless an
exemption from such registration is available, municipal obligations which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for municipal obligations which have not been publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on holdings of
securities which are not readily marketable based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its recorded
value. The AARP Funds believe that the quality standards applicable to their
investments enhance marketability. In addition, stand-by commitments,
participation interests and demand obligations also enhance marketability.
For the purpose of the AARP Funds' investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Fund Manager on the basis of the characteristics
of the obligation as described above, the most significant of which is the
source of funds for the payment of principal and interest on such obligations.
Trust Preferred Securities. AARP High Quality Bond Fund and AARP Bond
Fund for Income may invest in Trust Preferred Securities, which are hybrid
instruments issued by a special purpose trust (the "Special Trust"), the entire
equity interest of which is owned by a single issuer. The proceeds of the
issuance to the Funds of Trust Preferred Securities are typically used to
purchase a junior subordinated debenture, and distributions from the Special
Trust are funded by the payments of principal and interest on the subordinated
debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Funds, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
(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
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prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Funds, to sell their holdings.
Municipal Lease Obligations and Participation Interests. Participation
interests represent undivided interests in municipal leases, installment
purchase contracts, conditional sales contracts or other instruments. These are
typically issued by a Trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or contracts.
Each AARP Tax Free Fund may purchase from banks participation interests
in all or part of specific holdings of municipal obligations, provided the
participation interest is fully insured. Each participation is backed by an
irrevocable letter of credit or guarantee of the selling bank that the AARP
Funds' investment adviser has determined meets the prescribed quality standards
of the Fund. Thus either the credit of the issuer of the municipal obligation or
the selling bank, or both, will meet the quality standards of the particular
Fund. Each Fund has the right to sell the participation back to the bank after
seven days' notice for the full principal amount of the Fund's interest in the
municipal obligation plus accrued interest, but only (1) as required to provide
liquidity to the Fund, (2) to maintain a high quality investment portfolio or
(3) upon a default under the terms of the municipal obligation. The selling bank
will receive a fee from the Fund in connection with the arrangement. Neither
Fund will purchase participation interests unless it receives an opinion of
counsel or a ruling of the Internal Revenue Service satisfactory to the Trustees
that interest earned by that Fund on municipal obligations on which it holds
participation interests is exempt from Federal income tax.
A municipal lease obligation may take the form of a lease, installment
purchase contract or conditional sales contract which is issued by a state or
local government and authorities to acquire land, equipment and facilities.
Income from such obligations is generally exempt from state and local taxes in
the state of issuance. Municipal lease obligations frequently involve special
risks not normally associated with general obligations or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title in the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in a delay in recovery or the failure to
fully recover a Fund's original investment.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Fund Manager to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Fund Manager will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Fund Manager will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
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,
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the interest from such participations is exempt from regular federal income tax
and state income tax for each state specific fund.
Stand-by Commitments. Pursuant to an exemptive order from the SEC, each
AARP Tax Free Fund may acquire "stand-by commitments," which will enable the
Fund to improve its portfolio liquidity by making available same-day settlements
on sales of its securities. A stand-by commitment is a right acquired by a Fund,
when it purchases a municipal obligation from a broker, dealer or other
financial institution ("seller"), to sell up to the same principal amount of
such securities back to the seller, at the Fund's option, at a specified price.
Stand-by commitments are also known as "puts." Each Fund's investment policies
permit the acquisition of stand-by commitments solely to facilitate portfolio
liquidity and not to protect against changes in the market price of the Fund's
portfolio securities. The exercise by a Fund of a stand-by commitment is subject
to the ability of the other party to fulfill its contractual commitment.
Stand-by commitments acquired by a Fund will have the following
features: (1) they will be in writing and will be physically held by the Fund's
custodian; (2) a Fund's right to exercise them will be unconditional and
unqualified; (3) they will be entered into only with sellers which in the Fund
Manager's opinion present a minimal risk of default; (4) although stand-by
commitments will not be transferable, municipal obligations purchased subject to
such commitments may be sold to a third party at any time, even though the
commitment is outstanding; and (5) their exercise price will be (i) the Fund's
acquisition cost (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized original
issue discount during the period the Fund owned the securities, plus (ii) all
interest accrued on the securities since the last interest payment date.
Each Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding stand-by commitments will not
exceed 1/2 of 1% of the value of its total assets calculated immediately after
any stand-by commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Trustees
will determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a stand-by commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
There is no assurance that stand-by commitments will be available to a
Fund nor does either Fund assume that such commitments would continue to be
available under all market conditions.
Third Party Puts. The AARP Tax Free Funds may also purchase long-term
fixed rate bonds that have been coupled with an option granted by a third party
financial institution allowing a Fund at specified intervals (not exceeding 397
calendar days in the case of AARP High Quality Tax Free Money Fund) to tender
(or "put") the bonds to the institution and receive the face value thereof (plus
accrued interest). These third party puts are available in several different
forms, may be represented by custodial receipts or Trust certificates and may be
combined with other features such as interest rate swaps. The Fund receives a
short-term rate of interest (which is periodically reset), and the interest rate
differential between that rate and the fixed rate on the bond is retained by the
financial institution. The financial institution granting the option does not
provide credit enhancement, and in the event that there is a default in the
payment of principal or interest, or downgrading of a bond to below investment
grade, or a loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond and the weighted average maturity of the Fund's portfolio would be
adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-By
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the
Internal Revenue Service will agree with such position in any particular case.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the treatment of tender fees and swap payments, in
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relation to various regulated investment company tax provisions is unclear.
However, the Fund Manager intends to manage the Funds' portfolios in a manner
designed to minimize any adverse impact from these investments.
Repurchase Agreements. Each of the AARP Funds may enter into repurchase
agreements with any member bank of the Federal Reserve System and any
broker-dealers which are recognized as a reporting government securities dealer,
whose creditworthiness has been determined by the Fund Manager to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by any of the nationally-recognized rating services including Moody's
and S&P, two of the most widely recognized rating services for the types of
securities in which a Fund invests. A repurchase agreement, which provides a
means for a Fund to earn income on monies for periods as short as overnight, is
an arrangement under which the purchaser (i.e., the Fund) acquires a security
("Obligation") and the seller agrees, at the time of sale, to repurchase the
Obligation at a specified time and price. The repurchase price may be higher
than the purchase price, the difference being income to the Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the Fund at the time of repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the Obligation itself. For purposes of
the Investment Company Act of 1940, as amended, ("1940 Act") a repurchase
agreement is deemed to be a loan to the seller of the Obligation and is
therefore covered by each Fund's investment restriction applicable to loans.
Each repurchase agreement entered into by a Fund requires that if the market
value of the Obligation becomes less than the repurchase price (including
interest), a Fund will direct the seller of the Obligation, on a daily basis to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. In the
event that a Fund is unsuccessful in seeking to enforce the contractual
obligation to deliver additional securities, and the seller defaults on its
obligation to repurchase, the Fund bears the risk of any drop in market value of
the Obligation(s). In the event that bankruptcy or insolvency proceedings were
commenced with respect to a bank or broker-dealer before its repurchase of the
Obligation, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
Obligation. In the case of repurchase agreements, it is not clear whether a
court would consider a repurchase agreement as being owned by the particular
Fund or as being collateral for a loan by the Fund. If a court were to
characterize the transaction as a loan and the Fund had not perfected a security
interest in the Obligation, the Fund could be required to return the Obligation
to the bank's estate and be treated as an unsecured creditor. As an unsecured
creditor, the Fund would be at the risk of losing some or all of the principal
and income involved in that transaction. The Fund Manager seeks to minimize the
risk of loss through repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligations.
Securities subject to a repurchase agreement are held in a segregated
account, and the amount of such securities is adjusted so as to provide a market
value at least equal to the repurchase price on a daily basis.
Each of the AARP Income Funds has adopted a policy, which may be
changed without the vote of the shareholders of those funds, not to invest more
than 50% of its total assets in repurchase agreements. In addition, none of the
AARP Funds may invest more than 10% of its net assets in repurchase agreements
maturing in more than seven days. (See "Investment Restrictions", herein,
regarding requirements for a majority vote.)
Mortgage-Backed Securities and Mortgage Pass-Through Securities. The
AARP High Quality Bond Fund, the AARP Bond Fund for Income, and the AARP
Balanced Stock and Bond Fund may invest in mortgage-backed securities, which are
interests in pools of mortgage loans, including mortgage loans made by savings
and loan institutions, mortgage bankers, commercial banks and others. The AARP
GNMA and U.S. Treasury Fund invests in mortgage-backed securities guaranteed
primarily by the Government National Mortgage Association. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
AARP High Quality Bond Fund, the AARP Bond Fund for Income, and the AARP
Balanced Stock and Bond Fund may also invest in debt securities which are
secured with collateral consisting of mortgage-backed securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities.
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When interest rates rise, mortgage prepayment rates decline, thus
lengthening the life of a mortgage-related security and increasing the price
volatility of that security, affecting the price volatility of the Fund's
shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage-backed securities or to the value of Fund shares.
Also, GNMA securities often are purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Fund Manager determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMO"s). The AARP High Quality Bond Fund,
the AARP Bond Fund for Income, and the AARP Balanced Stock and Bond Fund may
invest in CMOs which are hybrids between mortgage-backed bonds and mortgage
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pass-through securities. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with the AARP High Quality Bond Fund's, the AARP Bond Fund
for Income's, and the AARP Balanced Stock and Bond Fund's investment objectives
and policies, the Funds may invest in these and other types of asset-backed
securities that may be developed in the future. In general, the collateral
supporting these securities is of shorter maturity than mortgage loans and is
less likely to experience substantial prepayments with interest rate
fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust ("Trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
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results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Fund will not pay any additional or separate fees for
credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security.
The Funds may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act of 1933 (the "1933 Act") may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Funds to dispose of any then existing holdings of such
securities.
Zero Coupon Securities. The AARP Balanced Stock and Bond Fund and the
AARP Global Growth Fund may invest in zero coupon securities which pay no cash
income and are sold at substantial discounts from their value at maturity. When
held to maturity, their entire income, which consists of accretion of discount,
comes from the difference between the issue price and their value at maturity.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero coupon securities which are
convertible into common stock offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks, as they usually are issued with maturities of 15 years
or less and are issued with options and/or redemption features exercisable by
the holder of the obligation entitling the holder to redeem the obligation and
receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number 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 (hereinafter referred to as "lower rated securities") or which
are unrated, but deemed equivalent to those rated below investment-grade by the
Fund Manager. The lower the ratings of such debt securities, the greater their
risks. These debt instruments generally offer a higher current yield than that
available from higher grade issues, but typically involve greater risk. The
yields on high yield/high risk bonds will fluctuate over time. In general,
prices of all bonds rise when interest rates fall and fall when interest rates
rise. While less sensitive to changing interest rates than investment-grade
debt, lower-rated securities are especially subject to adverse changes in
general economic conditions and to changes in the financial condition of their
issuers. During periods of economic downturn or rising interest rates, issuers
of these instruments may experience financial stress that could adversely affect
their ability to make payments of principal and interest and increase the
possibility of default.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of these
securities especially in a market characterized by only a small amount of
trading and with relatively few participants. These factors can also limit the
Fund's ability to obtain accurate market quotations for these securities, making
it more difficult to determine the Fund's NAV.
In cases where market quotations are not available, lower rated
securities are valued using guidelines established by the Fund's Board of
Trustees. Perceived credit quality in this market can change suddenly and
unexpectedly, and may not fully reflect the actual risk posed by a particular
lower rated or unrated security.
Loans of Portfolio Securities. Each Fund may lend its portfolio
securities provided: (1) the loan is secured continuously by collateral
consisting of U.S. Government securities or cash or cash equivalents adjusted
daily to have a market value at least equal to the current market value of the
securities loaned; (2) the Fund may at any time call the loan and regain the
securities loaned; (3) the Fund will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the Fund. In
addition, it is anticipated that the Fund may share with the borrower some of
the income received on the collateral for the loan or that it will be paid a
premium for the loan. In determining whether to lend securities, the Fund's
investment adviser considers all relevant factors and circumstances including
the creditworthiness of the borrower. The AARP Funds have no current intention
of lending their portfolio securities.
Securities Purchased on a "Forward Delivery" or "When-Issued" Basis.
Debt securities, including municipal obligations when originally issued, are
frequently offered on a "forward delivery" or "when-issued" basis and may be
purchased on this basis by the AARP Money, Income and Tax Free Funds, and the
AARP Balanced Stock and Bond Fund. When so offered, the price, which may be
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase of U.S. Government obligations. During the period between purchase and
settlement, no payment is made on behalf of the Fund and no interest accrues to
the Fund. To the extent that assets of the Fund are not invested prior to the
settlement of a purchase of securities, the Fund will earn no income; however,
it is the intention of each Fund to be fully invested to the extent practicable,
subject to the policies stated above. While securities purchased on a forward
delivery or when-issued basis may be sold prior to the settlement date, each of
the above Funds intends to purchase such securities with the purpose of actually
acquiring them for its portfolio unless a sale appears desirable for investment
reasons. At the time the commitment to purchase a debt security on a forward
delivery or when-issued basis is made, the transaction will be recorded and the
value of the security will be reflected in determining its net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Funds do not
believe that their net asset value or income will be adversely affected by their
purchase of debt securities on a when-issued or forward delivery basis. Each
Fund will establish with its custodian a segregated account in which it will
maintain cash, U.S. Government securities and other high-quality debt
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obligations equal in value to commitments for when-issued or forward delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date.
Futures Contracts. The AARP Income Funds, the AARP Insured Tax Free
General Bond Fund, the AARP Balanced Stock and Bond Fund, the AARP Global Growth
Fund, the AARP International Stock Fund, the AARP U.S. Stock Index Fund and the
AARP Small Company Stock Fund may each enter into financial futures contracts.
Such contracts may be either based on indices of particular groups or varieties
of securities ("Index Futures Contracts") or be for the purchase or sale of debt
obligations ("Debt Futures Contracts"). Such futures contracts are traded on
exchanges licensed and regulated by the Commodity Futures Trading Commission.
Each Fund enters into futures contracts to gain a degree of protection against
anticipated changes in interest rates that would otherwise have an adverse
effect upon the economic interests of the Fund. However, the costs of and
possible losses from futures transactions reduce the Funds' yield from interest
on its holdings of debt securities. Income from futures transactions constitutes
taxable gain.
For each Fund, the custodian places cash, U.S. government securities
and other high grade debt obligations into a segregated account in an amount
equal to the value of the total assets committed to the consummation of futures
positions. If the value of the securities placed in the segregated account
declines, additional cash or securities are required to be placed in the account
on a daily basis so that the value of the account equals the amount of a Fund's
commitments with respect to such contracts. Alternatively, a Fund may cover such
positions by purchasing offsetting positions, or covering such positions partly
with cash, U.S. government securities and other high grade debt obligations, and
partly with offsetting positions.
An Index Futures Contract is a contract to buy or sell units of a
particular index of securities at a specified future date at a price agreed upon
when the contract is made. Index Futures Contracts typically specify that no
delivery of the actual securities making up the index takes place. Instead, upon
termination of the contract, final settlement is made in cash based on the
difference between the contract price and the actual price on the termination
date of the units of the index.
A Debt Futures Contract is a binding contractual commitment which, if
held to maturity, requires a Fund to make or accept delivery, during a
particular month, of obligations having a standardized face value and rate of
return. By purchasing a Debt Futures Contract, a Fund legally obligates itself
to accept delivery of the underlying security and to pay the agreed price; by
selling a Debt Futures Contract it legally obligates itself to make delivery of
the security against payment of the agreed price. However, positions taken in
the futures markets are not normally held to maturity. Instead they are
liquidated through offsetting transactions which may result in a profit or loss.
While Debt Futures Contract positions taken by a Fund are usually liquidated in
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
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vary in direct proportion with the value of a Fund's securities, limiting the
ability of the Fund to hedge effectively against interest rate risk.
Presently the only available index futures contract in which the AARP
Insured Tax Free General Bond Fund might invest is the Bond Buyer Municipal Bond
Index. The Fund might sell a contract based on this index in anticipation of an
increase in interest rates, to attempt to offset the decrease in market value of
its portfolio securities which could result. Or the Fund might purchase such a
contract in the anticipation of a significant decrease in interest rates to
offset the increased cost of securities it hopes to purchase in the future. No
index futures contracts have yet been developed which are suitable for
investment by the Funds in the AARP Income Trust.
The investment restriction concerning futures contracts does not
specify the types of index-based futures contracts into which the Funds may
enter because it is impossible to foresee what particular indices may be
developed and traded or may prove useful to the Funds in implementing their
overall risk management strategies. For example, price trends for a particular
index-based futures contract may show a significant correlation with price
trends in the securities held by the Funds, or either of them, even though the
securities comprising the index are not necessarily identical to those held by
such Fund or Funds. In any event, the Funds would not enter into a particular
index-based futures contract unless the Fund Manager determined that such a
correlation existed.
Index Futures Contracts and Debt Futures Contracts currently are
actively traded on the Chicago Board of Trade and the International Monetary
Market at the Chicago Mercantile Exchange.
Options on Futures Contracts. To attempt to gain additional protection
against the effects of interest rate fluctuations, each of the AARP Income
Funds, the AARP Insured Tax Free General Bond Fund, the AARP Balanced Stock and
Bond Fund, the AARP Global Growth Fund, the AARP International Stock Fund, the
AARP U.S. Stock Index Fund and the AARP Small Company Stock Fund may purchase
and write (sell) put and call options on futures contracts that are traded on a
U.S. exchange or board of trade and enter into related closing transactions.
There can be no assurance that such closing transactions will be available at
all times. In return for the premium paid, such an option gives the purchaser
the right to assume a position in a futures contract at any time during the
option period for a specified exercise price.
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 a related option, the
value of the aggregate initial margin deposits with respect to all futures
contracts (both for receipt and delivery), and premiums paid on related options,
entered into on behalf of the Fund will not exceed 5% of the fair market value
of the Fund's total assets. Additionally, the value of the aggregate premiums
paid for all put and call options held by a Fund will not exceed 20% of its net
assets. Futures contracts and put options written (sold) by a Fund will be
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offset by assets of the Fund held in a segregated account in an amount
sufficient to satisfy obligations under such contracts and options.
Each Fund has received from the CFTC an interpretative letter
confirming its opinion that it is not a "commodity pool" as defined under the
Commodity Exchange Act. To ensure that its futures transactions meet this
definition, each Fund will enter into them for the purposes and with the hedging
intent specified in CFTC regulations. It will further determine that the price
fluctuations in the futures contracts used for hedging are substantially related
to price fluctuations in securities held by the Fund or which it expects to
purchase, though there can be no assurance this result will be achieved. The
Funds' futures transactions will be entered into for traditional hedging
purposes-- that is, futures contracts will be sold (or related put options
purchased) to protect against a decline in the price of securities that a Fund
owns, or futures contracts (or related call options) will be purchased to
protect the Fund against an increase in the price of securities it intends to
purchase. As evidence of this hedging intent, each Fund expects that
approximately 75% of its long futures positions (purchases of futures contracts
or call options on futures contracts) will be "completed"; that is, upon sale
(or other termination) of these long contracts, the Fund will have purchased, or
will be in the process of, purchasing, equivalent amounts of related securities
in the cash market. However, under unusual market conditions, a long futures
position may be terminated without the corresponding purchase of securities.
Covered Call Options. Each of the AARP Growth Funds and each of the
AARP Income Funds may write (sell) covered call options on their portfolio
securities in an attempt to enhance investment performance. The writing of
covered call options by each Fund is subject to limitations imposed by certain
state securities authorities. The Funds have been advised that, under the most
restrictive of such limitations currently in effect, no more than 25% of a
Fund's net assets may be subject to covered options. Further, such states advise
that, unless an exception is granted with respect to certain transactions in
debt securities and related options, such options and the securities underlying
the call must both be listed on national securities exchanges.
When a Fund writes (sells) a covered call option, it gives the
purchaser of the option the right to buy the underlying security at the price
specified in the option (the "exercise price") at any time during the option
period, generally ranging up to nine months. If the option expires unexercised,
the Fund will realize gain to the extent of the amount received for the option
(the "premium") less any commission paid. If the option is exercised, a decision
over which the Fund has no control, the Fund must sell the underlying security
to the option holder at the exercise price. By writing a covered option, the
Fund forgoes, in exchange for the premium less the commission ("net premium"),
the opportunity to profit during the option period from an increase in the
market value of the underlying security above the exercise price.
When a Fund sells an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked-to-market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a closing purchase transaction (i.e., the Fund
terminates its obligation as the writer of the option by purchasing a call
option on the same security with the same exercise price and expiration date as
the option previously written), the Fund will realize a gain (or loss if the
cost of a closing purchase transaction exceeds the net premium received when the
option was sold) and the deferred credit related to such option will be
eliminated. If an option is exercised, the Fund will realize a long-term or
short-term gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received.
The writing of covered options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
options are written will be segregated on the books of the Fund's custodian.
Purchasing Options on Stock Indices. To protect the value of their
portfolios against declining stock prices, each of the AARP Growth Funds may
purchase put options on stock indices. To protect against an increase in the
value of securities that it wants to purchase, a Fund may purchase call options
on stock indices. A stock index (such as the Standard & Poor's 500) assigns
relative values to the common stocks included in the index and the index
fluctuates with the changes in the market values of the common stocks so
included. Options on stock indices are similar to options on stock except that,
rather than giving the purchaser the right to take delivery of stock at a
specified price, an option on a stock index gives the purchaser the right to
receive cash. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars,
times a specified multiple (the "multiplier"). The writer of the option is
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obligated, in return for the premium received, to make delivery of this amount.
Gain or loss with respect to options on stock indices depends on price movements
in the stock market generally rather than price movements in individual stocks.
The multiplier for an index option performs a function similar to the
unit of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Because the value of a stock index option depends upon movements in the
level of the stock index rather than the price of a particular stock, whether a
Fund will realize a gain or loss on the purchase of a put or call option on a
stock index depends upon movements in the level of stock prices in the stock
market generally or in an industry or market segment rather than movements in
the price of a particular stock. Accordingly, successful use by a Fund of both
put and call options on stock indices will be subject to the Fund Manager's
ability to accurately predict movements in the direction of the stock market
generally or of a particular industry. In cases where the Fund Manager's
prediction proves to be inaccurate, a Fund will lose the premium paid to
purchase the option and it will have failed to realize any gain.
In addition, a Fund's ability to hedge effectively all or a portion of
its securities through transactions in options on stock indices (and therefore
the extent of its gain or loss on such transactions) depends on the degree to
which price movements in the underlying index correlate with price movements in
the Fund's securities. Inasmuch as such securities will not duplicate the
components of an index, the correlation probably will not be perfect.
Consequently, a Fund will bear the risk that the prices of the securities being
hedged will not move in the same amount as the option. This risk will increase
as the composition of a Fund's portfolio diverges from the composition of the
index.
Over-the-counter options ("OTC options") are purchased from or sold to
securities dealers, financial institutions or other parties ("Counterparties")
through direct bilateral agreement with the Counterparty. In contrast to
exchange listed options, which generally have standardized terms and performance
mechanics, all the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guarantees and security, are set by
negotiation of the parties. A Fund will only sell OTC options (other than OTC
currency options) that are subject to a buy-back provision permitting a Fund to
require the Counterparty to sell the option back to the Fund at a formula price
within seven days. A Fund expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Fund Manager must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. A Fund will engage in OTC option transactions only
with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers", or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of A-1 from S&P or P-1 from Moody's or an equivalent rating from any other
nationally recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 10% of its assets in illiquid securities.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
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expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
Risks of Futures and Options Investments. A Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate Funds for the benefit of brokers as margin to guarantee
performance of its futures and options contracts. In addition, while such
contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while a Fund may benefit from the
use of futures contracts and related options, unanticipated changes in interest
rates may result in a poorer overall performance for that Fund than if it had
not entered into any such contracts. Additionally, the skills required to invest
successfully in futures and options may differ from skills required for managing
other assets in the Fund's portfolio.
The AARP Growth Funds may engage in over-the-counter options
transactions with broker-dealers who make markets in these options. The Fund
Manager will consider risk factors such as their creditworthiness when
determining a broker-dealer with which to engage in options transactions. The
ability to terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the issuing
broker rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Certain
over-the-counter options may be deemed to be illiquid securities and may not be
readily marketable. The Fund Manager will monitor the creditworthiness of
dealers with whom the Funds enter into such options transactions under the
general supervision of the Funds' Trustees.
Convertible Securities. Each Fund in the AARP Growth Trust, AARP High
Quality Bond Fund and AARP Bond Fund for Income may invest in convertible
securities. Convertible securities include convertible bonds, notes and
debentures, convertible preferred stocks, and other securities that give the
holder the right to exchange the security for a specific number of shares of
common stock. Convertible securities entail less credit risk than the issuer's
common stock because they are considered to be "senior" to common stock.
Convertible securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar quality. They may also reflect
changes in value of the underlying common stock.
Foreign Securities. All the Funds in the AARP Growth Trust may invest
without limit in foreign securities. The AARP High Quality Bond Fund may invest
without limit in U.S. dollar denominated foreign securities and may invest up to
20% of its assets in foreign bonds denominated in foreign currencies although no
more than 5% of the Fund's total assets will be represented by a given foreign
currency. The AARP Bond Fund for Income may invest without limit in U.S. dollar
denominated investment-grade foreign securities and may invest up to 20% of its
assets in foreign bonds denominated in foreign currencies. The AARP Money Funds
may currently invest in U.S. dollar-denominated certificates of deposit and
bankers' acceptances of foreign branches of large U.S. banks.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in United States securities and
which may favorably or unfavorably affect the Funds' performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
United States and, at times, volatility of price can be greater than in the
United States. Fixed commissions on some foreign securities exchanges and bid to
asked spreads in foreign bond markets are generally higher than commissions on
bid to asked spreads on U.S. markets, although the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S. It may be more difficult for the
Funds' agents to keep currently informed about corporate actions which may
affect the prices of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Payment for securities without
delivery may be required in certain foreign markets. In addition, with respect
to certain foreign countries, there is the possibility of expropriation or
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confiscatory taxation, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Investments in foreign securities may also entail certain risks such as possible
currency blockages or transfer restrictions, and the difficulty of enforcing
rights in other countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, to the
extent investments in foreign securities involve currencies of foreign
countries, the Funds may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversion between currencies.
Investments in companies domiciled in developing countries may be
subject to potentially greater risks than investments in developed countries.
The possibility of revolution and the dependence on foreign economic assistance
may be greater in these countries than in developed countries. The management of
each Fund seeks to mitigate the risks associated with these considerations
through diversification and active professional management.
Forward Foreign Currency Exchange Contracts. Each of the AARP Growth
Funds and the AARP High Quality Bond Fund and the AARP Bond Fund for Income may
enter into forward foreign currency exchange contracts in connection with its
investments in foreign securities. A forward foreign currency exchange contract
("forward contract") involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The maturity date of a forward contract may be any fixed number of days
from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month, and forward contracts may be in any amount
agreed upon by the parties rather than predetermined amounts. Also, forward
contracts are traded directly between banks or currency dealers so that no
intermediary is required. A forward contract generally requires no margin or
other deposit. Closing transactions with respect to forward contracts are
effected with the currency trader who is a party to the original forward
contract.
The Funds may enter into foreign currency futures contracts in several
circumstances. First, when the Funds enter into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Funds
anticipates the receipt in a foreign currency of interest and dividend payments
on such a security which it holds, the Funds may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such interest and
dividend payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of U.S. dollars, of the amount of
foreign currency involved in the underlying transactions, the Funds will attempt
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend payment is declared, and the date on which such
payments are made or received.
The Funds' activities involving forward contracts may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company.
General Investment Policies of the AARP Funds
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
The AARP Funds have no present intention of acquiring restricted
securities, though they have limited authority to do so (see "Investment
Restrictions").
The AARP Funds cannot guarantee a gain or eliminate the risk of loss.
The net asset value of a non-money market Fund's shares will increase or
decrease with changes in the market prices of the Fund's investments and there
is no assurance that a Fund's objective(s) will be achieved.
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Except where otherwise indicated, the objectives and policies stated
above may be changed by the Trustees without a vote of the shareholders.
Investment Restrictions
The following restrictions may not be changed with respect to a Fund
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (1) 67% of the shares
of such Fund present at a meeting if the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of such Fund.
(A) Neither AARP Bond Fund for Income, AARP U.S. Stock Index Fund,
AARP International Stock Fund nor AARP Small Company Stock Fund may:
(1) borrow money, except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements; provided that a Fund maintains asset
coverage of 300% for all borrowings;
(2) act as an underwriter of securities issued by others, except
to the extent that it may be deemed an underwriter in
connection with the disposition of portfolio securities of
a Fund;
(3) make loans to other persons, except to the extent that the
entry into repurchase agreements in accordance with its
investment objectives and investment policies may be deemed to
be loans;
(4) purchase or sell real estate (except that a Fund may invest in
(i) securities of companies which deal in real estate or
mortgages, and (ii) securities secured by real estate or
interests therein, and that a Fund reserves freedom of action
to hold and to sell real estate acquired as a result of a
Fund's ownership of securities); and
(5) purchase or sell physical commodities or contracts relating to
physical commodities.
(B) Neither AARP Diversified Income Portfolio nor AARP Diversified Growth
Portfolio may:
(1) borrow money, except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements; provided that a Portfolio maintains
asset coverage of 300% for all borrowings;
(2) act as an underwriter of securities issued by others, except
to the extent that it may be deemed an underwriter in
connection with the disposition of portfolio securities of a
Portfolio;
(3) make loans to other persons, except to the extent that the
entry into repurchase agreements in accordance with its
investment objectives and investment policies may be deemed to
be loans;
(4) purchase or sell real estate (except that an Underlying
Scudder Fund may invest in (i) securities of companies which
deal in real estate or mortgages, and (ii) securities secured
by real estate or interests therein, and that an Underlying
Scudder Fund reserves freedom of action to hold and to sell
real estate acquired as a result of an Underlying Scudder
Fund's ownership of securities); and
(5) purchase or sell physical commodities or contracts relating to
physical commodities.
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(C) Neither AARP High Quality Money Fund, AARP GNMA and U.S. Treasury Fund,
AARP High Quality Bond Fund, AARP High Quality Tax Free Money Fund,
AARP Insured Tax Free General Bond Fund, AARP Balanced Stock and Bond
Fund, AARP Growth and Income Fund, AARP Global Growth Fund nor AARP
Capital Growth Fund may:
(1) borrow money, except for temporary or emergency purposes and
not for investment purposes or except in connection with
reverse repurchase agreements; provided that a Fund maintains
asset coverage of 300% for all borrowings;
(2) underwrite any securities issued by other persons, except
that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Fund;
(3) purchase or sell real estate, but this shall not prevent a
Fund from investing in (i) securities of companies which deal
in real estate or mortgages, and (ii) securities secured by
real estate or interests therein, and that the Fund reserves
freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities;
(4) purchase or sell physical commodities, or contracts relating
to physical commodities;
(5) make loans to other persons, except (i) loans of portfolio
securities, and (ii) except to the extent that the entry into
repurchase agreements and the purchase of debt securities in
accordance with its investment objective and investment
policies may be deemed to be loans;
(6) issue senior securities except as appropriate to evidence
indebtedness which it is permitted to incur and except for
shares of the separate classes or series of the Trusts,
provided that collateral arrangements with respect to
currency-related contracts, futures contracts, option or other
permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction; and
(7) with respect to 75% of each Fund's total assets, purchase more
than 10% of the voting securities of any one issuer or invest
more than 5% of the value of the total assets of the Fund in
the securities of any one issuer (except for investments in
obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, cash and cash equivalents and
securities of other investment companies), provided that the
amount of the total assets of each of the AARP High Quality
Money Fund and AARP High Quality Tax Free Money Fund, that may
be invested in the securities of any one issuer will, instead,
be limited in accordance with federal law, regulation and
regulatory interpretation applicable to money market funds, as
amended from time to time.
(D) Neither the AARP High Quality Money Fund, the AARP GNMA and U.S.
Treasury Fund, the AARP High Quality Bond Fund, the AARP Bond Fund for
Income, the AARP Growth and Income Fund, the AARP Global Growth Fund
nor the AARP Capital Growth Fund may:
(1) purchase any securities which would cause more than 25% of the
market value of the total assets of the Fund at the time of
such purchase to be invested in the securities of one or more
issuers having their principal business activities in the same
industry (for this purpose, telephone companies are considered
to be a separate industry from gas and electric public
utilities, and wholly-owned finance companies are considered
to be in the industry of their parents if their activities are
primarily related to financing the activities of the parents),
provided that there is no limitation in respect to investments
in the U.S. Government or its agencies or instrumentalities
or, in the case of AARP High Quality Money Fund, in
certificates of deposit or bankers' acceptances or, in the
case of the AARP Growth and Income Funds, to municipal
securities other than pollution control and industrial
development bonds.
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(E) Neither the AARP High Quality Tax Free Money Fund nor the AARP Insured
Tax Free General Bond Fund may:
(1) purchase (i) private activity bonds or (ii) securities which
are neither municipal bonds nor securities of the U.S.
Government, its agencies or instrumentalities, if in either
case the purchase would cause more than 25% of the market
value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers having their
principal business activities in the same industry. For this
purpose, telephone companies are considered to be a separate
industry from gas and electric public utilities and
wholly-owned finance companies are considered to be in the
industry of their parents if their activities are primarily
related to financing the activities of their parents provided
that, in the case of the AARP High Quality Tax Free Money
Fund, there is no limitation in respect to investments in the
U.S. Government or its agencies or instrumentalities, or in
certificates of deposit or bankers' acceptances.
(F) AARP High Quality Tax Free Money Fund may not:
(1) purchase securities which are not municipal obligations if
such purchase would cause more than 20% of the Fund's total
assets to be invested in such securities, except, for
temporary defensive purposes, that the Fund may invest more
than 20% of its total assets in such securities prior to the
time normal operating conditions have been achieved and during
other than normal market conditions.
The following restrictions are not fundamental and may be changed by a Fund
without shareholder approval, in compliance with applicable law, regulation or
regulatory policy.
Neither AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund and AARP Small Company Stock Fund, AARP Diversified
Income Portfolio nor AARP Diversified Growth Portfolio may:
(a) invest in companies for the purpose of exercising management
or control; and
(b) borrow money in excess of 5% of total assets (taken at market
value) except for temporary or emergency purposes or borrow
other than from banks.
Neither AARP High Quality Money Fund, AARP GNMA and U.S. Treasury Fund, AARP
High Quality Bond Fund, AARP High Quality Tax Free Money Fund, AARP Insured Tax
Free General Bond Fund, AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, AARP Global Growth Fund nor AARP Capital Growth Fund may:
(a) make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary
for the clearance of transactions; and, in the case of the
AARP Income Funds and AARP Insured Tax Free General Bond Fund
in connection with entering into futures contracts and related
options;
(b) purchase or retain for a Fund the securities of any issuer if
those officers and Trustees of a Trust, or partners and
officers of its investment adviser, who individually own more
than 1/2 of 1% of the outstanding securities of such issuer,
together own more than 5% of such outstanding securities;
(c) purchase from or sell to any of the officers and Trustees of a
Trust, its investment adviser, its principal underwriter or
the officers, directors, and partners of its investment
adviser or principal underwriter, portfolio securities of a
Fund;
(d) purchase restricted securities (for these purposes restricted
security means a security with a legal or contractual
restriction on resale in the principal market in which the
security is traded), including repurchase agreements maturing
in more than seven days and securities which are not readily
marketable if as a result more than 10% of the net assets
(valued at market at purchase) would be invested in such
securities;
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(e) purchase securities of any issuer with a record of less than
three years continuous operation, including predecessors, and
equity securities of issuers that are not readily marketable,
except obligations issued or guaranteed by the U.S. Government
or its agencies (or, in the case of the AARP Tax-Free Income
Funds, municipal securities rated by a recognized municipal
bond rating service), if such purchase would cause the
investments of that Fund in all such issuers to exceed 5% of
the value of the total assets of that Fund;
(f) invest its assets in securities of other open-end investment
companies, but may invest in closed-end investment companies
when such purchases are made in the open market where no
commission or profit to a sponsor or dealer result from such
purchase other than the customary broker's commission, if
after such purchase (a) a Fund would own no more than 3% of
the total outstanding voting stock of such investment
company, (b) no more than 5% of a Fund's total assets would
be invested in the securities of any single investment
company, (c) no more than 10% of a Fund's total assets would
be invested in the securities of investment companies in the
aggregate, or (d) all the investment companies advised by
the Fund Manager would own no more than 10% of the total
outstanding voting stock of any closed-end company; provided
that this restriction shall not preclude acquisition of
investment company securities by dividend, exchange offer or
reorganization. To the extent that a Fund invests in shares
of other investment companies, additional fees and expenses
may be deducted from such investments in addition to those
incurred by a Fund. Except in the case of the AARP Insured
Tax Free Income Funds, for purposes of this limitation,
foreign banks or their agencies or subsidiaries are not
considered investment companies;
(g) invest in other companies for the purpose of exercising
control or management;
(h) purchase or sell real estate and real estate limited
partnership interests, but this shall not prevent a Fund from
investing in securities secured by real estate or interest
therein; and
(i) purchase or sell commodities, commodities contracts (except,
in the case of the AARP Income Funds, the AARP Insured Tax
Free General Bond Fund and the AARP Global Growth Fund,
contracts for the future delivery of debt obligations and
contracts based on debt indices) or oil, gas or other mineral
exploration or development programs or leases (although it may
invest in issuers which own or invest in such interests).
AARP High Quality Money Fund may not:
(j) purchase or sell any put or call options or any combination
thereof; or
(k) purchase warrants, unless attached to other securities in
which the Fund is permitted to invest.
Neither the AARP High Quality Money Fund nor the AARP High Quality Tax Free
Money Fund may:
(l) pledge, mortgage or hypothecate its assets, except that, to
secure borrowings permitted by subparagraph (C) (1) above, it
may pledge securities having a value at the time of pledge not
exceeding 15% of the cost of the Fund's total assets.
Neither the AARP GNMA and U.S. Treasury Fund nor the AARP High Quality Bond Fund
may:
(m) purchase warrants of any issuer, except that AARP High Quality
Bond Fund can purchase warrants on a limited basis. As a
result of such purchases by the Fund, no more than 2% of the
value of the total assets of the Fund may be invested in
warrants which are not listed on the New York Stock Exchange
or the American Stock Exchange, and no more than 5% of the
value of the total assets of the Fund may be invested in
warrants whether or not so listed, such warrants in each case
to be valued at the lesser of cost or market, but assigning no
value to warrants acquired by the Fund in units with or
attached to debt securities;
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(n) purchase or sell any put or call options or any combination
thereof, except that the Fund may write and sell national
exchange-listed covered call option contracts on national
exchange-listed securities and, to the extent permitted by
applicable state regulatory limits, on other debt securities
owned by the Fund up to, but not in excess of, 25% of the
value of the Fund's net assets at the time such option
contracts are written. The Fund may also purchase call
options for the purpose of terminating its outstanding
obligations with respect to securities upon which covered
call option contracts have been written (i.e., "closing
purchase transaction"). In connection with the writing of
covered call options, the Fund may pledge assets to an
extent not greater than 25% of the value of its net assets
at the time such options are written. The Fund also may
purchase and write options on futures contracts in the
manner described under "The Funds' Investment Objectives and
Policies";
(o) pledge, mortgage or hypothecate its assets, (a) except to the
extent that the writing of covered call options may be deemed
to involve the pledge of securities against which the option
is being written, (b) except to the extent that margin
deposits on futures contracts and related options may be
deemed to involve a pledge of assets to guarantee the
performance of the futures obligations, and (c) except to
secure borrowings permitted by subparagraph (C) (1) above, it
may pledge securities having a value at the time of pledge not
exceeding 15% of the cost of the Fund's total assets.
AARP High Quality Bond Fund has adopted a non-fundamental policy that
it will not underwrite securities issued by entities regulated under Part II of
the Federal Power Act.
Neither AARP Insured Tax Free General Bond Fund nor AARP High Quality Tax Free
Money Fund may:
(p) purchase or sell any put or call options or combinations
thereof, except to the extent that the acquisition of Stand-by
Commitments or Participation Interests may be considered the
purchase or sale of a put option and except that the AARP
Insured Tax Free General Bond Fund may purchase and write
options on futures contracts in the manner and to the extent
described herein;
(q) underwrite securities issued by entities regulated under Part
II of the Federal Power Act, provided that, for this purpose
private activity bonds the interest on which is exempt from
tax under Section 103 of the Internal Revenue Code of 1986
will be treated as obligations of the municipal authority or
other governmental unit issuing the bonds.
AARP Insured Tax Free General Bond Fund may not:
(r) hold for a period of more than 30 days any municipal
securities maturing in 60 or more days from purchase by a Fund
which are not fully insured or guaranteed directly or
indirectly by the U.S. Treasury.
(s) pledge, mortgage or hypothecate its assets, except to the
extent that margin deposits on futures contracts and related
options may be deemed to be a pledge of assets to guarantee
performance of such obligations, and except that, to secure
borrowings permitted by subparagraph (C) (1) above, it may
pledge securities having a value at the time of the pledge not
exceeding 15% of the cost of the Fund's total assets;
Neither AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP
Global Growth Fund nor AARP Capital Growth Fund may:
(t) purchase or sell any put or call options or any combination
thereof, except that the Funds may each purchase and sell
options on stock indices in accordance with the requirements
of applicable regulations. The Funds may write (sell)
covered call option contracts on securities owned by the
Fund up to, but not in excess of, 25% of the value of the
Fund's net assets at the time such option contracts are
written. The Funds may also purchase call options for the
purpose of terminating their outstanding obligations with
respect to securities upon which covered call option
contracts have been written (i.e., "closing purchase
transactions"). In connection with the writing of covered
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call options, the Funds may pledge assets to an extent not
greater than 25% of the value of its net assets at the time
such options are written;
(u) purchase securities if, as a result thereof, more than 5% of
the value of the net assets would be invested in restricted
securities (for these purposes restricted security means a
security with a legal or contractual restriction on resale in
the principal market in which the security is traded).
(v) purchase warrants of any issuer if, as a result more than 2%
of the value of the total assets of the Fund would be invested
in warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange, or more than 5% of
the value of the total assets of the Fund would be invested in
warrants acquired by the Fund in units with or attached to
debt securities.
Neither the AARP Growth and Income Fund nor the AARP Capital Growth Fund may:
(w) pledge, mortgage or hypothecate its assets, except as provided
in subparagraph (t), above, and except that, to secure
borrowings permitted by subparagraph (C) (1) above, it may
pledge an amount not exceeding 15% of the Fund's total assets
taken at cost;
AARP Global Growth Fund may not:
(x) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(y) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of its net assets; or sell put
options on securities if, as a result, the aggregate value of
the obligations underlying such put options would exceed 50%
of the Fund's net assets;
(z) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the Fund's
total assets, provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5% limit;
(aa) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the
time any loan is made; all loans of portfolio securities will
be fully collateralized and marked to market daily. The Fund
has no current intention of making loans of portfolio
securities that would amount to greater than 5% of the Fund's
total assets; or
(bb) borrow money, including reverse repurchase agreements, in
excess of 5% of its total assets (taken at market value)
except for temporary or emergency purposes, or borrow other
than from banks.
"Value" for the purposes of the above fundamental and non-fundamental
investment policies shall mean the value used in determining a Fund's net asset
value.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, the restricted
activity or, in the case of AARP High Quality Money Fund and the AARP Income
Funds, an acquisition or encumbrance of securities or assets of, or borrowings
by, the Fund.
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PURCHASES
(See "OPENING AN ACCOUNT" and "ADDING TO YOUR INVESTMENT" in the Prospectus.)
General Information
Confirmations of each transaction will be sent following the
transaction by Scudder Investor Services, Inc., as the AARP Funds' agent. By
retaining year-to-date confirmations, an investor will have an historical record
of the account activity.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in United States Funds and must be drawn on a
United States financial institution.
If shares are purchased by a check which proves to be uncollectible,
the Trusts reserve the right to cancel the purchase immediately and the
purchaser will be responsible for any loss incurred by the Fund or the principal
underwriter by reason of such cancellation. Each Trust has the authority, as
agent of the shareholder, to redeem shares in the account to reimburse the Fund
or the principal underwriter for any loss incurred. Investors whose orders have
been canceled may be prohibited from or restricted in placing future orders in
any of the Funds in the Program or in other Funds advised by the AARP Funds'
investment adviser or an affiliate.
Share Price
Accepted purchases for shares in all the AARP Funds will be filled at
the net asset value next computed after receipt of payment by check or other
means. Each Fund's net asset value per share is currently determined once daily,
as of the close of regular trading on the New York Stock Exchange (the
"Exchange") (usually 4:00 p.m. Eastern time), on each day the Exchange is open
for trading. For AARP High Quality Money Fund and AARP High Quality Tax Free
Money Fund, Scudder Fund Accounting Corporation also determines net asset value
per share as of noon Eastern time on each day the Exchange is open for trading.
(See "NET ASSET VALUE," herein for additional information on how the Fund's net
asset value is calculated.) Orders received after the close of regular trading
will be filled at the next day's net asset value per share for the relevant
Fund.
There is no sales charge in connection with purchase of shares of any
of the AARP Funds.
Share Certificates
In order to afford ease of redemption, ownership in the AARP Funds is
on a non-certificated basis. Share certificates now in a shareholder's
possession may be sent to the AARP Funds' transfer agent for cancellation and
credit to such shareholder's account. Shareholders who prefer may hold the
certificates now in their possession until they wish to exchange or redeem such
shares. See "EXCHANGING" and "ACCESS TO YOUR INVESTMENT" in the Funds'
Prospectus.
Direct Deposit Program
Investors can have Social Security or other checks from the U.S.
Government or any other regular income checks such as pension, dividends, and
even payroll checks automatically deposited directly to their accounts.
Investors may allocate a minimum of 25% of their income checks into any AARP
Fund. Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
Wire Transfers
In the case of wire purchases, failure to receive timely and complete
account information will delay investment and subsequent accrual of dividends
and will result in the federal funds being returned to the sender on the day
following receipt by State Street Bank and Trust Company (the "custodian").
Unlike shareholders subscribing by check, purchasers who wire funds will be able
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to redeem shares so purchased by any method without any limitation as to the
period of time such shares have been on a Fund's books.
The bank sending federal funds by bank wire may charge for the service.
Presently, Scudder Investor Services, Inc. or the AARP Funds pay a fee for
receipt by the custodian of "wired funds," but the right to charge investors for
this service is reserved.
Holidays
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Martin Luther King, Jr. Day (the 3rd Monday in
January), Columbus Day (the 2nd Monday in October) and Veterans Day (November
11). Investors are not able to purchase shares by wiring federal funds on such
holidays because the custodians are not open to receive such federal funds on
behalf of a Fund.
Other Information
All purchase payments will be invested in full and fractional shares.
The Trusts and Scudder Investor Services, Inc., the AARP Funds'
principal underwriter, each have the right to limit the amount of shares
purchased of a Fund, to reject any purchase and to refuse to sell shares to any
person.
It should be noted that if purchases are made through a member of the
National Association of Securities Dealers other than Scudder Investor Services,
Inc., that member may, in its discretion, charge a fee for this service. It is
the responsibility of the broker, not the AARP Funds, to place the purchase
order by the time as of which the net asset value of the Funds is next
determined.
The Trusts may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of, the assets of any investment
company or personal holding company, subject to the requirements of the 1940
Act.
REDEMPTIONS
(See "ACCESS TO YOUR INVESTMENT" in the Prospectus.)
General Information
If a shareholder redeems all shares in an account, the shareholder will
receive, in addition to the net asset value thereof, all declared but unpaid
dividends thereon. The AARP Funds do not impose a redemption charge.
The proceeds of redemption transactions are normally available to be
mailed or wired to the designated bank account within one business day, and in
any event will be available within seven calendar days, following receipt of a
redemption request in good order.
A shareholder's right to redeem shares of a Fund and to receive payment
therefore may be suspended at times (a) when the Exchange is closed, other than
customary weekend and holiday closings, (b) when trading on the Exchange is
restricted for any reason, (c) when an emergency exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets, or (d) when the SEC permits a suspension of the right of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b) or (c) exist.
The Trustees may suspend or terminate the offering of shares of a Fund
at any time.
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Redemption by Telephone
Redemption by telephone is not available for shares for which share
certificates have been issued. Redemptions of such shares must be requested by
mail as explained in the section entitled "Redemption by Mail" below.
For other investors, the following procedures are available.
TO ADDRESS OF RECORD: New investors automatically receive the option,
without having to elect it, to redeem by telephone to their address of record
for any amount up to $100,000 per Fund. Telephone Redemption to Address of
Record may be used as long as the account registration address has not changed
within the last 15 days. In order to decline this feature, the shareholder must
notify the Program in writing. Any shareholder who refuses Telephone Redemption
to Address of Record can later establish the feature with a signature guaranteed
written request. This request must be done prior to utilizing this service for
the first time.
TO YOUR BANK--BY MAIL OR BY WIRE: In order to request redemptions by
telephone to their bank, shareholders must have completed the telephone
redemption authorization included in the enrollment form and have sent the
authorization to the Program. This authorization requires designation of a bank
account to which the redemption payment is to be sent. The proceeds will be
mailed or wired only to the designated bank account.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate section
on the enrollment form, and send it to the Program.
(b) EXISTING SHAREHOLDERS who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption payments
should either enter the new information on the "Telephone Option
Form" which may be obtained by calling the Program, or send a
signature guaranteed letter identifying the account and
specifying the exact information to be changed. In each case, the
letter must be signed exactly as the shareholder's name(s)
appears on the account. All requests for telephone redemption
should be accompanied by a voided check from the designated bank
account. All signatures will require a guarantee, which can be
obtained from most banks, credit unions or savings associations,
or from broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities
associations, or clearing agencies deemed eligible by the SEC. An
original signature and an original signature guarantee are
required for each person in whose name the account is registered.
Signature guarantees by notaries public are not acceptable.
In addition, if shares to be redeemed were purchased by check, mailing
of the redemption proceeds may be delayed long enough to assure that the
purchase check has cleared.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve wire to the bank account
designated on the application form unless a request is made that the redemption
be mailed to the designated bank account. For each wire redemption, the program
charges a $5.00 fee which is deducted from the proceeds of the redemption.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a participant in
the Federal Reserve System, redemption proceeds must be wired through a
commercial bank which is a correspondent of the savings bank. As this may delay
receipt by the shareholder's account, it is suggested that investors wishing to
use a savings bank discuss wire procedures with their bank and submit any
special wire transfer information with the telephone redemption authorization.
If appropriate wire information is not supplied, redemption proceeds will be
mailed to the designated bank.
The Trusts and their agents each reserve the right to modify,
interrupt, suspend or terminate the telephone redemption privilege at any time,
without notice. A shareholder may cancel the telephone redemption authorization
upon written notice. Each Trust employs procedures including recording telephone
calls, testing a caller's identity, and sending written confirmation of
telephone transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
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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 and not
more than $1,000,000. By using one of these checks, the shareholder will receive
daily dividend credit on his or her shares in either Fund until the check has
cleared the banking system. Investors who purchased shares by check may write
checks against those shares only after they have been on the Fund's books for 7
days. Shareholders who use this service may also use other redemption
procedures. Both Funds pay the bank charges for this service. However, each Fund
will review the cost of operation periodically and it reserves the right to
determine if direct charges to the persons who avail themselves of this service
would be appropriate. An account cannot be closed using the "free Checkwriting"
privilege. The Trusts, the transfer agent and the custodian each reserve the
right at any time to suspend or terminate the "free Checkwriting" procedure.
Redemption-in-Kind
The AARP Growth Trust and AARP Managed Investment Portfolios Trust
reserve the right to permit the AARP Balanced Stock and Bond Fund, AARP Growth
and Income Fund, the AARP Global Growth Fund, AARP Capital Growth Fund, AARP
International Stock Fund, AARP Small Company Fund, AARP U.S. Stock Index Fund,
AARP Diversified Income Portfolio and AARP Diversified Growth Portfolio, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or repurchase order by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for purposes of
computing the Fund's net asset value (a redemption-in-kind). If payment is made
in securities, a shareholder may incur transaction expenses in converting these
securities into cash. The AARP Growth Trust has elected, however, to be governed
by Rule 18f-1 under the 1940 Act as a result of which each Fund of the Trust is
obligated to redeem shares, with respect to any one shareholder during any 90
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day period, solely in cash up to the lesser of $250,000 or 1% of the net asset
value of such Fund at the beginning of the period.
Other Information
The value of shares redeemed or repurchased may be more or less than
the shareholder's cost depending on the net asset value at the time of
redemption or repurchase. The Funds do not impose a redemption or repurchase
charge. Redemptions of shares, including redemptions undertaken to effect an
exchange for shares of another Fund in the Program, may result in tax
consequences (gain or loss) to the shareholder and the proceeds of such
redemptions may be subject to backup withholding (see "TAXES").
Shareholders who wish to redeem shares from Retirement Plans (see
"RETIREMENT PLANS," below) should contact the Trustee or custodian of the Plan
for information on proper procedures.
The Trustees have established certain amount size requirements. For
AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP GNMA and
U.S. Treasury Fund, the minimum investment is $500. For all other AARP Mutual
Funds, the minimum is $2,000. Each Trust reserves the right to adopt a policy
that if transactions at any time reduce a shareholder's account in a Fund to
below the applicable minimum, the shareholder will be notified that, unless the
account is brought up to at least the applicable minimum the Fund will redeem
all shares and close the account by making payment to the shareholder. The
shareholder has sixty days to bring the account up to the applicable minimum
before any action will be taken by the Fund. Reductions in value that result
solely from market activity will not trigger an involuntary redemption. No
transfer from an existing to a new account may be for less than the minimums set
forth above; otherwise the new account may be redeemed as described above. (This
policy applies to accounts of new shareholders in a particular Fund, but does
not apply to Retirement Plan Accounts.) The Trustees have the authority to
increase the minimum account size.
EXCHANGES
The procedure for exchanging shares from one AARP Fund to another AARP
Fund in the Program, when the account in the new AARP Fund is established with
the same registration, telephone option, dividend option and address as the
present account, is set forth under "EXCHANGING" in the Prospectus. If the
registration data for the account receiving the proceeds of the exchange is to
be different in any respect from the account from which shares are to be
exchanged, the exchange request must be in writing and must contain a signature
guarantee as described under "SIGNATURE GUARANTEES" in the Prospectus. If an
exchange involves an initial investment in the Fund being acquired, the amount
to be exchanged must be at least $2000 for non-retirement plan accounts. For IRA
and Keogh Plan accounts the amount must be $250. If the exchange is made into an
existing account, there is no minimum requirement.
Only exchange orders received between 8:00 a.m. and 4:00 p.m. Eastern
time on any business day will ordinarily be accomplished at respective net asset
values determined on that day. Exchange orders received after 4:00 p.m. are
processed on the next business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one AARP Fund to an
existing account in another AARP Fund through the AARP Funds' Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the phone or in writing. Automatic Exchanges will continue until
the shareholder requests by phone or in writing to have the feature removed, or
until the originating account is depleted. The Trusts and the Transfer Agent
each reserve the right to modify, interrupt, suspend or terminate the privilege
of the Automatic Exchange Program at any time, without notice.
There is no charge to the shareholder for any exchange described above.
An exchange from any AARP Fund other than the AARP Money Funds is likely to
result in recognition of gain or loss to the shareholder.
Investors currently receive the exchange privilege automatically
without having to elect it. The Trusts and the AARP Funds' distributor, Scudder
Investor Services, Inc., reserve the right to suspend or terminate the exchange
privilege at any time. Telephone exchange may be initiated by anyone able to
identify the registration of an account, but the proceeds will only be invested
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in another AARP Fund with the same registration. The AARP Funds employ
procedures to give reasonable assurance that telephone instructions are genuine,
including recording telephone calls, testing a caller's identity and sending
written confirmation of such transactions. If an AARP Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions.
All the AARP Funds in the Program into which investors may make an
exchange are described in the combined Prospectus and in this Statement of
Additional Information. Before making an exchange, shareholders should read the
information in the Prospectus regarding the Fund into which the exchange is
being contemplated.
TRANSACT BY PHONE
(See "INVESTOR SERVICES--TRANSACT BY PHONE" in the Prospectus.)
Shareholders, whose bank of record is a member of the Automated
Clearing House Network (ACH) and who have enrolled in the "Transact by Phone"
option, may purchase or redeem shares by telephone. Shareholders may purchase
shares valued at up to $250,000 but not less than $250. Shareholders may redeem
shares in an amount not less than $250.
In order to utilize the Transact by Phone service, shareholders must
have completed the Transact by Phone authorization. This authorization requires
designation of a bank account from which the purchase payment will be debited or
to which the redemption payment will be credited. New investors wishing to
establish the Transact by Phone service can do so by completing the appropriate
section on the enrollment form. Existing shareholders who wish to establish
Transact by Phone will need to complete a Transact by Phone Enrollment Form. If
a shareholder has previously elected the "Telephone Redemption to Bank of
Record" and/or the "Automatic Investment Plan" services, the banking information
must be identical for all of these services for each of the shareholder's Funds.
After sending in their enrollment forms, shareholders should allow 15 days for
the service to be activated. The Trusts and their agents each reserve the right
to modify, interrupt, suspend or terminate the Transact by Phone service at any
time, without notice.
Purchasing Shares by Transact by Phone
To purchase shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time. Shares will be purchased at that
night's closing share price. The shareholder's bank account will be debited on
the first business day following the purchase request. Requests received after
4:00 p.m. will be purchased at the next business day's closing price.
Redeeming Shares by Transact by Phone
To redeem shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time to receive that night's closing
share price. Requests received after 4:00 p.m. will be sold at the next business
day's closing price. The shareholder's bank account will be credited with
redemption proceeds on the second or third business day following the redemption
request.
The AARP Funds employ procedures to give reasonable assurance that
telephone instructions are genuine, including recording telephone calls, testing
a caller's identity and sending written confirmation of such transactions. If an
AARP Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
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FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "STATEMENTS AND REPORTS," "EXCHANGING"
and "INVESTOR SERVICES" in the Prospectus.)
Automatic Dividend Reinvestment
Investors may elect on their enrollment form whether they wish to
receive any dividends from net investment income or any distributions from
realized capital gains in cash or to reinvest such dividends and distributions
in additional shares of the Fund paying the dividend or distribution. They may
also elect to have these payments invested in shares of any other AARP Fund in
the Program in which they have an account. If no election is made, dividends and
distributions will be reinvested in additional shares. A change of instructions
for the method of payment may be given to the Program at any time prior to a
record date.
Each distribution, whether by check or reinvested in a Fund, will
include a brief explanation of the source of the distribution.
Distributions Direct
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the AARP Funds'
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-253-2277. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Reports to Shareholders
The AARP Funds send to shareholders at least semiannually financial
statements, which are examined at least annually by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets, and financial highlights.
Investors receive a brochure entitled Your Guide to Simplified
Investment Decisions when they order an investment kit for the 15 AARP Funds
which also contains a prospectus. The Shareholder's Handbook is sent to all new
shareholders to help answer any questions they may have about investing. An IRA
Handbook is sent to all new IRA shareholders. Every month, shareholders will be
sent the newsletter, Financial Focus. Retirement plan shareholders will be sent
a special edition of Financial Focus on a quarterly basis. The newsletters are
designed to help you keep up to date on economic and investment developments,
and any new financial services and features of the Program.
Consolidated Statements
Shareholders with investments in two or more AARP Funds will receive,
without charge, a convenient monthly Consolidated Statement. IRA and Keogh Plan
accounts receive Consolidated Statements quarterly. This statement contains the
market value of all holdings, a complete listing of transactions for the
statement period and a summary of the shareholder's investment program for the
statement period and for the year to date. Information may be obtained by
contacting the AARP Investment Program from Scudder, P.O. Box 2540, Boston,
Massachusetts 02208-2540, or by calling toll free, 1-800-253-2277.
RETIREMENT PLANS
Shares of AARP High Quality Money Fund, AARP GNMA and U.S. Treasury
Fund, AARP High Quality Bond Fund, AARP Bond Fund for Income, AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP Global Growth Fund, AARP
Capital Growth Fund, AARP U.S. Stock Index Fund, AARP International Stock Fund
and AARP Small Company Stock Fund ("Eligible Funds") may be purchased in
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connection with several types of tax-deferred retirement plans. These plans were
created for members of AARP. Each plan is briefly described below. The plans
provide convenient ways for AARP members to make investments which may be
tax-deductible for their retirement and have taxes on any income from their
investment deferred until their retirement, when they may be in a lower tax
bracket. Additional information on each plan may be obtained by contacting the
AARP Investment Program from Scudder, P.O. Box 2540, Boston, Massachusetts,
02208-2540, or by calling toll free, 1-800-253-2277. Investment professionals
and retirement-benefits experts estimate that prospective retirees will need 70%
to 80% of their current salaries during each year of their retirement, with
adjustment for changes in prices during retirement, to maintain their current
life-style. Investment professionals recommend diversifying investments among
stock, bonds and cash-equivalents when building retirement reserves. It is
advisable for an investor considering any of the plans described below to
consult with an attorney or tax advisor with respect to the terms, suitability
requirements and tax aspects of the plan.
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")
Shares of the Eligible Funds may be purchased as the underlying
investment for an AARP No-Fee IRA which meets the requirements of Section 408(a)
of the Internal Revenue Code. Any AARP member with earned income or wages is
eligible to make annual contributions to the AARP No-Fee IRA before the year the
member attains age 70 1/2. An individual may establish an AARP No-Fee IRA
whether or not he or she is an active participant in another tax-qualified
retirement plan, including a tax-sheltered annuity or government plan.
AARP No-Fee IRA participants may generally contribute to an AARP No-Fee
IRA up to the lesser of $2,000 or 100% of their compensation or earned income.
If both a husband and wife work, each may set up an AARP No-Fee IRA before the
year they attain age 70 1/2, permitting a potential maximum contribution of
$4,000 per year for both persons. If one spouse has no earnings, each spouse may
have an AARP No-Fee IRA and the total maximum contributions will be $4,000 with
no more than $2,000 going to either AARP No-Fee IRA.
An individual will be allowed a full deduction for contributions to an
AARP No-Fee IRA only if (1) neither the individual, nor his or her spouse, if
they file a joint return, is an active participant in an employer-maintained
retirement plan, or (2) the individual (and his or her spouse, if applicable)
has an adjusted gross income below a certain level ($25,050 for a single
individual, with a phase-out of the deduction for adjusted gross income between
$25,050 and $35,000; $40,050 for married individuals filing a joint return, with
a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000). However, an individual not permitted to make a deductible contribution
may nonetheless make a nondeductible contribution to an AARP No-Fee IRA.
Any AARP member who is entitled to receive a qualifying distribution
from a qualified retirement plan (including a tax-sheltered annuity plan) or
another IRA may make a rollover contribution of all or any portion of the
distribution to the AARP No-Fee IRA, either in a direct rollover or within 60
days after receipt of the distribution, whether or not the member has attained
age 70 1/2. If a qualified rollover contribution is made, the distribution will
not be subject to Federal income tax until distributed from the AARP No-Fee IRA;
however, distributions not directly rolled over might be subject to automatic
20% federal tax withholding.
AARP Mutual Fund Representatives are available to help you transfer
your IRA to the AARP No-Fee IRA. You pay no transfer fees for this service. An
AARP Mutual Fund Representative can help you with the paperwork, contact your
present IRA custodian, help to transfer your funds to the AARP No-Fee IRA, and
send you a confirmation when your transfer is complete.
Earnings on the AARP No-Fee IRA are not subject to current Federal
income tax until distributed; distributions are taxed as ordinary income.
Withdrawals attributable to nondeductible contributions are not taxable
(however, early withdrawals of such amounts are subject to penalty). The assets
in an AARP No-Fee IRA may be withdrawn without penalty after the participant
reaches age 59 1/2 or becomes disabled, and must begin to be withdrawn by April
1st following the taxable year in which the participant reaches age 70 1/2.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
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Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- ------------------ ----------------- ------------------------- -----------------
Starting
Age of Annual Rate of Return
-------------------------------------------------------------
Contributions 5% 10% 15%
- ------------------ ----------------- ------------------------- -----------------
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
AARP Keogh Plan
Shares of the Eligible Funds may be purchased for the AARP Keogh Plan.
The AARP Keogh Plan (the "Plan") is designed as a tax-qualified retirement plan
consisting of a profit sharing plan and a money purchase pension plan which can
be adopted by self-employed persons who are members of AARP and by corporations
whose principal shareholders are members of AARP. Self-employed persons may make
annual tax-deductible contributions to the Plan equal to the lesser of $30,000
or 20% of their earned income. An adopting corporation may contribute for each
employee the lesser of $30,000 or 25% of the employee's taxable compensation. No
more than $150,000 (as adjusted) of earned income or taxable compensation may be
taken into account, however. If the Plan is "top heavy," a minimum contribution
may be required for certain employees. Additional information on contributions
to the Plan is found in Your Guide to the AARP Keogh Plan.
The Plan provides that contributions may continue to be made on behalf
of participants after they have reached the age of 70 1/2 if they are still
working.
Lump sum distributions from the Plan may be eligible to be taxed for
Federal income tax purposes according to a favorable 5-year averaging (or
10-year averaging for individuals who reached age 50 before 1986) method not
available to IRA distributions. If members eligible to join this Plan choose to
roll over pension and profit-sharing distributions from other tax-qualified
retirement plans, they will retain the right to use the averaging method for
such distributions.
The Plans are prototype plans approved by the Internal Revenue Service.
In general, distributions from all tax-qualified retirement programs,
including IRAs and tax-sheltered annuity programs, must begin by April 1st in
the year following the year in which the participant reaches age 70 1/2, whether
or not he or she continues to be employed. Excise taxes will apply to premature
distributions, and to taxpayers who are required, but fail, to receive a
distribution after reaching age 70 1/2. An additional excise tax may apply to
certain excess retirement accumulations. Special favorable tax treatment for
certain distributions is reduced or phased out, except where grandfathering
provisions apply.
Shares of the Eligible Funds may be purchased also as an investment for
an IRA or tax-qualified retirement plan (including a tax-sheltered annuity plan)
other than those described above, if permitted by the provisions of the relevant
plan.
OTHER PLANS
(See "INVESTOR SERVICES" in the Prospectus.)
Automatic Investment
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts. The minimum pre-authorized investment amount
is $500. New shareholders who open a Gift to Minors Account pursuant to the
Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA)
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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. This feature is only available to Gifts to Minors
Account investors. The Automatic Investment Plan may be discontinued at any time
without prior notice to a shareholder if any debit from their bank is not paid,
or by written notice to the shareholder at least thirty days prior to the next
scheduled payment to the Automatic Investment Plan.
Automatic Withdrawal Plan
Shareholders who own or purchase $10,000 or more of shares of a AARP
Fund may establish an Automatic Withdrawal Plan with that Fund. The investor can
then receive monthly, quarterly or periodic redemptions from his or her account
for any designated amount of $50 or more. Payments are mailed at the end of each
month. The check amounts may be based on the redemption of a fixed dollar
amount, fixed share amount or percent of account value or declining balance. The
Automatic Withdrawal Plan provides for income dividends and capital gains
distributions, if any, to be reinvested in additional shares. Shares are then
liquidated as necessary to provide for withdrawal payments. Since the
withdrawals are in amounts selected by the investor and have no relationship to
yield or income, payments received cannot be considered as yield or income on
the investment and the resulting liquidations may deplete or possibly extinguish
the initial investment and any reinvested dividends and capital gains
distributions. Requests for increases in withdrawal amounts or to change the
payee must be submitted in writing, signed exactly as the account is registered,
and contain signature guarantee(s) as described under "SIGNATURE GUARANTEES" in
the Prospectus. Any such request must be received by the AARP Fund's transfer
agent by the 15th of the month in which such change is to take effect. An
Automatic Withdrawal Plan may be terminated at any time by the shareholder, the
AARP Funds or their agents on written notice, and will be terminated when all
shares of the Funds under the Plan have been liquidated or upon receipt by the
Funds of notice of death of the shareholder. For more information concerning
this plan, write to the AARP Investment Program from Scudder, P.O. Box 2540,
Boston, MA 02208-2540 or call, toll-free, 1-800-253-2277.
Direct Payment of Regular Fixed Bills
Shareholders who own or purchase $10,000 or more of shares of an AARP
Fund may arrange to have regular fixed bills such as rent, mortgage or other
payments of more than $50 made directly from their account. The arrangements are
virtually the same as for an Automatic Withdrawal Plan (see above). For more
information concerning this plan, write to the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
DIVIDENDS AND YIELD
(See "UNDERSTANDING FUND PERFORMANCE" in the Prospectus.)
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. AARP Bond Fund for Income intends to pay dividends monthly and
any net realized capital gains after the September 30 fiscal year end. See
"TAXES."
Both types of distributions will be made in shares of the respective
AARP Fund and confirmations will be mailed to each shareholder unless a
shareholder has elected to receive cash, in which case a check will be sent.
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The net income of each AARP Money Fund, each of the AARP Income Funds
and the AARP Insured Tax Free General Bond Fund, is determined as of the close
of trading on the Exchange (usually 4:00 p.m. Eastern time) on each day on which
the Exchange is open for business. All of the net income so determined normally
will be declared as a dividend daily to shareholders of record as of 4:00 p.m.
on the preceding day, and distributed monthly. Dividends commence on the next
business day after purchase. Dividends which are not paid by check will be
reinvested in additional shares of the particular Fund at the net asset value
per share determined as of a day selected within five days of the last business
day of the month. Checks will be mailed to shareholders no later than the fourth
business day of the following month, and consolidated statements confirming the
month's dividends will be mailed to shareholders electing to invest dividends in
additional shares. Dividends will ordinarily be invested on the last business
day of each month at the net asset value per share determined as of the close of
regular trading on the Exchange.
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
such Fund 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.
Similarly, should the AARP High Quality Money Fund incur or anticipate
any unusual or unexpected significant income, appreciation or gain which would
affect disproportionately the Fund's income for a particular period, the
Trustees or the Executive Committee of the Trustees may 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 income, appreciation or gain on the dividend
received by existing shareholders. Such actions may reduce the amount of the
daily dividend received by existing shareholders.
Performance Information: Computation of Yields and Total Return
a) The AARP Money Funds
From time to time, quotations of an AARP Money Fund's yield may be
included in advertisements, sales literature or shareholder reports. These yield
figures are calculated in the following manner:
The current yield is the net annualized yield based on a specified 7
calendar-days calculated at simple interest rates. Current yield is calculated
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period and dividing such change by the value of the account at the
beginning of the base period to obtain the base-period return. The base-period
return is then annualized by multiplying it by 365/7; the resultant product
equals net annualized current yield. The current yield figure is stated to the
nearest hundredth of one percent. The current yield of the AARP High Quality
Money Fund and the AARP High Quality Tax Free Money Fund for the seven-day
period ended September 30, 1996 respectively, were 4.67% and 3.01%.
The effective yield is the net annualized yield for a specified 7
calendar-days assuming a reinvestment in Fund shares of all dividends during the
period, i.e., compounding. Effective yield is calculated by using the same
base-period return used in the calculation of current yield except that the
base-period return is compounded by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, according to the
following formula:
Effective Yield = [(Base Period Return +1)^365/7] - 1.
The effective yield of the AARP High Quality Money Fund and the AARP
High Quality Tax Free Money Fund for the seven-day period ended September 30,
1996 respectively, were 4.78% and 3.06%.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and are
not intended to indicate future performance. Current yield and effective yield
will vary based on changes in market conditions and the level of Fund expenses.
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In connection with communicating its current yield and effective yield
to current or prospective shareholders, a Fund also may compare these figures to
the performance of other mutual Funds tracked by mutual Fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
b) The AARP Money Funds, AARP Income Funds, AARP Growth Funds, AARP
Insured Tax Free General Bond Fund and AARP Managed Investment
Portfolios
From time to time, quotations of a Fund's total return may be included
in advertisements, sales literature or shareholder reports. This total return
figure is calculated in the following manner:
The total return is the average annualized compound rate of return for,
where applicable, the periods of one year, five years and ten years, all ended
on the last day of a recent calendar quarter. Total return quotations reflect
changes in the price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Total return is calculated by finding the average annualized
compound rates of return of a hypothetical investment over such periods,
according to the following formula (total return is then expressed as a
percentage):
T = (ERV/P)^1/n - 1
Where:
T = average annualized compound total rate of return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
<TABLE>
<CAPTION>
Total Return
-----------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/96 9/30/96 9/30/96(1)
------- ------- ----------
<S> <C> <C> <C>
AARP High Quality Money Fund 4.62% 3.74% 5.19%
AARP High Quality Tax Free Money Fund 2.80% 2.35% 3.76%
AARP GNMA and U.S. Treasury 4.79% 5.95% 7.30%
AARP High Quality Bond 4.59% 6.86% 7.69%
AARP Bond Fund for Income+ n.a. n.a. n.a.
AARP Insured Tax Free General Bond 5.88% 6.99% 7.48%
AARP Balanced Stock and Bond Fund 13.08% n.a. 10.69%
AARP Growth and Income 20.20% 15.80% 13.74%
AARP U.S. Stock Index Fund+ n.a. n.a. n.a.
AARP Global Growth Fund n.a. n.a. 3.27%
AARP Capital Growth 15.97% 12.05% 13.10%
AARP International Stock Fund+ n.a. n.a. n.a.
AARP Small Company Stock Fund+ n.a. n.a. n.a.
AARP Diversified Income Portfolio+ n.a. n.a. n.a.
AARP Diversified Growth Portfolio+ n.a. n.a. n.a.
</TABLE>
(1) For the ten fiscal years ended September 30, 1996 for each of the above
listed Funds except for the period February 1, 1994 (commencement of
operations) to September 30, 1996 for the AARP Balanced Stock and Bond
Fund and for the period February 1, 1996 (commencement of operations)
to September 30, 1996 for the AARP Global Growth Fund.
* Prior to August 1, 1991, the AARP High Quality Tax Free Money Fund
operated as the AARP Insured Tax Free Short Term Fund. The total return
figures for the five and ten years ended September 30, 1996 for the
AARP High Quality Tax Free Money Fund are representative of the Fund
prior to its conversion date except that the figures have been adjusted
to reflect its conversion to a money market fund.
49
<PAGE>
+ AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund, AARP Small Company Stock Fund, AARP
Diversified Income Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
In addition to total return described above, the Funds may quote
nonstandard "cumulative total return."
The cumulative total return is the rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of a Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the rates of
return of a hypothetical investment over such periods, according to the
following formula. (Cumulative total return is then expressed as a percentage):
C = (ERV/P) -1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/96 9/30/96 9/30/96(1)
------- ------- ----------
<S> <C> <C> <C>
AARP Balanced Stock and Bond Fund 13.08% n.a. 31.04%
AARP Growth and Income 20.20% 108.24% 262.51%
AARP U.S. Stock Index Fund+ n.a. n.a. n.a.
AARP Global Growth Fund n.a. n.a. 3.27%
AARP Capital Growth 15.97% 76.63% 242.55%
AARP International Stock Fund+ n.a. n.a. n.a.
AARP Small Company Stock Fund+ n.a. n.a. n.a.
</TABLE>
(1) For the period February 1, 1994 (commencement of operations) to
September 30, 1996 for the AARP Balanced Stock and Bond Fund and for
the period February 1, 1996 (commencement of operations) to September
30, 1996 for the AARP Global Growth Fund.
+ AARP U.S. Stock Index Fund, AARP International Stock Fund and AARP
Small Company Stock Fund commenced operations on February 1, 1997.
c) The AARP Income Funds and AARP Insured Tax Free General Bond Fund
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:
50
<PAGE>
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the period, including
(except for mortgage or receivable-backed obligations) the
amortization of market premium or accretion of market
discount. For mortgage or receivables-backed obligations,
this amount includes realized gains or losses based on
historic cost for principal repayments received.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield for the 30-day period
Fund ended September 30, 1996
---- ------------------------
AARP GNMA and U.S. Treasury 6.54%
AARP High Quality Bond 5.96
AARP Bond Fund for Income+ n.a.
AARP Insured Tax Free General Bond 4.72
+ AARP 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, 1996
-------------------------------
Fund Tax Bracket: 28% 31%
----
AARP High Quality Tax Free Money 4.18% 4.36%
AARP Insured Tax Free General Bond 6.56% 6.84%
(e) General Performance Information
Quotations of an AARP Fund's performance are based on historical
earnings and are not intended to indicate future performance of the Fund. An
investor's shares when redeemed may be worth more or less than their original
cost. Performance of a Fund will vary based on changes in market conditions and
the level of the Fund's expenses. In periods of declining interest rates a
Fund's quoted yield and 30-day current yield will tend to be somewhat higher
than prevailing market rates, and in periods of rising interest rates a Fund's
quoted yield and 30-day current yield will tend to be somewhat lower.
Comparison of non-standard performance data of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.
From time to time, in marketing and other AARP Fund literature, these
AARP Funds' performances may be compared to the performance of broad groups of
mutual funds with similar investment goals, as tracked by independent
organizations, such as Lipper Analytical Services, Inc. ("Lipper"), Investment
Company Data, Inc. ("ICD"), CDA Investment Technologies, Inc. ("CDA"), Value
51
<PAGE>
Line Mutual Fund Survey, Morningstar, Inc. and other independent organizations.
For instance, AARP Growth Funds will be compared to funds in the growth fund
category; and so on. In similar fashion, the performance of the AARP GNMA and
U.S. Treasury Fund will be compared to that of certificates of deposit.
Evaluations of AARP Fund performance made by independent sources or independent
experts may also be used in advertisements concerning the AARP Funds, including
reprints of, or selections from, editorials or articles about these Funds.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to unmanaged
indices which may assume reinvestment of dividends or interest but generally do
not reflect deductions for administrative and management costs. Indices with
which the Fund may be compared include but are not limited to, the following:
Standard & Poor's 500 Stock Index (S&P 500), The Europe/Australia/Far East
(EAFE) Index, Morgan Stanley Capital International World Index, J.P. Morgan
Global Traded Bond Index, and Salomon Brothers World Government Bond Index.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Evaluation of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of, or
selections from, editorials or articles about these Funds. Sources for AARP Fund
performance information and articles about the AARP Funds may include, but are
not limited to, the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by MasterFund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly
that periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Federal Reserve Bulletin, a monthly publication that reports domestic and
international financial statistics, including short-term certificate of deposit
interest rates.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
52
<PAGE>
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter published by Sheldon Jacobs that
includes mutual fund performance data and recommendations for the mutual Fund
investor.
No-Load Fund X, a monthly newsletter published by DAL Investment Company, Inc.
that reports on mutual fund performance, rates funds, and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow
Jones and Company, Inc. and The Hearst Corporation. Focus is placed on ideas
for investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
53
<PAGE>
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because
they assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S.
investments strike the best balance between risk and reward.
TRUST ORGANIZATION
(See "FUND ORGANIZATION" in the Prospectus.)
Each of the AARP Funds is a separate series of a Massachusetts business
trust. AARP GNMA and U.S. Treasury Fund, AARP High Quality Bond Fund, and the
AARP Bond Fund for Income are series of AARP Income Trust. AARP High Quality Tax
54
<PAGE>
Free Money Fund and AARP Insured Tax Free General Bond Fund are series of AARP
Tax Free Income Trust which changed its name from AARP Insured Tax Free Income
Trust on August 1, 1991. AARP Balanced Stock and Bond Fund, AARP Growth and
Income Fund, AARP U.S. Stock Index Fund, AARP Global Growth Fund, AARP Capital
Growth Fund, AARP International Stock Fund and AARP Small Company Stock Fund are
series of AARP Growth Trust. Each of the above Trusts was established under a
separate Declaration of Trust dated June 8, 1984. AARP High Quality Money Fund
is a separate series of the AARP Cash Investment Funds, which was established
under a Declaration of Trust dated January 20, 1983. The original name of AARP
Cash Investment Funds was Master Investment Services Fund. That name was changed
to AARP Money Fund Trust on February 6, 1985, and to its present name on May 24,
1985. AARP Diversified Income Portfolio and AARP Diversified Growth Portfolio
are series of AARP Managed Investment Portfolios Trust which was established
under a Declaration of Trust on October 21, 1996. Each Trust's shares of
beneficial interest of $.01 (AARP High Quality Tax Free Money Fund $.001) par
value per share are issued in separate series. AARP Cash Investment Funds has
three series in addition to AARP High Quality Money Fund that are not currently
offered. None of the other Trusts has an existing series which is not currently
being offered. Other series may be established and/or offered by the Trusts in
the future. Each share of a series represents an interest in that series which
is equal to each other share of that series.
The assets received for the issue or sale of the shares of each series
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are specifically allocated to that series and constitute
the underlying assets of that series. The underlying assets of each series are
segregated on the books of account of the Trust, and are to be charged with the
liabilities of that series. The Trustees have determined that expenses with
respect to all series in a Trust are to be allocated in proportion to the net
asset value, or such other reasonable basis, of the respective series in that
Trust except where allocations of direct expenses can otherwise be more fairly
made. The officers of each Trust, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to all the
series in a Trust. Each Trust's Declaration of Trust provides that allocations
so made to each series shall be binding on all persons. While each Declaration
of Trust provides that liabilities of a series may be satisfied only out of the
assets of that series, it is possible that if a series were unable to meet its
obligations, a court might find that the assets of other series in the Trust
should satisfy such obligations. In the event of the dissolution or liquidation
of a Trust, the holders of the shares of each series are entitled to receive as
a class the underlying assets of that series available for distribution to
shareholders.
Shareholders are entitled to one vote per share. Separate votes are
taken by each series on all matters except where the 1940 Act requires that a
matter be decided by the vote of shareholders of all series of a Trust voting
together or where a matter affects only one of the series, in which case only
shareholders of that series shall vote thereon. For example, a change in
investment policy for a series would be voted upon only by shareholders of the
series involved. Additionally, approval of each Trust's investment advisory
agreement is a matter to be determined separately by each series in that Trust.
Approval of the agreement by the shareholders of one series in a Trust is
effective as to that series whether or not enough votes are received from the
shareholders of other series in the Trust to approve such agreement as to the
other series.
The Trustees of each Trust have the authority to establish additional
series and to designate the relative rights and preferences as between the
series. All shares issued and outstanding of each series that is offered by a
Trust will be fully paid and non-assessable by the Trust, and redeemable as
described in this Statement of Additional Information and in the Prospectus.
Each Declaration of Trust provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust, that the Trustees and officers will not be liable for errors of judgment
or mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against litigation in which they may be involved because of their
offices with the Trust except if it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the Trust. However,
nothing in any of the Declarations of Trust protects or indemnifies a Trustee or
officer against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
55
<PAGE>
MANAGEMENT OF THE FUNDS
(See "FUND ORGANIZATION" in the Prospectus.)
Each Trust has retained Scudder, Stevens & Clark, Inc., a Delaware
corporation (the "Fund Manager"), to perform management and investment advisory
services for the Funds. Each Trust, except AARP Managed Investment Portfolios
Trust, has retained the Fund Manager pursuant to Investment Management and
Advisory Agreements with each Trust ("Management Agreement") dated February 1,
1994. AARP Managed Investment Portfolios Trust has retained the Fund Manager to
perform management and investment advisory services for the Portfolios pursuant
to a Special Servicing Agreement dated February 1, 1997.
Each Management Agreement provides that the Fund Manager will regularly
provide, or cause to be provided, to the AARP Funds investment research, advice
and supervision and furnish continuously an investment program for the AARP
Funds consistent with each Fund's investment objective and policies.
The Fund Manager assumes responsibility for the compensation and
expenses of all officers and executive employees of each Trust and makes
available or causes to be made available, without expense to the Trusts, the
services of such of its partners, directors, officers and employees as may duly
be elected officers or Trustees of a Trust, subject to their individual consent
to serve and to any limitations imposed by law, and pays the Trusts' office rent
and provides, or causes to be provided, investment advisory, research and
statistical facilities and related clerical services. For these services the
AARP Funds pay the Fund Manager a monthly fee consisting of a base fee and an
individual Fund fee. The base fee is based on average daily net assets of all
Funds in the AARP Investment Program, as follows:
Program Assets Annual Rate at Each
(Billions) Asset Level
---------- -----------
First $2 0.35%
Next $2 0.33
Next $2 0.30
Next $2 0.28
Next $3 0.26
Next $3 0.25
Over $14 0.24
Total program assets as of September 30, 1996 were over $13 billion.
All AARP Funds pay a flat individual Fund fee monthly based on the net
assets of that Fund, except AARP Diversified Investment Income Portfolio and
AARP Diversified Investment Growth Portfolio.
The individual Fund fees are as follows:
<TABLE>
<S> <C>
AARP High Quality Money Fund, 10/1200 of 1% (or approximately .10 of 1% on an annual basis);
AARP GNMA and U.S. Treasury Fund, 12/1200 of 1% (or approximately .12 of 1% on an annual basis);
AARP High Quality Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis);
AARP Bond Fund for Income, 28/1200 of 1% (or approximately .28 of 1% on an annual basis);
AARP High Quality Tax Free Money Fund, 10/1200 of 1% (or approximately .10 of 1% on an annual basis);
AARP Insured Tax Free General Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis);
AARP Balanced Stock and Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis);
AARP Growth and Income Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis);
AARP U.S. Stock Index Fund, 0/1200 of 1% (0 of 1% on an annual basis);
AARP Global Growth Fund, 55/1200 of 1% (or approximately .55 of 1% on an annual basis);
AARP Capital Growth Fund, 32/1200 of 1% (or approximately .32 of 1% on an annual basis);
AARP International Stock Fund, 60/1200 of 1% (or approximately .60 of 1% on an annual basis);
AARP Small Company Stock Fund, 55/1200 of 1% (or approximately .55 of 1% on an annual basis);
AARP Diversified Income Portfolio, n/a;
AARP Diversified Growth Portfolio, n/a.
</TABLE>
56
<PAGE>
The advisory fees from October 1, 1993 to January 31, 1994 under the
previous Investment Management and Advisory Agreements and under the present
Investment Management Agreement from February 1, 1994 to September 30, 1994 and
for the two fiscal years ended September 30, 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund $ 1,244,322 $ 1,492,545 $1,522,929
AARP GNMA and U.S. Treasury Fund 26,198,841 22,095,173 21,113,592
AARP High Quality Bond Fund 2,952,999 2,600,629 2,550,245
AARP Bond Fund for Income** n.a. n.a. n.a.
AARP High Quality Tax Free Money Fund 568,107 493,693 453,559
AARP Insured Tax Free General Bond Fund 9,944,429 8,813,051 8,665,253
AARP Balanced Stock and Bond Fund@ 365,435 960,412 1,560,129
AARP Growth and Income Fund 9,533,476 12,406,325 17,423,770
AARP U.S. Stock Index Fund** n.a. n.a. n.a.
AARP Global Growth Fund* n.a. n.a. 266,155
AARP Capital Growth Fund 4,184,437 3,988,023 4,626,894
AARP International Stock Fund** n.a. n.a. n.a.
AARP Small Company Stock Fund** n.a. n.a. n.a.
AARP Diversified Income Portfolio** n.a. n.a. n.a.
AARP Diversified Growth Portfolio** n.a. n.a. n.a.
</TABLE>
Each Management Agreement provides that the Fund Manager will reimburse
the AARP Funds or the Trust for annual expenses in excess of the lowest expense
limitation imposed by the states in which the Funds of the particular Trust are
at the time offering their shares for sale, although no payments are required to
be made by the Fund Manager pursuant to this reimbursement provision in excess
of the annual fee paid by the funds of a Trust to the Fund Manager. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitation. The Fund Manager has agreed that its
obligation to reimburse the Funds will not be restricted to the amounts of the
management fees. Such agreement may be modified or withdrawn without shareholder
approval.
The expense ratios, net of voluntary and statutory fee waivers and
reimbursements of expenses, for the periods ended September 30, 1994, 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund 1.13% .98% .96%
AARP GNMA and U.S. Treasury Fund .66 .67 .64
AARP High Quality Bond Fund .95 .95 .91
AARP Bond Fund for Income** n.a. n.a. n.a.
AARP High Quality Tax Free Money Fund .90 .87 .85
AARP Insured Tax Free General Bond Fund .68 .69 .66
AARP Balanced Stock and Bond Fund@ 1.31+ 1.01 .88
AARP Growth and Income Fund .76 .72 .69
AARP U.S. Stock Index Fund** n.a. n.a. n.a.
AARP Global Growth Fund* n.a. n.a. 1.75+
AARP Capital Growth Fund .97 .95 .90
AARP International Stock Fund** n.a. n.a. n.a.
AARP Small Company Stock Fund** n.a. n.a. n.a.
AARP Diversified Income Portfolio** n.a. n.a. n.a.
AARP Diversified Growth Portfolio** n.a. n.a. n.a.
</TABLE>
57
<PAGE>
For the fiscal years ended September 30, 1994, 1995 and 1996, the
reimbursements by the Fund Manager based on the expense limitation then in
effect were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund -- -- --
AARP GNMA and U.S. Treasury Fund -- -- --
AARP High Quality Bond Fund -- -- --
AARP Bond Fund for Income** n.a. n.a. n.a.
AARP High Quality Tax Free Money Fund $8,083 -- --
AARP Insured Tax Free General Bond Fund -- -- --
AARP Balanced Stock and Bond Fund@ -- -- --
AARP Growth and Income Fund -- -- --
AARP U.S. Stock Index Fund** n.a. n.a. n.a.
AARP Global Growth Fund* n.a. n.a. 175,025
AARP Capital Growth Fund -- -- --
AARP International Stock Fund** n.a. n.a. n.a.
AARP Small Company Stock Fund** n.a. n.a. n.a.
AARP Diversified Income Portfolio** n.a. n.a.. n.a.
AARP Diversified Growth Portfolio** n.a. n.a. n.a.
@ AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
* AARP Global Growth Fund commenced operations on February 1, 1996.
** AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International Stock Fund, AARP Small
Company Stock Fund, AARP Diversified Income Portfolio and AARP Diversified Growth Portfolio
commenced operations on February 1, 1997.
+ Annualized.
</TABLE>
If reimbursement is required, it will be made as promptly as
practicable after the end of each Trust's fiscal year. However, no fee payment
will be made to the Fund Manager during any fiscal year which will cause
year-to-date expenses to exceed the cumulative pro rata expense limitation at
the time of such payment. The amortization of organizational costs is described
herein under "ADDITIONAL INFORMATION-- Other Information."
Under the Management Agreements, each Trust is responsible for all of
its other expenses including organizational expenses; clerical salaries; fees
and expenses incurred in connection with membership in investment company
organizations; brokers' commissions; any fees for portfolio pricing paid to a
pricing agent; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the cost of preparing share
certificates, if any, and any other expenses including clerical expenses of
issue, redemption or repurchase of shares; the expenses and fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees of the
Trust who are not affiliated with the Fund Manager, Scudder, Stevens & Clark,
Inc., AARP Financial Services Corporation or AARP; the cost of preparing and
distributing reports and notices to shareholders; and the fees and disbursements
of custodians. Each Trust may arrange to have third parties assume all or part
of the expenses of sale, underwriting and distribution of shares of the Trust.
Each Trust is also responsible for its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees with respect thereto. The custodian
agreement for each Trust provides that the custodian shall compute the net asset
value for that Trust.
Each Management Agreement provides that the Fund Manager shall not be
required to pay expenses of distribution of the Funds' shares to the extent that
(i) such distribution expenses are, pursuant to a written contract, to be borne
by a principal underwriter of the Trust ("Scudder Investor Services, Inc." is
principal underwriter for the AARP Trusts), (ii) the Trust shall have adopted a
plan in conformity with Rule 12b-1 under the 1940 Act ("Rule 12b-1 plan")
providing for the Trust (or the Funds or some other party) to assume some or all
of such expenses, or (iii) such expenses are required to be paid by Scudder,
Stevens & Clark, Inc. 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.)
58
<PAGE>
The Management Agreements for all Funds except AARP Global Growth Fund,
AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP International Stock
Fund, and AARP Small Company Stock Fund will remain in effect until August 31,
1997 and from year to year thereafter only if their continuance is specifically
approved at least annually by the vote of a majority of those Trustees who are
not parties to such Agreements or "interested persons" of the Fund Manager,
Scudder, Stevens & Clark, Inc. or the particular Trust cast in person at a
meeting called for the purpose of voting on such approval and either by vote of
a majority of the Trustees or, with respect to each Fund, by a majority of the
outstanding voting securities of that Fund. The Supplement to Investment
Management Agreement for the AARP Global Growth Fund will remain in effect until
August 31, 1997 and from year to year thereafter only if its continuance is
specifically approved at least annually by the vote of a majority of those
Trustees who are not parties to such Agreement or "interested persons" of the
Fund Manager, Scudder, Stevens & Clark, Inc. or the particular Trust cast in
person at a meeting called for the purpose of voting on such approval and either
by vote of a majority of the Trustees or, by a majority of the outstanding
voting securities of the AARP Global Growth Fund. The Supplement to Investment
Management Agreement for the AARP Bond Fund for Income, AARP U.S. Stock Index
Fund, AARP International Stock Fund, and AARP Small Company Stock Fund will
remain in effect until August 31, 1998 and from year to year thereafter only if
its continuance is specifically approved at least annually by the vote of a
majority of those Trustees who are not parties to such Agreement or "interested
persons" of the Fund Manager, Scudder, Stevens & Clark, Inc. or the particular
Trust cast in person at a meeting called for the purpose of voting on such
approval and either by vote of a majority of the Trustees or, by a majority of
the outstanding voting securities of the particular AARP Fund. In the event a
Management Agreement is approved by the shareholders of one of the Funds but not
by the shareholders of the other Fund, the Management Agreement will continue in
effect as to the former Fund but not the latter. The Management Agreements for
all Funds except AARP Global Growth Fund were last approved by the Trustees
(including a majority of the Trustees who are not "interested persons") on June
18, 1996 and by the shareholders on January 13, 1994. The Supplement to
Investment Management Agreement for AARP Global Growth Fund dated February 1,
1996 was approved by the Trustees on December 13, 1995 and by the initial
shareholder on January 24, 1996. The Supplement to Investment Management
Agreement for the AARP Bond Fund for Income, AARP U.S. Stock Index Fund, AARP
International Stock Fund and AARP Small Company Stock Fund, dated February 1,
1997 was approved by the Trustees on December 16, 1996 and by the initial
shareholder of each Fund on ____________. Each Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice, and automatically terminates in the event of its assignment.
Pursuant to a Subadvisory Agreement entered into between the AARP U.S.
Stock Index Fund and Bankers Trust Company on February 1, 1997, Bankers Trust
Company (the "Subadviser") serves as Subadviser to the AARP U.S. Stock Index
Fund. The fee paid to the Subadviser is calculated on a quarterly basis and
depends on the level of total assets in the AARP U.S. Stock Index Fund. The fee
rate decreases as the level of total assets for the Fund increases. The fee rate
for each level of assets is: .07% of the first $100 million of average daily net
assets, .03% of such assets in excess of $100 million, and .01% of such assets
in excess of $200 million with a minimum annual fee of $75,000. For the first
twelve months of management, the Subadviser has agreed to waive a portion of its
fee. After the first year, the full fee will be charged.
A Special Servicing Agreement (the "Service Agreement") has been
entered into among the Fund Manager, the Underlying AARP Mutual Funds, Scudder
Service Corporation, Scudder Fund Accounting Corporation, Scudder Investor
Services, Inc. and the AARP Managed Investment Portfolios Trust on February 1,
1997. Under the Service Agreement, the Fund Manager will arrange for all
services pertaining to the operation of the Trust including the services of
Scudder Service Corporation and Scudder Fund Accounting Corporation to act as
Shareholder Servicing Agent and Fund Accounting Agent, respectively, for each
Portfolio. In addition, the Service Agreement will provide that, if the officers
of any Underlying AARP Mutual Fund, at the direction of the Board of Trustees,
determine that the aggregate expenses of a Portfolio are less than the estimated
savings to the Underlying AARP Mutual Fund from the operation of that Portfolio,
the Underlying AARP Mutual Fund will bear those expenses in proportion to the
average daily value of its shares owned by that Portfolio. No Underlying AARP
Mutual Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly in
the Underlying AARP Mutual Funds and the resulting reduction in shareholder
servicing costs. In this regard, the shareholder servicing costs to any
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.
59
<PAGE>
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 Series anticipate that the aggregate financial benefits to the
Underlying AARP Mutual Funds from these arrangements will exceed the costs of
operating the Portfolios. If such turns out to be the case, there will be no
charge to the Trust for the services under the Service Agreement. Rather, in
accordance with the Service Agreement, such expenses will be passed through to
the Underlying AARP Mutual Funds in proportion to the value of each Underlying
AARP Mutual Fund's shares held by each Portfolio.
In the event that the aggregate financial benefits to the Underlying
AARP Mutual Funds do not exceed the costs of a Portfolio, the Fund Manager will
pay, on behalf of that Portfolio, that portion of costs, as set forth herein,
determined to be greater than the benefits. The determination of whether and the
extent to which the benefits to the Underlying AARP Mutual Funds from the
organization of the Trust will exceed the costs to such funds will be made based
upon the analysis criteria set forth in the Order. This cost-benefit analysis
was initially reviewed by the Trustees of the Underlying AARP Mutual Funds
before participating in the Service Agreement. For future years, there will be
an annual review of the Service Agreement to determine its continued
appropriateness for each Underlying AARP Mutual Fund.
Certain non-recurring and extraordinary expenses will not be paid in
accordance with the Service Agreement including: the fees and costs of actions,
suits or proceedings and any penalties or damages in connection therewith, to
which a Portfolio may incur directly, or may incur as a result of its legal
obligation to provide indemnification to its officers, trustees and agents; the
fees and costs of any governmental investigation and any fines or penalties in
connection therewith; and any federal, state or local tax, or related interest
penalties or additions to tax, incurred, for example, as a result of the
Portfolios' failure to distribute all of its earnings, failure to qualify under
subchapter M of the Internal Revenue Code, or failure to timely file any
required tax returns or other filings. Under unusual circumstances, the parties
to the Service Agreement may agree to exclude certain other expenses.
Scudder, Stevens & Clark, Inc. is one of the most experienced
investment management firms in the United States. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual Fund to the public. In 1953, Scudder introduced Scudder International
Fund, the first Fund available in the U.S. investing internationally in
securities of issuers in several foreign countries. The principal source of the
Fund Manager's income is professional fees received from providing continuous
investment advice, and the firm derives no income from banking, brokerage or
underwriting of securities. Today, it provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. In addition,
it manages Montgomery Street Income Securities, Inc., Scudder California Tax
Free Trust, Scudder Cash Investment Trust, Scudder Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment
Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia
Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder
Portfolio Trust, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, Scudder World Income Opportunities Fund,
Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The First Iberian Fund,
Inc., The Korea Fund, Inc., The Japan Fund, Inc., and The Latin America Dollar
Income Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Fund Manager maintains a large research department, which conducts
continuous studies of the factors that affect the condition of various
industries, companies and individual securities. In this work, the Fund Manager
utilizes certain reports and statistics from a wide variety of sources,
including brokers and dealers who may execute portfolio transactions for the
Fund and for clients of the Fund Manager, but conclusions are based primarily on
investigations and critical analyses by its own research specialists.
Certain investments may be appropriate for more than one Fund and also
for other clients advised by the Fund Manager. Investment decisions for each
Fund and for other clients are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment and the size of their investments
generally. Frequently, a particular security may be bought or sold for only one
60
<PAGE>
Fund or client or in different amounts and at different times for more than one
but less than all Funds or other clients. Likewise, a particular security may be
bought for one or more Funds or clients when one or more other Funds or clients
are selling the security. In addition, purchases or sales of the same security
may be made for two or more Funds or clients on the same date. In such event
such transactions will be allocated among the Funds and/or clients in a manner
believed by the Fund Manager to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by a Fund. Purchase and sale orders for a Fund may be combined
with those of other Funds or clients of the Fund Manager in the interest of most
favorable net results to the particular Fund.
Each 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 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. Dechert Price & Rhoads acts as general counsel
for the Trusts.
Pursuant to a Member Services Agreement with the Fund Manager, dated
February 1, 1994, AARP Financial Services Corp. ("AFSC") provides the Fund
Manager with nondistribution related service and advice primarily concerning
designing and tailoring the AARP Investment Program from Scudder and its Funds
to meet the needs of AARP's members on an ongoing basis. AARP Financial Services
Corp. receives, as compensation for its services, a Monthly Member Services fee.
The fee paid to AFSC is calculated on a daily basis and depends on the level of
total assets of the AARP Investment Program. The fee rate decreases as the level
of total assets increases. The fee rate for each level of assets is .07 of 1%
for the first $6 billion, .06 of 1% for the next $10 billion and .05 of 1%
thereafter.
The Member Services Agreement will remain in effect until August 31,
1997 and from year to year thereafter only if its continuance is specifically
approved at least annually by the vote of a majority of those Trustees who are
not "interested persons" of the Fund Manager, AFSC, or the Funds cast in person
at a meeting called for the purpose of voting on such approval and either by
vote of a majority of the Trustees or, with respect to each Fund, by a majority
of the outstanding voting securities of that Fund. The continuance of the Member
Services Agreement was last approved by the Trustees (including a majority of
the Trustees who are not such "interested persons") on June 18, 1996 and by
shareholders on January 13, 1994. The Member Services Agreement may be
terminated at any time without payment of penalty by the Funds on sixty days'
written notice, or by AFSC upon six months' notice to the Funds and to the Fund
Manager, and automatically terminates in the event of its assignment or the
assignment of the Management Agreement.
Pursuant to a Service Mark License Agreement, dated March 20, 1996
among the Trusts, except for AARP Managed Investment Portfolios Trust, the Fund
Manager and AARP, use of the AARP service marks by a Trust and its Funds will be
terminated, unless otherwise agreed to by AARP, upon termination of that Trust's
Management Agreement.
Officers and employees of the Fund Manager from time to time may have
transactions with various banks, including the AARP Funds' custodian bank. It is
the Fund Manager's opinion that the terms and conditions of those transactions
which have occurred were not influenced by existing or potential custodial or
other Fund relationships.
None of the officers or Trustees of a Trust may have dealings with that
Trust as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Funds.
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
61
<PAGE>
standards recommended by the Investment Company Institute's Advisory Group on
Personal Investing, prohibits certain types of transactions absent prior
approval, imposes time periods during which personal transactions may not be
made in certain securities, and requires the submission of duplicate broker
confirmations and monthly reporting of securities transactions. Additional
restrictions apply to portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular circumstances
after review by appropriate personnel.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Linda Coughlin#* (45) Chairman of the Managing Director of Scudder, Director and Senior
Board and Trustee Stevens & Clark, Inc. Vice President
Horace B. Deets+* (58) Vice Chairman and Executive Director, American --
Trustee Association of Retired Persons
Carole Lewis Anderson (52) Trustee President, MASDUN Capital --
3616 Reservoir Road, N.W. Advisors; Formerly Principal,
Washington, DC Suburban Capital Markets, Inc.;
Director, VICORP Restaurants,
Inc.; Member of the Board,
Association for Corporate Growth
of Washington, D.C.; Trustee,
Hasbro Children's Foundation and
Mary Baldwin College
Adelaide Attard (66) Trustee Gerontology Consultant; Member, --
270-28N Grand Central Parkway New York City Department of
Floral Park, NY Aging Advisory Council--
Appointed by Mayor (1995); Board
Member, American Association on
International Aging (1981 to
present); Commissioner, County
of Nassau, New York, Dept. of
Senior Citizen Affairs
(1971-1991); Chairperson,
Federal Council on Aging
(1981-1986)
Cyril F. Brickfield+* (78) Trustee Honorary President and Special --
Counsel, American Association of
Retired Persons
62
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Robert N. Butler, M.D. (70) Trustee Director, International --
211 Central Park West Longevity Center and Professor
Apt. 7F of Geriatrics and Adult
New York, NY Development; Chairman, Henry L.
Schwartz Department of
Geriatrics and Adult
Development, Mount Sinai Medical
Center (1982 to present);
Formerly Director, National
Institute on Aging, National
Institute of Health (1976-1982)
Esther Canja+* (69) Trustee Vice President, American --
Association of Retired Persons;
Trustee and Chair, AARP Group
Health Insurance Plan; Board
Liaison, National Volunteer
Leadership Network Advisory
Committee; Chair, Board
Operations Committee; AARP State
Director of Florida (1990-1992)
Edgar R. Fiedler (67) Trustee Senior Fellow and Economic --
845 Third Ave. Counselor
New York, NY
Lt. Gen. Eugene P. Forrester (70) Trustee Lt. General (Retired), U.S. --
1101 S. Arlington Ridge Rd. Army; International Trade
Arlington, VA Counselor (1983 to present);
Consultant
Wayne F. Haefer+* (60) Trustee Director, Membership Division of --
AARP; Formerly Secretary,
Employee's Pension and Welfare
Trusts of AARP and Retired
Persons Services, Inc.
George L. Maddox, Jr. (71) Trustee Professor Emeritus and Director, --
P.O. Box 2920 Long Term Care Resources
Duke Univ. Medical Center Program, Duke University Medical
Durham, NC Center; Professor Emeritus of
Sociology, Departments of
Sociology and Psychiatry, Duke
University
63
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Robert J. Myers (84) Trustee Actuarial Consultant (1983- --
9610 Wire Ave. present); Formerly Chairman,
Silver Spring, MD Commission on Railroad
Retirement Reform (1988-90);
Deputy Commissioner, Social
Security Administration
(1981-1982); Member, National
Commission on Social Security
(1978-1981); Formerly Executive
Director, National Commission on
Social Security Reform
(1982-1983); Director: NASL
Series Trust, Inc. and North
American Funds, Inc.; Member,
Prospective Payment Assessment
Commission.
James H. Schulz (60) Trustee Professor of Economics and --
158 Scruton Pond Road Kirstein Professor of Aging
Barrington, NH Policy, Policy Center on Aging,
Florence Heller School, Brandeis
University
Gordon Shillinglaw (71) Trustee Professor Emeritus of --
196 Villard Ave. Accounting, Columbia University
Hastings-on-Hudson, NY Graduate School of Business
Thomas W. Joseph## (57) Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer and
Assistant Clerk
David S. Lee## (63) Vice President and Managing Director of Scudder, President, Assistant
Assistant Treasurer Stevens & Clark, Inc. Treasurer and Director
Thomas F. McDonough## (50) Vice President and Principal of Scudder, Stevens & Clerk
Assistant Secretary Clark, Inc.
Pamela A. McGrath## (43) Vice President and Managing Director of Scudder, --
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell# (51) Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
James W. Pasman## (44) Vice President Principal of Scudder, Stevens & --
Clark, Inc.
Kathryn L. Quirk# (44) Vice President and Managing Director of Scudder, Senior Vice President
Secretary Stevens & Clark, Inc.
64
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Howard Schneider## (39) Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Cornelia M. Small# (52) President Managing Director of Scudder, --
Stevens & Clark, Inc.
* Messrs. Brickfield, Deets, Findlay, Haefer and Ms. Canja and Ms. Coughlin are Trustees of each of the Trusts
and are considered by the Trusts and their counsel to be persons who are "interested persons" of the Trusts
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been associated with their respective companies
for more than five years, but not necessarily in the same capacity.
# Address: 345 Park Avenue, New York, New York
## Address: Two International Place, Boston, Massachusetts
+ Address: 601 E Street, N.W., Washington, D.C.
</TABLE>
As of December 31, 1996, all Trustees and officers of the Funds as a
group owned beneficially (as that term is defined under Section 13(d) of the
Securities Exchange Act) less than 1% of the outstanding shares of each Fund. To
the best of the Trusts' knowledge as of December 31, 1996 no person owned
beneficially more than 5% of the outstanding shares of any of the Trusts.
REMUNERATION
Several of the officers and Trustees of the Trusts may be officers or
employees of Scudder, Stevens & Clark, Inc., Scudder Service Corporation,
Scudder Investor Services, Inc., Scudder Fund Accounting Corp., or Scudder Trust
Company and will participate in the fees received by such entities. No
individual affiliated with AARP will participate directly in any such fees. The
Trusts pay no direct remuneration to any officer of the Trusts. However, each of
the Trustees who is not affiliated with Scudder, Stevens & Clark, Inc. or AARP
will be paid by the Trust(s) for which he or she serves as Trustee. Until
September 30, 1996, each of these unaffiliated Trustees received an annual fee
of $2000 from each Fund for which he or she serves plus $270 for each Trustees'
meeting and $200 for each audit committee meeting or meeting held for the
purpose of considering arrangements between the Fund and the Fund Manager or any
of its affiliates attended. Each unaffiliated Trustee also received $100 per
committee meeting, other than an audit committee meeting, attended. If any such
meetings are held jointly with meetings of one or more mutual funds advised by
the Fund Manager, a maximum fee of $800 for meetings of the Board, meetings of
the unaffiliated members of the Board for the purpose of considering
arrangements between the Fund and the Fund Manager or any of its affiliates or
the audit committees of such Funds, and $400 for all other committee meetings or
meetings of the unaffiliated members of the Board is paid, to be divided equally
among the Funds. Effective October 1, 1996, each unaffiliated Trustee will
receive an annual retainer of $10,000 for serving as a Trustee of the AARP
Investment Program. In addition, each Trustee will receive from each Fund, a fee
of $175 for attending each Trustees' meeting; $150 for attending each audit and
contract committee meeting; $100 for attending each nominating committee
meeting; and $125 for attending each additional committee meeting. For the year
ended September 30, 1996, the Trustees' fees and expenses for nine of the Funds
were as follows:
Fund Expense
---- -------
AARP High Quality Money Fund $19,028
AARP GNMA and U.S. Treasury Fund 29,609
AARP High Quality Bond Fund 29,612
AARP High Quality Tax Free Money Fund 25,712
AARP Insured Tax Free General Bond Fund 25,715
AARP Balanced Stock and Bond Fund 24,005
AARP Growth and Income Fund 24,002
65
<PAGE>
AARP Global Growth Fund 15,157
AARP Capital Growth Fund 24,009
The following table shows the aggregate compensation received by each
unaffiliated Trustee from each Trust and from all AARP Trusts and Scudder Fund
complex for the year ended December 31, 1996.
<TABLE>
<CAPTION>
AARP Cash AARP AARP Tax All AARP Trusts
Investment Income Free Income AARP and Scudder
Name Fund Trust Trust Growth Trust Fund Complex
- ---- ---- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Carole L. Anderson (__ funds)
Adelaide Attard (__ funds)
Robert N. Butler (__ funds)
Mary Johnston Evans (__ funds)
Edgar R. Fiedler (__ funds)
Eugene P. Forrester (__ funds)
William B. Macomber (__ funds)
George L. Maddox, Jr. (__ funds)
Robert J. Myers (__ funds)
James H. Schulz (__ funds)
Gordon Shillinglaw (__ funds)
+ AARP Diversified Investment Income Portfolio and AARP Diversified Investment Growth Portfolio, series of AARP
Investment Portfolio Trust, commenced operations on February 1, 1997.
AARP Cash Investment Fund consists of one Fund: AARP High Quality Money Fund.
AARP Income Trust consists of three Funds: AARP GNMA and U.S. Treasury Fund, AARP High Quality Bond Fund, and
AARP Bond Fund for Income.*
AARP Tax Free Income Trust consists of two Funds: AARP High Quality Tax Free Money Fund and AARP Insured Tax
Free General Bond Fund.
AARP Growth Trust consists of seven Funds: AARP Balanced Stock and Bond Fund, AARP U.S. Stock Index Fund,* AARP
Growth and Income Fund, AARP Global Growth Fund,* AARP Capital Growth Fund, AARP International Stock Fund,* and
AARP Small Company Stock Fund.*
* AARP Global Growth Fund commenced operations on February 1, 1996. AARP Bond Fund for Income, AARP U.S. Stock
Index Fund, AARP International Stock Fund, and AARP Small Company Stock Fund commenced operations on February 1,
1997.
** Mr. Fiedler received $______ through a deferred compensation program. As of December 31, 1996, Mr. Fiedler had
a total of $______ accrued in a deferred compensation program for serving on the Board of Directors of Scudder
Institutional Fund, Inc. and Scudder Fund, Inc.
</TABLE>
DISTRIBUTOR
Each of the Trusts has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), a Massachusetts corporation, which is a
subsidiary of Scudder, Stevens & Clark, Inc., a Delaware corporation. The
underwriting agreements dated September 4, 1985 will remain in effect until
August 31, 1997 and from year to year thereafter only if their continuance is
approved annually by a majority of the members of the Board of Trustees of each
Trust who are not parties to such agreement or interested persons of any such
party and either by vote of a majority of the Board of Trustees of each Trust or
a majority of the outstanding voting securities of each Trust.
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
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<PAGE>
Distributor), notices, proxy statements, reports or other communications
(including newsletters) to shareholders of the Trust; the cost of printing and
mailing confirmations of purchases of shares and the prospectuses accompanying
such confirmations; any issue taxes or any initial transfer taxes; a portion of
shareholder toll-free telephone charges; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); and the cost of printing and postage of business reply envelopes.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of shares of the
Funds to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Funds to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
customer service representatives, a portion of the cost of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by each Trust.
Note: Although each Trust does not currently have a Rule 12b-1 Plan and
shareholder approval would be required in order to adopt one, the underwriting
agreements provide that the Trust will also pay those fees and expenses
permitted to be paid or assumed by that Trust pursuant to a Rule 12b-1 Plan, if
any, adopted by each Trust, notwithstanding any other provision to the contrary
in the underwriting agreement and each Trust or a third party will pay those
fees and expenses not specifically allocated to the Distributor in the
underwriting agreement.
As agent, the Distributor currently offers shares of the Funds to
investors in all states. Each underwriting agreement provides that the
Distributor accepts orders for shares at net asset value because no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of any of the Funds.
TAXES
(See "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" in the Prospectus.)
Each AARP Fund has qualified and intends to elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code (the "Code"), as amended, since its inception and intends to
continue to so qualify. (Such qualification does not involve supervision of
management or investment practices or policies by a government agency.) In any
year in which a Fund so qualifies and distributes at least 90% of its investment
company taxable income, and at least 90% of its net tax-exempt income, if any,
the Fund generally is not subject to Federal income tax to the extent that it
distributes to shareholders its investment company taxable income and net
realized capital gains in the manner required under the Code.
Each AARP Fund must distribute its taxable income according to a
prescribed formula and will be subject to a 4% nondeductible excise tax on
amounts not so distributed. The formula requires a Fund to distribute each
calendar year at least 98% of its ordinary income (excluding tax-exempt income)
for the calendar year, at least 98% of the excess of its capital gains over
capital losses (adjusted for certain ordinary losses) realized during the
one-year period ending October 31 of such year, and any ordinary income and
capital gains for prior years that was not previously distributed.
To qualify under Subchapter M, gains from the sale of stock, securities
and certain options, futures and forward contracts held for less than three
months must be limited to less than 30% of each Fund's annual gross income.
Moreover, short-term gains (i.e., gains from the sale of securities held for one
year or less) are taxed as ordinary income when distributed to shareholders.
Options, futures and forward activities of the AARP Funds may increase the
amount of the short-term gains and gains that are subject to the 30% limitation.
The determination of the nature and amount of investment company
taxable income of a Fund will be based solely on the transactions in, and on the
income received and expenses incurred by or allocated to, the Fund. Each AARP
Fund intends to offset any realized net capital gains against any capital loss
carryforward before making capital gains distributions to shareholders.
Distributions of any investment company taxable income (which includes
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss, less expenses) are taxable to shareholders as ordinary
income.
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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 are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the Fund
have been held by such shareholders. Any loss realized upon the redemption of
shares held at the time of redemption for six months or less will be treated as
a long-term capital loss to the extent of any amounts treated as distributions
of long-term capital gain on such shares.
Distributions of investment company taxable income and net realized
capital gains by a Fund will be taxable as described above, whether made in
shares or in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in each
share received equal to the net asset value of a share of the Fund on the
reinvestment date.
Distributions by a Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, such distribution nevertheless would be taxable to the shareholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a return of capital upon
distribution which will nevertheless be taxable to them.
Shareholders who redeem, sell or exchange shares of a Fund may realize
gain or loss if the proceeds are more or less than the shareholder's purchase
price. Such gain or loss generally will be a capital gain or loss if the Fund
shares were capital assets in the hands of the shareholder, and generally will
be long- or short-term, depending on the length of time the Fund shares were
held. However, if a shareholder realizes a loss on the sale of a share held at
the time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
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.
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Many futures contracts, certain foreign currency forward contracts and
all listed nonequity options (including options on debt securities, options on
futures contracts, options on securities indices and options on broad-based
stock indices) will constitute "section 1256 contracts." Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or losses. Also, section 1256 contracts held by the
Funds at the end of each taxable year (and, for purposes of the 4% excise tax,
on October 31) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60% long-term and 40% short-term capital gain or loss. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options, and
similar financial instruments entered into or acquired by a Fund will be treated
as ordinary income.
Positions of a Fund which consist of at least one security and at least
one option or other position with respect to the security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for any "qualified covered
call options" on stock written by a Fund.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures contract, foreign currency forward
contract or nonequity option governed by Section 1256 which substantially
diminishes the Fund's risk of loss with respect to such other position will be
treated as a "mixed straddle." Although mixed straddles are subject to the
straddle rules of Section 1092 of the Code, certain tax elections exist for them
which reduce or eliminate the operation of these rules. Each Fund will monitor
its transactions in options and futures and may make certain tax elections in
connection with these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain futures
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Proposed regulations have been issued which may allow the Fund to make
an election to mark to market its shares of these foreign investment companies
in lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Fund would report as ordinary
income the amount by which the fair market value of the foreign company's stock
exceeds the Fund's adjusted basis in these shares. No mark to market losses may
be recognized. The effect of the election would be to treat excess distributions
and gain on dispositions as ordinary income which is not subject to a Fund level
tax when distributed to shareholders as a dividend. Alternatively, the Fund may
elect to include as income and gain its share of the ordinary earnings and net
capital gain of certain foreign investment companies in lieu of being taxed in
the manner described above.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by those countries.
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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.
In addition, some of the debt securities may be purchased by the Funds
at a discount which exceeds the original issue discount on such debt securities,
if any. This additional discount represents market discount for Federal income
tax purposes. The gain realized on the disposition of many debt securities,
including tax-exempt securities having market discount will be treated as
ordinary income to the extent it does not exceed the accrued market discount on
such debt security. Generally, market discount accrues on a daily basis for each
day the debt security is held by the Funds at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Funds, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest.
The Funds will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. All such distributions and proceeds may be subject to
withholding of Federal income tax at the rate of 31% in the case of non-exempt
shareholders who fail to furnish the Funds with their taxpayer identification
numbers and with required certifications regarding their status under Federal
income tax laws. Withholding may also be required if a Fund is notified by the
IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions or proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Investors may wish to consult their tax advisers about the applicability of the
backup withholding provisions.
In addition to Federal taxes, shareholders of the Funds may be subject
to state and local taxes on distributions from the Funds. Under the laws of
certain states, distributions of investment company taxable income are taxable
to shareholders as dividend income even though a substantial portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by the resident of such state, would be exempt from such
state's income tax. Shareholders should consult their own tax advisers with
respect to the tax status of distributions from the Funds in their own state and
localities.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, Trusts and estates). Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and foreign
tax consequences of ownership of shares of the Fund, including the likelihood
that such a shareholder would be subject to a U.S. withholding tax at a rate of
31% (or at a lower rate under a tax treaty) on amounts constituting ordinary
income to him or her.
Special Information Regarding AARP High Quality Tax Free Money Fund and
AARP Insured Tax Free General Bond Fund: Each of the AARP Tax Free Income Funds
intends to qualify to pay "exempt-interest dividends" to its shareholders. Each
Fund will be so qualified if, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of securities of states,
U.S. possessions, their political subdivisions, and the District of Columbia,
the interest on which is exempt from Federal tax. To the extent that the Funds'
dividends distributed to shareholders are derived from earnings on interest
income exempt from Federal tax and are designated as "exempt-interest dividends"
by the Funds, they will be excludable from a shareholder's gross income for
Federal income tax purposes. "Exempt-interest dividends," however, must be taken
into account by shareholders in determining whether their total incomes are
large enough to result in taxation of up to 85% of their Social Security
benefits. In addition, interest on certain municipal obligations (private
activity bonds) will be treated as a preference item for purposes of calculating
the alternative minimum tax for individuals and for corporations. Similarly,
income distributed by the Funds, including exempt-interest dividends, may
constitute an adjustment to alternative minimum taxable income of corporate
shareholders. The Funds do not intend to purchase any private activity bonds.
The Funds will inform shareholders annually as to the portion of the
distributions from the Funds which constituted "exempt-interest dividends."
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To the extent that the Funds' dividends are derived from interest on
their temporary taxable investments or from an excess of net short-term capital
gain over net long-term capital loss, they are considered ordinary taxable
income for Federal income tax purposes. Distributions, if any, of net long-term
capital gains from the sale of securities are taxable at long-term capital gain
rates regardless of the length of time the shareholder has owned Fund shares.
However, if a shareholder realizes a loss on the sale of a share held at the
time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period. Furthermore, a loss realized by a
shareholder on the sale of shares of the Funds with respect to which
exempt-interest dividends have been paid will be disallowed if such shares have
been held by the shareholder for six months or less (to the extent of
exempt-interest dividends paid).
Under the Code, a shareholder's interest expense deductions with
respect to indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends, such as either of the AARP
Tax-Free Funds, may be limited. In addition, under rules issued by the Internal
Revenue Service for determining when borrowed Funds are considered used for the
purposes of purchasing or carrying particular assets, the purchase of shares may
be considered to have been made with borrowed Funds even though the borrowed
Funds are not directly traceable to the purchase of shares.
Opinions relating to the validity of municipal securities and the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the issuer. Neither AARP, the Fund Manager, nor Counsel to the Funds
makes any review of proceedings relating to the issuer of municipal securities
or the bases of such opinions.
The foregoing description regarding the AARP Tax-Free Funds relates
only to Federal income tax law. Investors should consult with their tax advisers
as to exemption from other state or local law. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
industrial development bonds should consult their tax advisers before purchasing
shares of the Funds.
BROKERAGE AND PORTFOLIO TURNOVER
Brokerage Commissions
To the maximum extent feasible the AARP Funds' investment adviser will
place orders for portfolio transactions through the Distributor, which in turn
will place orders on behalf of the AARP Funds with other brokers and dealers.
The Distributor receives no commission, fees or other remuneration from the
Funds for this service. Allocation of brokerage is supervised by the Fund
Manager.
Purchases and sales of fixed-income securities for the AARP Funds are
generally placed by the Fund Manager with primary market makers for these
securities on a net basis, without any brokerage commission being paid by a
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The primary objective of the Fund Manager in placing orders for the
purchase and sale of assets for the AARP Funds' portfolios is to obtain the most
favorable net results, taking into account such factors as price, commission
(which is negotiable in the case of national securities exchange transactions),
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Fund Manager seeks to evaluate the overall reasonableness of
brokerage commissions paid through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the AARP Funds to reported commissions paid by others. The
Fund Manager reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
AARP Diversified Portfolio Investments are made directly in Underlying
AARP Funds with no commission.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Fund Manager's practice to place such orders
with brokers and dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes, or who supply research, market and
statistical information to the Funds or the Fund Manager. The term "research,
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market and statistical information" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and concerning the performance
of accounts. The Fund Manager is not authorized, when placing portfolio
transactions for the AARP Funds, except for the AARP Growth Funds, to pay a
brokerage commission in excess of that which another broker might have charged
for executing the same transaction solely on account of the receipt of research,
market or statistical information. The Fund Manager will not place orders with
brokers or dealers on the basis that the broker or dealer has or has not sold
shares of the Funds. Except for implementing the policy stated above, there is
no intention to place portfolio transactions with particular brokers or dealers
or groups thereof. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Subject to obtaining the most favorable results, the Fund Manager may
place particular transactions through the Distributor, with the net commission
or fee being credited against the fee payable to the Fund Manager. The
Distributor, however, does not intend to engage in a general brokerage business.
Also subject to obtaining the most favorable net results, the Fund Manager may
place brokerage transactions with Bear, Stearns & Co.
Although certain research, market and statistical information from
brokers and dealers can be useful to the AARP Funds and to the Fund Manager, it
is the opinion of the Fund Manager that such information is only supplementary
to its own research effort since the information must still be analyzed,
weighed, and reviewed by the Fund Manager's staff. Such information may be
useful to the Fund Manager in providing services to clients other than the AARP
Funds, and not all such information is used by the Fund Manager in connection
with the AARP Funds. Conversely, such information provided to the Fund Manager
by brokers and dealers through whom other clients of the Fund Manager effect
securities transactions may be useful to the Fund Manager in providing services
to the AARP Funds.
For the fiscal years ended September 30, 1994, 1995 and 1996 the AARP
Growth and Income Fund paid brokerage commissions of $2,319,113, $1,690,604 and
$___________ and the AARP Capital Growth Fund paid brokerage commissions of
$1,156,320, $2,636,662, and $___________, both respectively. For the fiscal
period ended September 30, 1994, and for the fiscal years ended September 30,
1995 and 1996, the AARP Balanced Stock and Bond Fund paid brokerage commissions
of $152,376, $149,816, and $__________, respectively. For the fiscal period
February 1, 1996 (commencement of operations) until September 30, 1996, the AARP
Global Growth Fund paid brokerage commissions of $__________. In the fiscal year
ended September 30, 1996, $__________ (___%) of the total brokerage commissions
paid by AARP Growth and Income Fund and $____________ (___%) by AARP Capital
Growth Fund resulted from orders placed, consistent with the policy of obtaining
the most favorable net results, with brokers and dealers who provided
supplementary research information to the Funds or the Fund Manager. The amount
of such transactions aggregated $_____________ for the AARP Capital Growth Fund,
(___% of all brokerage transactions) and $____________ (___%) of all brokerage
transactions) for the AARP Growth and Income Fund. The balance of such brokerage
was not allocated to any particular broker or dealer or with regard to the
above-mentioned or other special factors. For the fiscal year ended September
30, 1996, $________ (___%) of the total brokerage commissions paid by AARP
Balanced Stock and Bond Fund resulted from orders placed, consistent with the
policy of obtaining the most favorable net results, with brokers and dealers who
provided supplementary research information to the Funds or the Fund Manager.
The amount of such transactions aggregated $_____________ for AARP Balanced
Stock and Bond Fund, (___% of all brokerage transactions). For the fiscal period
ended September 30, 1996, $________ (___%) of the total brokerage commissions
paid by AARP Global Growth Fund resulted from orders placed, consistent with the
policy of obtaining the most favorable net results, with brokers and dealers who
provided supplementary research information to the Funds or the Fund Manager.
The balance of such brokerage was not allocated to any particular broker or
dealer or with regard to the above-mentioned or other special factors.
The Trustees review from time to time whether the recapture for the
benefit of the Funds of some portion of the brokerage commissions or similar
fees paid by the Funds on portfolio transactions is legally permissible and
advisable. To date, no recapture has been effected.
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Portfolio Turnover
Fund securities may be sold to take advantage of investment
opportunities arising from changing market levels or yield relationships.
Although such transactions involve additional costs in the form of spreads or
commissions, they will be undertaken in an effort to improve the overall
investment return of a Fund, consistent with that Fund's objectives. The
portfolio turnover rate of a Fund is defined in a Rule of the SEC as the lesser
of the value of securities purchased or securities sold during the year,
excluding all securities whose maturities at the time of acquisition were one
year or less, divided by the average monthly value of such securities owned
during the year. The portfolio turnover rates for the fiscal years ended
September 30, 1994, 1995, and 1996 for five of the non-money market Funds were:
AARP GNMA and U.S. Treasury Fund, 114.54%, 70.35%, and 83.44%; AARP High Quality
Bond Fund, 63.75%, 201.07%, and 169.96%; AARP Insured Tax Free General Bond
Fund, 38.39%, 17.45%, and 18.69%; AARP Growth and Income Fund, 31.82%, 31.26%,
and 25.02%; AARP Capital Growth Fund, 79.65%, 98.44%, and 64.84%, all
respectively. The portfolio turnover rate for the period ended September 30,
1994 and for the fiscal years ended September 30, 1995 and 1996 for the AARP
Balanced Stock and Bond Fund was 49.32%, 63.77%, and 35.22%, respectively. The
portfolio turnover rate for AARP Global Growth Fund for the period February 1,
1996 (commencement of operations) to September 30, 1996 was 12.56%. Under normal
investment conditions, it is anticipated that the AARP Bond Fund for Income's,
the AARP U.S. Stock Index Fund's, the AARP International Stock Fund's or the
AARP Small Company Stock Fund's annual portfolio turnover rate will not exceed
75% for the initial fiscal year. It is also anticipated that the annual
portfolio turnover rate for AARP Diversified Growth Portfolio and AARP
Diversified Income Portfolio will not exceed 50% for the initial fiscal year.
NET ASSET VALUE
AARP Money Funds
The net asset value per share of the Fund is computed twice daily as of
twelve o'clock noon and the close of regular trading on the Exchange, normally 4
p.m. eastern time, on each day when the Exchange is open for trading. The
Exchange is normally closed on the following national holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. Net asset value is determined by dividing the total
assets of the Fund, less all of its liabilities, by the total number of shares
of the Fund outstanding. The Fund uses the amortized cost method of security
valuation as permitted under Rule 2a-7 under the 1940 Act. Under this method,
portfolio securities for which market quotations are readily available and which
have remaining maturities of more than 60 days from the date of valuation are
valued at the mean between the over-the-counter bid and asked prices. Securities
which have remaining maturities of 60 days or less are valued by the amortized
cost method; if acquired with remaining maturities of 61 days or more, the cost
thereof for purposes of valuation is deemed to be the value on the 61st day
prior to maturity. Other securities are appraised at fair value as determined in
good faith by or on behalf of the Trustees of the Fund. For example, securities
with remaining maturities of more than 60 days for which market quotations are
not readily available are valued on the basis of market quotations for
securities of comparable maturity, quality and type. Determinations of net asset
value per share for the Fund made other than as of the close of the Exchange may
employ adjustments for changes in interest rates and other market factors.
AARP Non-Money Market Funds
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of the Fund, less all liabilities, by the total
number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any sales, the security is valued
at the most recent bid quotation. The value of an equity security not quoted on
the NASDAQ System, but traded in another over-the-counter market, is its most
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recent sale price. Lacking any sales, the security is valued at the Calculated
Mean. Lacking a Calculated Mean, the security is valued at the most recent bid
quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturities of sixty days or less are valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
Trading in securities on foreign securities exchanges is normally
completed before the close of regular trading on the Exchange. Trading on these
foreign exchanges may not take place on all days on which there is regular
trading on the Exchange, or may take place on days on which there is no regular
trading on the Exchange. If events materially affecting the value of a Fund's
portfolio securities occur between the time when these foreign exchanges close
and the time when the Fund's net asset value is calculated, such securities will
be valued at fair value as determined by each Trust's Board of Directors. Shares
of AARP Underlying Funds in which the AARP Diversified Portfolios invest in next
determine net asset value after the order is placed.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial statements of the AARP Funds included in the Annual
Report to shareholders dated September 30, 1996, have been examined by Price
Waterhouse LLP, independent accountants, and are incorporated by reference into
this Statement of Additional Information in reliance upon the accompanying
report of said firm, which report is given upon their authority as experts in
accounting and auditing.
Shareholder Indemnification
Each of the Trusts is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. Each Declaration of Trust contains an express
74
<PAGE>
disclaimer of shareholder liability in connection with the Trust property or the
acts, obligations or affairs of the Trust. Each Declaration of Trust also
provides for indemnification out of the Trust property of any shareholder held
personally liable for the claims and liabilities to which a shareholder may
become subject by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Trust itself would be unable to meet its
obligations. No series of one Trust is liable for the obligations of another
series in the AARP Complex.
Ratings of Corporate Bonds
The three highest ratings of Moody's for corporate bonds are Aaa, Aa
and A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they comprise what are generally known as high-grade bonds. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa securities. Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Although factors
giving security to principal and interest on bonds rated A are adequate, other
elements may be present which suggest a susceptibility to impairment sometime in
the future.
The three highest ratings of S&P for corporate bonds are AAA (Prime),
AA (High-grade) and A. Bonds rated AAA have the highest rating assigned by S&P
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rating issues only in small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
more susceptible to the adverse effects of changes in circumstances and economic
conditions. Bonds rated BBB have an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
Ratings of Commercial Paper
The ratings Prime-1 and Prime-2 are the highest commercial paper
ratings assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; 6) trend of
earnings over a period of ten years; (7) financial strength of a parent company
and the relationships which exist with the issuer; and (8) recognition by the
management 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
75
<PAGE>
Aaa group, they comprise what are generally known as high-grade bonds. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
The three highest ratings of S&P for municipal bonds are AAA (Prime),
AA (High-grade), and A (Good grade). Bonds rated AAA have the highest rating
assigned by S&P to a municipal obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in a
small degree. Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of Funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
S&P's top ratings for municipal notes are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The ratings F-1+ and F-1 are the two highest ratings assigned by Fitch.
Among the factors considered by Fitch in assigning these rating are: (1) the
issuer's liquidity; (2) its standing in the industry; (3) the size of its debt;
(4) its ability to service its debt; (5) its profitability; (6) its return on
equity; (7) its alternative sources of financing; and (8) its ability to access
the capital markets. Analysis of the relative strength or weakness of these
factors and others determines whether an issuer's commercial paper is within
these two ratings.
Other Information
Each AARP Fund has a fiscal year ending on September 30.
The CUSIP for AARP High Quality Money Fund is 000036E-10-7
The CUSIP for AARP GNMA & U.S. Treasury Fund is 00036M-10-9.
The CUSIP for AARP High Quality Bond Fund is 00036M-20-8.
The CUSIP for AARP Bond Fund for Income Fund is 00036M-30-7.
The CUSIP for AARP Tax Free Money Fund is 00036Q-10-0.
The CUSIP for AARP Insured Tax Free General Bond Fund is 00036Q-20-9.
The CUSIP for AARP Balanced Stock & Bond is 00036J-30-4.
The CUSIP for AARP Growth & Income Fund is 00036J-10-6.
The CUSIP for AARP Capital Growth Fund is 00036J-20-5.
The CUSIP for AARP Global Growth Fund is 00036J-40-3.
The CUSIP for AARP U.S. Stock Index Fund is 00036J-50-2
The CUSIP for AARP International Stock Fund is 00036J-60-1.
The CUSIP for AARP Small Company Stock is 00036J-70-0.
The CUSIP for AARP Diversified Income Portfolio is 00036W-10-7.
The CUSIP for AARP Diversified Growth Portfolio is 00036W-20-6.
Portfolio securities of the AARP Funds except AARP Global Growth Fund
are held separately, pursuant to a custodian agreements with each Trust, by
State Street Bank and Trust Company of Boston as Custodian.
76
<PAGE>
Portfolio securities of AARP Global Growth Fund are held separately,
pursuant to a custodian agreement with AARP Growth Trust on behalf of AARP
Global Growth Fund, by Brown Brothers Harriman & Co. of Boston as Custodian.
Each Trust has shareholder servicing agreements with Scudder Service
Corporation ("SSC"), a subsidiary of Scudder, Stevens & Clark, Inc. SSC is the
transfer agent, dividend disbursing and shareholder service agent for each Fund.
Shareholder service expenses charged by SSC were for AARP High Quality Money
Fund, $1,526,580; AARP GNMA and U.S. Treasury Fund, $7,340,012; AARP High
Quality Bond Fund, $1,586,232; AARP High Quality Tax Free Money Fund, $304,924;
AARP Insured Tax Free General Bond Fund, $1,925,762; AARP Balanced Fund,
$724,796; AARP Growth and Income Fund, $3,850,612; and AARP Capital Growth Fund,
$1,176,990, for the fiscal year ended September 30, 1996. Shareholder service
expenses charged by SSC for AARP Global Growth Fund were $178,759 for the period
February 1, 1996 (commencement of operations) to September 30, 1996. Not all of
these fees were paid in full at the fiscal year end.
The firm of Dechert Price & Rhoads of Washington, D.C. is counsel for
the Trusts.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of Scudder, Stevens & Clark, Inc.,
computes net asset value for each Fund. AARP High Quality Money Fund and AARP
High Quality Tax Free Money Fund each pay Scudder Fund Accounting an annual fee
equal to 0.020% on the first $150 million of average daily net assets, 0.0060%
of such assets in excess of $150 million, up to and including $1 billion and
0.0035% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. AARP Insured Tax Free General Bond Fund pays Scudder
Fund Accounting an annual fee equal to 0.024% on the first $150 million of
average daily net assets, 0.0070% on such assets in excess of $150 million up to
and including $1 billion, and 0.0040% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. AARP GNMA and U.S.
Treasury Fund, AARP High Quality Bond Fund and AARP Bond Fund for Income each
pay Scudder Fund Accounting an annual fee equal to 0.025% of the first $150
million of average daily net assets, 0.0075% of such assets in excess of $150
million up to and including $1 billion, and 0.0045% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP U.S. Stock Index Fund,
AARP Capital Growth Fund and AARP Small Company Stock Fund each pay Scudder Fund
Accounting an annual fee equal to 0.025% on the first $150 million of average
daily net assets, 0.0075% of such assets in excess of $150 million up to and
including $1 billion, and 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges. AARP Global Growth Fund and Scudder
International Stock Fund each pay Scudder Fund Accounting Corporation an annual
fee equal to 0.065% on the first $150 million of average daily net assets,
0.0400% of such assets in excess of $150 million up to and including $1 billion,
and 0.0200% of such assets in excess of $1 billion, plus holding and transaction
charges for this service.
Scudder Investor Services, Inc. is the Distributor for each Fund. For
the fiscal years ended September 30, 1996, 1995 and 1994, the Distributor was
paid $___________, $___________ and $___________ , respectively by AARP High
Quality Money Fund, $___________, $___________ and $___________ , respectively
by AARP GNMA and U.S. Treasury Fund, $___________, $___________ and $___________
, respectively by AARP High Quality Bond Fund, $___________, $___________ and
$___________ , respectively by AARP High Quality Tax Free Money Fund,
$___________, $___________ and $___________ , respectively by AARP Insured Tax
Free General Bond Fund, $___________ by AARP Balanced Stock and Bond Fund,
$___________, $___________ and $___________ , respectively by AARP Growth and
Income Fund, $___________, $___________ and $___________ , respectively by AARP
Global Growth Fund and $___________, $___________ and $___________ ,
respectively by AARP Capital Growth Fund.
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 $__________ incurred by AARP Bond Fund for Income in
conjunction with its organization are amortized over the five year period
beginning ____________.
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<PAGE>
Costs of $__________ incurred by AARP U.S. Stock Index Fund in
conjunction with its organization are amortized over the five year period
beginning ____________.
Costs of $__________ incurred by AARP International Stock Fund in
conjunction with its organization are amortized over the five year period
beginning ____________.
Costs of $__________ incurred by AARP Small Company Stock Fund in
conjunction with its organization are amortized over the five year period
beginning ____________.
Costs of $__________ incurred by AARP Diversified Income Portfolio in
conjunction with its organization are amortized over the five year period
beginning ____________.
Costs of $__________ incurred by AARP Diversified Growth Portfolio in
conjunction with its organization are amortized over the five year period
beginning ____________.
Each Trust is located at Two International Place, Boston, Massachusetts
02110-4103 (telephone: 1-800-253-2277). Each has filed with the Securities and
Exchange Commission, Washington, D.C. 20549, a Registration Statement under the
Securities Act of 1933, as amended, with respect to the shares of the Funds
offered by the Prospectus. The Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statements, certain parts of which are omitted in accordance with Rules and
Regulations of the SEC. The Registration Statements may be inspected at the
principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C. and
copies thereof may be obtained from the SEC at prescribed rates.
The following chart demonstrates that tax-free yields are equivalent to
higher taxable yields due to their tax-exempt status. For example, tax-free
interest of 5% is the equivalent of 6.94% taxable in a 28% tax bracket.
Please refer to the chart for more examples.
Tax-Exempt Income vs. Taxable Income
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the 1996
calendar year.
<TABLE>
<CAPTION>
1996 Taxable Income To Equal Hypothetical Tax-Free Yields of 5%,
Brackets 7% and 9%, a Taxable Investment Would
Have To Earn**
Individual Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
<S> <C> <C> <C> <C>
$0 - $23,350 15.0% 5.88% 8.24% 10.59%
$23,351 - $56,550 28.0% 6.94% 9.72% 12.50%
$56,551 - $117,950 31.0% 7.25% 10.14% 13.04%
$117,951 - $256,500 36.0% 7.81% 10.94% 14.06%
Over $256,500 39.6% 8.28% 11.59% 14.90%
Joint Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
$0 - $39,000 15.0% 5.88% 8.24% 10.59%
$39,001 - $94,250 28.0% 6.94% 9.72% 12.50%
$94,251 - $143,600 31.0% 7.25% 10.14% 13.04%
$143,601 - $256,500 36.0% 7.81% 10.94% 14.06%
Over $256,500 39.6% 8.28% 11.59% 14.90%
** 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
78
<PAGE>
exemptions. Note also that these federal income tax brackets and rates do not take into account the effects
of (i) a reduction in the deductibility of itemized deductions for taxpayers whose federal adjusted gross
income exceeds $114,700 ($57,350 in the case of a married individual filing a separate return), or of (ii)
the gradual phaseout of the personal exemption amount for taxpayers whose federal adjusted gross income
exceeds $114,700 (for single individuals) or $172,050 (for married individuals filing jointly). The
effective federal tax rates and equivalent yields for such taxpayers would be higher than those shown above.
</TABLE>
Example:*
Based on 1996 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $40,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
There is no guarantee that a Fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
* Net amount subject to federal income tax after deductions and
exemptions, exclusive of the alternative minimum tax.
FINANCIAL STATEMENTS
The financial statements and notes, including the investment portfolio,
of each AARP Fund, together with the Report of Independent Accountants and
Supplementary Information are incorporated by reference.
79
<PAGE>
Annual
REPORT TO SHAREHOLDERS
SEPTEMBER 30, 1996
AARP Investment Program
from SCUDDER
<PAGE>
TABLE OF CONTENTS
Letter to Shareholders 2
Special Section of the Annual Report 7
AARP Fund Reports 11
AARP High Quality Money Fund 12
AARP High Quality Tax Free Money Fund 13
AARP GNMA and U.S. Treasury Fund 14
AARP High Quality Bond Fund 16
AARP Insured Tax Free General Bond Fund 18
AARP Balanced Stock and Bond Fund 20
AARP Growth and Income Fund 22
AARP Global Growth Fund 24
AARP Capital Growth Fund 26
AARP Funds' Investment Portfolios 28
Financial Statements 74
Financial Highlights 81
Notes to Financial Statements 86
Report of Independent Accountants 92
Shareholder Meeting Results 93
Officers and Trustees 95
Service and Tax Information Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
AARP Investment Program
from Scudder
Dear Shareholders,
The period covered by this Annual Report -- October 1, 1995
through September 30, 1996 -- was a volatile time for investors. While the
stock market soared to new heights, there were significant dips along the
way. At the same time, bond investments struggled for much of 1996, as
long-term interest rates rose. The AARP Mutual Funds were shielded from
some of this volatility because of the conservative investment strategies
we use to reduce share price fluctuation. Beginning on page 12, you can
find performance information on the AARP Mutual Funds. We think you will
be pleased that despite some fluctuation, the AARP Mutual Funds provided
generally healthy returns.
During uncertain times such as that of the period covered by this
Report, some of you may be wondering if you are invested properly --
should you have less in stocks and more in bonds, more in stocks and less
in bonds, or less invested in long-term investments and more in money
market investments? If you are reassessing your portfolio, we encourage
you to read the Special Section to the Report this year beginning on page
7. It provides a basic guide to allocating your assets.
First, though, we would like to spend a few paragraphs looking
back on the past year in the financial markets and then review some
matters specific to the AARP Investment Program.
THE U.S. ECONOMY AND THE FINANCIAL MARKETS
The volatility in the markets since the beginning of the year
underscored the uncertainty about the direction of the U.S. economy.
Though we have enjoyed a period of low inflation and low interest rates,
intermittent signs of strengthening activity have raised fears of
increasing inflation. At the same time, disappointing earnings
announcements from time to time have caused the stock market to question
the longevity of the economic expansion. Simultaneous fears of economic
strengths and weaknesses have caused both markets to react dramatically.
2
<PAGE>
THE STOCK MARKET
The stock market, as measured by the Dow Jones Industrial Average
(the price-weighted average of 30 actively traded blue-chip stocks), has
been on an upward trend for more than a year, reaching new highs. This
strong stock market has not come easily, however. In fact, there have been
a record number of days in 1996 when the Dow has been up or down 50 points
from the previous day's close. If you look to the graph on page 4, you can
see how much the Dow has fluctuated. What is compelling about this graph
is that the Dow not only survived several setbacks, but sometimes recouped
most of its losses within a day or two. Back in March, for example, in
reaction to a strong employment report from the Federal Government
announcing a 509,000 increase in employed individuals, investors began
selling stocks at a furious pace fearing inflation. Consequently, the Dow
dropped 171 points in one day -- the third largest point decline in the
history of the Dow -- only to gain 110 points the next business day. From
the beginning of the period covered by this Report on October 1, 1995 to
its end on September 30, 1996, the Dow rose from 4761.26 to 5882.17,
posting a 23.5% gain.
THE BOND MARKET
Bond investors have experienced a disappointing year as fears of
inflation, fueled by strong economic growth, caused long-term interest
rates to rise. As you can see in the graph on page 4, long-term interest
rates, as measured by the 30-year Treasury bond, rose from 6.57% on
September 30, 1995 to 6.92% on September 30, 1996. If you look closely,
you will see that long-term rates were as low at 5.95% back in early
January and as high as 7.25% in July.
Unlike long-term rates, short-term interest rates are more
directly driven by actions of the Federal Reserve Board (the Fed). The Fed
lowered short-term interest rates back in January and, despite much
speculation of impending changes, has not made any moves since. Short-term
rates, in turn, have remained low over this period. Short-term rates (as
measured by the three-month Treasury bill) were 5.40% on September 30,
1995 and 5.01% on September 30, 1996.
WHAT THIS MEANS FOR INVESTORS
Stock investors should remember that while stock prices have
historically trended upward, markets do not move up in a straight line.
Volatility in the stock market, including periods when returns are
negative, cannot be predicted but are normal and should be expected. For
bonds, daily volatility remains high, but long-term interest rates have
remained within a small band (6.75% - 7.25%) over the past several months.
Yet, the direction of interest rates remains uncertain. It appears the Fed
believes that the economy is cooling down, rather than heating up. After
weeks of speculation that the Fed would take pre-emptive measures against
inflation, its officials decided not to raise the federal funds rate --
the rate which banks charge each other for overnight loans -- at their
meeting on September 24, 1996.
3
<PAGE>
LINE CHART TITLE: Stock Market
CHART PERIOD:
(PLOTTED WEEKLY FROM OCTOBER 1, 1995 TO SEPTEMBER 30, 1996)
CHART DATA:
10/1/95 4789
4769
4794
4795
4755
4870
4990
5049
5074
5157
5177
5098
12/31/95 5117
5181
5061
5185
5395
5542
5503
5630
5486
5470
5585
5637
3/31/96 5587
5682
5532
5535
5567
5518
5687
5762
5643
5697
5649
5705
6/30/96 5655
5588
5511
5427
5473
5681
5689
5723
5616
5660
5839
5888
9/30/96 5873
CAPTION TO PRECEDING CHART:
The stock market, as measured by the unmanaged Dow Jones Industrial Average,
gained 23.5% over the last year.
LINE CHART TITLE: Long-Term Interest Rates
CHART PERIOD:
(PLOTTED WEEKLY FROM OCTOBER 1, 1995 TO SEPTEMBER 30, 1996)
CHART DATA:
10/1/95 6.57 %
6.42
6.3
6.35
6.33
6.32
6.23
6.25
6.13
6.05
6.09
6.05
12/31/95 5.95
6.04
6.16
5.97
6.03
6.1
6.22
6.41
6.47
6.69
6.74
6.64
3/31/96 6.67
6.66
6.81
6.79
6.78
6.92
6.83
6.83
6.99
7.04
7.09
7.10
6/30/96 6.9
7.18
7.02
6.96
7.01
6.7
6.76
6.92
7.12
7.11
6.95
7.04
9/30/96 6.9
CAPTION TO PRECEDING CHART:
Long-term interest rates, as measured by the 30-year U.S. Treasury Bond, were
6.57% on October 1, 1995 and 6.92% at the end of September 1996.
Moving forward, we continue to believe there is long-term
opportunity in the stock and bond markets. New technology and global
competition are two reasons inflation should stay low. Technology also
provides exciting new products and new companies that generate equity
investment opportunities. All of this is good news for the financial
markets -- and for investors who are willing to stay committed for the
long-term.
A REMINDER FOR INVESTORS
CALLOUT: If you can accept that both the bond and stock markets will
have volatility, the inevitable declines in the markets should
not be cause for alarm.
While you may be tempted to get distracted by the day-to-day
changes in the financial markets, history tells us that long-term
investors are best served by putting the inevitable downturns of the
markets into proper perspective. If you can accept that both the bond and
stock markets will have volatility, inevitable downturns in the markets
should not be cause for alarm. In fact, these down periods often provide
buying opportunities for investors. It is also important to diversify your
assets in a mix of different investments such as stocks, bonds, and money
market investments. This sensible strategy often helps provide a degree of
protection from market volatility. Please refer to the Special Section for
more information on diversification.
THE AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Mutual Funds are distinct from many other mutual funds
that may seek higher returns, but do not focus on reducing share price
fluctuation. The AARP Mutual Funds seek to moderate the share price
volatility of your investment, while at the same time provide the
opportunity for competitive returns -- as they have over the period
covered by this Report. It is this commitment to conservative investing
that has continued to appeal to AARP members. As of September 30, 1996,
there were more than 650,000 investors participating in the Program and
4
<PAGE>
nearly $13 billion in assets under management. Of course, while the AARP
Mutual Funds are conservatively managed, it is important that you realize
that your principal is never insured or guaranteed, and the value of your
investment and your return will move up and down as market conditions
change.
The AARP Investment Program prides itself on the introduction of
new services and features that will help meet shareholders' changing
needs. We are pleased to note the following developments:
o INTRODUCTION OF THE AARP GLOBAL GROWTH FUND
We were pleased to offer our newest AARP Mutual Fund to
shareholders on February 1, 1996 -- the AARP Global Growth Fund. You can
read about this Fund in the current Prospectus and can find information
about it on page 24 of this Report.
o EASY-ACCESS LINE ENHANCEMENT
Since its initial introduction in 1990, we have continued to
improve the Easy-Access Line -- the toll-free automated service line -- as
the needs of our shareholders have changed. In response to the request of
shareholders, the latest enhancement allows you to get price, yield, and
total return information more easily. When you call our toll-free number
at 1-800-631-4636, you now have a choice. You can press the star (*) key
on your touch-tone phone to receive only prices, yields, total returns, or
AARP Fund descriptions (no sign-on required), or enter your Social
Security number and PIN to receive information on your specific account or
to make transactions.
o STATEMENT ENHANCEMENTS
o Investment Flow Summary. The Investment Flow Summary section
was added to your consolidated statement in March to make it
easier to see how the AARP Mutual Funds are performing for you.
It summarizes the flow of your transactions and market activity
for each of the AARP Mutual Funds in your portfolio. The section
adds up all additions to your accounts (new share purchases),
your withdrawals (shares sold), and indicates how market value
changes have impacted your account.
o Average Cost Information. In January, average cost information
was added to your statement. As you know, the IRS requires you to
report any gains from the sale or exchange of non-money market
mutual fund shares. To determine your gain (or loss), first you
need to know how much you paid for the shares you sold. To help
you better manage your AARP Mutual Funds investment, we now
provide you with an estimate of what you paid to obtain the
shares. This estimate now appears on each of your monthly
statements. Please refer to the January 1996 issue of Financial
Focus for more information and consult a tax advisor.
5
<PAGE>
NEW FUNDS CENTER IN NEW YORK
The newest Scudder Funds Center was opened in New York City in
March. When you visit us on the northwest corner of 51st Street and
Lexington Avenue, you can obtain information on the AARP Mutual Funds or
speak face-to-face with one of our AARP Mutual Fund Representatives. If
you need help in allocating your assets, have questions about planning for
retirement, or want to learn more about the AARP Mutual Funds, stop in and
see us. For directions or for information on other Funds Centers, please
call us at 1-800-253-2277.
We hope you find all the information in this Report helpful. If
you have any questions or require assistance, please call us toll-free at
1-800-253-2277. One of our knowledgeable AARP Mutual Fund Representatives
will be happy to assist you between the hours of 8:00 A.M. to 8:00 P.M.
Monday through Friday, eastern time.
Sincerely,
/s/Cuyler W. Findlay /s/Linda C. Coughlin
Cuyler W. Findlay Linda C. Coughlin
Chairman President
6
<PAGE>
ASSET ALLOCATION
TAILORING YOUR INVESTMENTS TO HELP REACH YOUR GOALS
As an investor, we encourage you to examine your asset mix annually to
ensure that the investments you have chosen still meet your needs. To assist
you, we have devoted this Special Section of the Annual Report to asset
allocation. We define asset allocation and offer some guidelines that can help
you choose the right mix of investments to meet your financial goals.
UNDERSTANDING ASSET ALLOCATION
CALL OUT: Because both the financial markets and your objectives change over
time, an annual reassessment of your current investment mix is
generally a sensible exercise.
Asset allocation is simply a plan that divides money among stocks, bonds,
and cash investments. Done properly, asset allocation offers the potential of
meeting investment objectives, and reducing risk to a portfolio through
diversification. This is because different kinds of investments do not always
react the same way to shifts in the economy or financial climate. By
diversifying, an investor is not relying on a single type of investment and may
be more able to ride out the ups and downs that are part of investing.
Generally speaking, just as it is wise to spread investments across a
variety of securities, it may also make sense to spread a portion of them across
a number of countries. Since the U.S. and foreign markets do not always move in
step with each other, a portfolio that includes global investments offers the
opportunity for the poor performance of one market to be offset by another
market that did better than expected.
Generally, you can allocate your investable assets among three major
investment categories:
MONEY MARKET INVESTMENTS, such as insured CDs, savings accounts, or money
market funds, which offer stability of principal and modest income;
INCOME-ORIENTED INVESTMENTS, such as bonds or bond mutual funds, which
offer higher regular income;
GROWTH-ORIENTED INVESTMENTS, such as stocks or stock mutual funds, which
generally tend to offer long-term growth of your money.
FACTORS THAT AFFECT YOUR ASSET ALLOCATION
Before planning an asset allocation or reexamining an allocation already
in place, it is important to keep the following points in mind:
o Your Financial Situation
Many of you need your investments to provide income to help meet current
living expenses like rent, food, or health care. In this case, you may have no
choice but to focus on investments such as money markets or bond investments,
which produce a steady stream of income. On the other hand, you may have other
7
<PAGE>
sources of income that provide sufficient income to meet day-to-day expenses. In
this case, you may choose to diversify your portfolio among stocks, bonds, and
cash equivalents.
o Your Objectives
CALL OUT: It is important to consider your financial situation, your investment
objectives, your time horizon, and your tolerance for risk when
allocating your assets.
Most investors share the same basic investment objectives -- safety of
principal, income, and growth of capital -- or some combination of the three.
Investors differ as to how to pursue these objectives, which ones to emphasize
at various times, and to what degree. Are you retired and looking to earn
income? Are you looking to create a nest egg to provide a college education for
your child or grandchild? Or, are you investing to enjoy a secure, comfortable
retirement at some undetermined time in your future? Your investment objective
will help determine the mix of investments that could be right for you.
o Your Investment Time Horizon
It is also important to determine a realistic time horizon over which your
money can work for you. Investors may confuse their investment time horizon with
their expected life span or with the number of years they have until retirement.
However, it is important to have a broad view of your investment time horizon.
For example, if you are eighty years old and investing for the college education
of your newborn grandchild, your investment time horizon is at least fifteen
years. If you're fifty and saving for retirement, your investment time horizon
could be your lifespan.
o Your Risk Tolerance
To determine your tolerance for risk, you must first understand what risk
means. Broadly defined, risk is the chance of loss. However, financial risk is
multifaceted. Investments can have currency, interest rate, inflation, credit,
liquidity and prepayment risk, to name a few. Complicating the analysis of risk
even further is that each investor has his or her own tolerance and attitude
toward risk. An investment considered "high risk" by one investor may be
considered "low risk" by another. Determining your particular tolerance for risk
is important. If you do not honestly assess how much risk you are willing to
accept, you may not be able to stick to a disciplined investment plan when
market conditions inevitably change.
CHOOSING THE APPROPRIATE ASSET ALLOCATION THAT'S BEST FOR YOU
Once you review the factors described above, you need to choose the right
mix of investments for your situation. To help illustrate, we have provided a
matrix of allocations on the following page that may assist you in deciding what
type of mix would work best for you. Of course, every investor's situation is
unique and will change. Keep in mind that these models are hypothetical and are
not intended as recommendations.
8
<PAGE>
- --------------------------------------------------------------------------------
CONSERVATIVE INVESTOR
PIE CHART INSERTED HERE:
60% U.S. Bonds
5% Non-U.S. Stocks
25% U.S. Stocks
10% Money Market Instruments
If you are an income-oriented investor who is uncomfortable with too much
risk and have an investment time horizon of at least three years, the
conservative model may be of interest to you. As you can see, a majority of
the portfolio is invested in bonds for income. Approximately one third of the
portfolio is invested in stocks for growth -- 5% in non-U.S. stocks for
further diversification. The remainder of the portfolio is invested in money
market instruments for liquidity. (If your investment time horizon is less
than three years and you are looking for stability of principal and easy
access to your assets, chances are you can't afford to expose your money to
short-term risk. Therefore, you may decide to change this allocation to at
least 50% money market investments, with the remainder of the portfolio in
bonds.)
- --------------------------------------------------------------------------------
MODERATE INVESTOR
PIE CHART INSERTED HERE:
35% U.S. Bonds
10% Non-U.S. Stocks
45% U.S. Stocks
10% Money Market Instruments
If you are looking for a combination of income and growth and have an
investment time horizon of at least three to five years, you may want to use
the moderate model as an example. Unlike the conservative model, a majority
of this portfolio would be allocated to stock for growth -- 10% of which
could be in non-U.S. stocks for further diversification. A little more than a
third of the portfolio could be invested in bonds for income. The remainder
of the portfolio could be invested in money market instruments for liquidity.
- --------------------------------------------------------------------------------
AGGRESSIVE INVESTOR
PIE CHART INSERTED HERE:
20% U.S. Bonds
15% Non-U.S. Stocks
60% U.S. Stocks
5% Money Market Instruments
If you are looking for long-term growth of capital, understand the risks that
accompany high growth investments, and have an investment time horizon of
5-10 years or more, the aggressive model may be of interest to you. As you
can see, 75% of the portfolio is invested in stocks because stocks have
provided the highest returns over the long term* -- 15% in non-U.S. stocks.
Approximately 20% of the portfolio could be invested in bonds. Only a small
portion of the portfolio is in money market investments.
*Past performance is not a guarantee of future results.
9
<PAGE>
CHANGING YOUR ASSET ALLOCATION -- REBALANCING YOUR PORTFOLIO
CALL OUT: Through regular monitoring of your portfolio's asset allocation,
you can ensure that your portfolio is in line with your investment
objectives.
We suggest that you review your asset allocation at least once a year to
see if your assets are invested in a way that continues to help satisfy your
objectives. If they are not, you may want to consider shifting your allocations
to meet your changing needs. Rebalancing your portfolio is a discipline that you
may want to incorporate into your long-term investment program. Rebalancing
simply means bringing your asset allocation back to its original target. For
example, suppose you allocated 60% of your portfolio to bonds, 30% to stocks and
10% to money markets. After a year of rising stock prices, the stocks now
represent 40% of your portfolio (without adding any new money). You may want to
readjust your portfolio by transferring a portion of your stock holdings to
bonds or by directing any dividends from stocks to add to your bond investments.
It is important to rebalance your portfolio to maintain a steady
allocation between stocks, bonds, and your money market investments. Your asset
allocation is determined by the risk you are willing to accept and the potential
rewards. If, for example, your stock portion were to rise above the original
level, your risk exposure increases. If the stock portion falls below its
target, your future earnings may be lower. Through regular monitoring of your
asset allocation, you can ensure that your portfolio is kept in line with your
investment objectives.
10
<PAGE>
AARP FUND REPORTS
The following pages contain a summary of each Fund in the AARP Investment
Program from Scudder. Each AARP Mutual Fund report contains the one-year
total return, five-year total return, and ten-year total return (or, in the
case of AARP Global Growth Fund, Life of Fund total return if the Fund is
less than 10 years old). Because a one-year total return could be high or low
depending on market conditions over a 12-month period, it is useful to have
the perspective of the five-year and ten-year total return figures. Within
some of the Fund descriptions, one-year total return is broken down into two
components: distribution of income and capital change. Distribution of income
is defined to include reinvested dividends. Capital change is defined as the
change in the price per share including any reinvested capital gains
distributions.
You will also note that all of the AARP Funds, except the AARP Money Funds,
have been compared to market indices. We are providing these comparisons to
comply with the Securities and Exchange Commission's (SEC) disclosure
requirements. Under these requirements, all mutual funds (except money funds)
are required to compare their performance over the past ten years (or Life of
Fund) to that of a broad-based securities market index. It is important to
note, however, that these indices may have limited relevance to the
performance of mutual funds. They do not reflect the deduction of any
servicing, investment management, or administration expenses.
Also, the AARP Mutual Funds are unique in the emphasis on seeking to reduce
share price fluctuation. This, in turn, can have significant impact on
performance. Therefore, when comparing an AARP Mutual Fund's performance with
that of a major market index, remember that any comparison may be of limited
value.
11
<PAGE>
AARP HIGH QUALITY MONEY FUND
FUND OVERVIEW
This Fund is designed to preserve your principal while you earn money market
returns. The AARP High Quality Money Fund has quality standards high enough to
have secured a AAAm rating from Standard & Poor's*, a leading national
independent rating firm. The Fund seeks to maintain a $1.00 share price,
although there may be circumstances under which this goal cannot be achieved. It
is important to note that unlike bank savings accounts, the Fund is not insured
or guaranteed by the U.S. Government and the yield of the Fund will fluctuate.
FOR WHOM THE
FUND IS DESIGNED
This Fund may be appropriate for investors who have short-term needs or who do
not want the risks associated with investing in stocks or bonds. These investors
include those seeking money market income to help meet regular day-to-day needs,
those who need immediate access to their assets through free checkwriting, those
who want to diversify their assets with an investment designed to provide a
degree of safety and stability, and those seeking a short-term investment prior
to making longer-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
Stephen L. Akers
Lead Portfolio Manager
K. Sue Cote
Debra A. Hanson
Robert T. Neff
Portfolio Managers
*The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
HOW THE FUND HAS PERFORMED
As with all money funds, the performance of the AARP High Quality Money
Fund mirrored what happened to short-term interest rates during the period
covered by this Report. Short-term interest rates, as measured by the
three-month U.S. Treasury Bill, declined from 5.40% on September 30, 1995 to
5.01% at the end of September 1996. This trend caused a gradual decline in the
Fund's 7-day net annualized yield from 4.97% on September 30, 1995 to 4.67% as
of September 30, 1996. The Fund's one-year total return as of September 30, 1996
was 4.62%, which was made up entirely of income. The five-year cumulative total
return was 20.13%; the five-year average annualized total return was 3.74%; the
10-year cumulative total return was 65.93%; and the 10-year average annualized
total return was 5.19%. Of course past performance is not a guarantee of future
results, and yield will fluctuate.
THE FUND'S INVESTMENT STRATEGY
As of September 30, 1996, the average maturity of the Fund was 46 days,
which is shorter than the average maturity of 55 days at the beginning of
October 1995. We allowed the average maturity of the Fund to decline by
investing in securities with maturities of one month or less. We took this step
due to the uncertain outlook for the economy and interest rates. By maintaining
a more neutral average maturity we were better positioned to take advantage of
the direction of interest rates, whether they rose or declined.
We are cautious in predicting the direction of short-term interest rates,
and therefore will not likely make significant changes in the portfolio during
the coming months. We believe this is the best way to offer shareholders both
competitive yields and stability.
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<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
FUND OVERVIEW
The AARP High Quality Tax Free Money Fund is designed to offer you stability of
principal, along with income free from federal taxes.^1 The quality of the Fund
is high enough to have secured a AAAm rating from Standard & Poor's (S&P).^2 The
AARP High Quality Tax Free Money Fund is designed to maintain a $1.00 share
price, although there may be circumstances under which this goal cannot be
achieved. It is important to note that the Fund is not insured or guaranteed by
the U.S. Government, and yield will fluctuate.
FOR WHOM THE
FUND IS DESIGNED
This Fund may be appropriate for investors seeking tax-free income or who do not
want the risks associated with stocks or bonds. These investors include those
seeking money market income to meet regular day-to-day expenses, those needing
immediate access to their assets through free checkwriting, those creating a
diversified portfolio who want a portion of their assets in a conservative
investment designed to offer stability, and those seeking a short-term
investment prior to making longer-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
K. Sue Cote
Lead Portfolio Manager
Donald C. Carleton
Portfolio Manager
^1 It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Capital gains may be
subject to taxes as well.
^2 The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
HOW THE FUND HAS PERFORMED
Over the past year, the yield on the AARP High Quality Tax Free Money Fund
declined as short-term interest rates declined. The Fund's 7-day net annualized
yield declined from 3.37% on September 30, 1995 to 3.01% on September 30, 1996.
This is a taxable equivalent yield of 4.98% for shareholders in the 39.6% tax
bracket. The Fund's one-year total return was 2.80%, which was made up entirely
of income. The five-year cumulative total return was 12.31%; the five-year
average annualized total return was 2.35%, the ten-year cumulative total return
was 44.62%; and the ten-year average annualized total return was 3.76%.
Please note that the ten-year figures include the performance of the AARP
Insured Tax Free Short Term Fund, which changed its name and objective to the
AARP High Quality Tax Free Money Fund on August 1, 1991. Of course, past
performance is not a guarantee of future results, and yield will fluctuate.
THE FUND'S INVESTMENT STRATEGY
Due to the uncertain outlook for the economy and interest rates, we
shortened the average maturity of the Fund from 55 days on September 30, 1995,
to 49 days as of September 30, 1996. We decreased our holdings of securities
with maturities of six to 12 months and increased our investment in securities
with maturities of less than six months. By maintaining a more neutral average
maturity we were better positioned to take advantage of the direction of
interest rates, whether they rose or declined.
As always, all securities we bought were rated within the two highest
quality ratings of at least one of the three leading national independent rating
firms: Fitch Investors Service Inc., Moody's Investors Service Inc., or Standard
& Poor's. For those funds rated by S&P, there are particular guidelines with
which any tax-free money fund must comply in order to maintain its AAAm rating.
In addition, within the universe of securities that fit the S&P criteria,
Scudder credit analysts approve only a small percentage of that universe.
Therefore, the number of securities that we have to choose from is much smaller
and in most cases of better quality than other tax-free money funds.
We expect the short-term volatility of interest rates to continue over the
near term and therefore will not be extending the average maturity of the Fund.
We believe this strategy should continue to offer shareholders competitive
tax-free income and stability.
13
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
FUND OVERVIEW
The AARP GNMA and U.S. Treasury Fund seeks to produce monthly income from a
conservatively managed high-quality portfolio. Although your principal is not
guaranteed as it is with an insured fixed-rate Certificate of Deposit (CD) or
savings account, the Fund is managed to help reduce share price fluctuation.
While the securities in the Fund are guaranteed as to the timely payment of
principal and interest, the guarantee is not related to the Fund's yield or
share price, both of which will fluctuate daily.
Total Return
CUMULATIVE
FUND INDEX^+
---- -------
1 yr. 4.79% 5.88%
5 yr. 33.51% 41.70%
10 yr. 102.33% 136.10%
AVERAGE ANNUAL
FUND INDEX^+
---- -------
1 yr. 4.79% 5.88%
5 yr. 5.95% 7.21%
10 yr. 7.30% 8.96%
HOW THE FUND HAS PERFORMED
As stated in the Letter to Shareholders, 1996 has been a disappointing
time for bond investors. Shareholders in the AARP GNMA and U.S. Treasury Fund
were shielded from some of this volatility because of the Fund's unique strategy
to keep 20% to 50% of its assets in short-term securities. It is this strategy,
however, that often causes the Fund to lag the unmanaged Lehman Brothers
Mortgage GNMA Index. When you look to the chart below, you will see that the
AARP GNMA and U.S. Treasury Fund's one-year total return of 4.79% (representing
6.63% in distributions of income and -1.84% in capital change) underperformed
the Index total return of 5.88%. Please note that the Index return does not
reflect investment in cash or the deduction of any servicing, investment
management, or administrative expenses as a mutual fund does.
While 12-month returns for the Fund will vary from year to year, by
maintaining a long-term focus and staying invested through good and bad times,
your investment has the opportunity to provide high monthly income and overcome
down periods in the market. As the graph to right shows, if you invested $10,000
in the Fund on September 30, 1986, your investment would have grown to $20,233,
assuming all distributions were reinvested. If you took your distributions in
cash, the value of your investment would have been $9,325, and you would have
received $7,442 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- ---------------------
1986 $ 10000 $ 10000
1987 10154 10194
1988 11277 11728
1989 12199 13055
1990 13280 14288
1991 15155 16662
1992 16851 18556
1993 17843 19789
1994 17503 19548
1995 19308 22299
1996 20233 23610
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return%)
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- ---------------------
1992 11.19 % 11.43 %
1993 5.89 % 6.59 %
1994 -1.90 % -1.22 %
1995 10.31 % 14.07 %
1996 4.79 % 5.88 %
- --------------------------------------------------------------------------------
^+ The unmanaged Lehman Brothers Mortgage GNMA Index is a market value weighted
measure of all fixed-rate securities backed by mortgage pools of the GNMA.
Index returns are calculated monthly and assume reinvestment of dividends.
Unlike Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
14
<PAGE>
The Fund's Investment Strategy
In an environment of rising long-term interest rates, such as that of most
of 1996, we favored GNMA securities with coupons of 7.5% or lower. We found
these mortgages attractive because the prepayment risk associated with such
securities is low. Moreover, the income from these mortgages is still above the
income from many other high-quality fixed-income investments such as U.S.
Treasurys. We also continued to maintain our position in older, higher-coupon
mortgages. Most of these mortgages are more than five years old and therefore
have had plenty of opportunities to be refinanced but have not been. We feel
that these securities offer high current income to shareholders while exposing
the portfolio to little risk of prepayment.
CALLOUT: It has been an ongoing strategy to keep 20% to 50% of the Fund's assets
in short-term U.S. Treasury obligations and cash equivalents to help
moderate share price volatility.
To help dampen share price volatility during a period of rising interest
rates, we increased the portion of the portfolio invested in short-term U.S.
Treasury obligations. Shareholders in this Fund should feel comfortable that the
current blend of GNMA securities has the potential to provide a competitive
stream of income, while the short-term Treasury securities and cash equivalents
will continue to dampen share price volatility.
PIE CHART TITLE: ASSET ALLOCATION
CHART PERIOD: As of September 30, 1996
CHART DATA:
Government National Mortgage
Association 66%
U.S. Treasury Obligations 33%
Cash Equivalents 1%
----
100%
====
For Whom the
Fund is Designed
The Fund is designed for conservative investors who want relatively high current
income and a degree of protection from day-to-day share price volatility.
Investors should be seeking to invest for the longer term (at least one to three
years) and be comfortable with fluctuation in the value of their principal and
yield.
Portfolio
Management Team
David H. Glen
Lead Portfolio Manager
Mark S. Boyadjian
Portfolio Manager
15
<PAGE>
AARP HIGH QUALITY BOND FUND
FUND OVERVIEW
The AARP High Quality Bond Fund offers you monthly income and the opportunity
for higher returns than you can expect from the AARP GNMA and U.S. Treasury
Fund. In pursuing higher returns, fluctuation in the value of your principal may
also be greater. The Fund has quality standards that are among the highest of
any general bond fund currently available, with at least 65% of the portfolio
invested in AAA-rated and AA-rated issues, and the other 35% in nothing less
than A-rated bonds.
Total Return
CUMULATIVE
FUND INDEX^+
---- -------
1 yr. 4.59% 4.90%
5 yr. 39.31% 43.32%
10 yr. 109.70% 126.02%
AVERAGE ANNUAL
FUND INDEX^+
---- -------
1 yr. 4.59% 4.90%
5 yr. 6.86% 7.46%
10 yr. 7.69% 8.49%
HOW THE FUND HAS PERFORMED
The past year was a disappointing year for bond investors, as long-term
interest rates rose. When you look to the chart below, the AARP High Quality
Bond Fund's one-year total return of 4.59% slightly underperformed the unmanaged
Lehman Brothers Aggregate Bond Index return of 4.90%. It is important to note
that the quality of the securities in the Fund is higher than the index and the
index return does not reflect investment in cash or the deduction of any
servicing, investment management, or administrative expenses, as a mutual fund
does.
While 12-month returns for the Fund will vary from year to year, by
maintaining a long-term focus and staying invested through good and bad times,
your investment has the opportunity to earn monthly income over time. As the
graph to the right shows, if you invested $10,000 in the Fund on September 30,
1986, your investment would have grown to $20,970, assuming all distributions
were reinvested. If you took your dividends in cash, your investment would have
been $9,962, and you would have received $7,285 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
------------------ ----------------------
1986 $ 10000 $ 10000
1987 9991 10027
1988 11228 11360
1989 12394 12640
1990 13040 13596
1991 15053 15770
1992 16793 17749
1993 18787 19520
1994 17746 18890
1995 20049 21547
1996 20970 22602
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return%)
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
----------------- ----------------------
1992 11.56 % 12.55 %
1993 11.88 % 9.98 %
1994 -5.55 % -3.22 %
1995 12.98 % 14.06 %
1996 4.59 % 4.90 %
- --------------------------------------------------------------------------------
^+ The unmanaged Lehman Brothers Aggregate Bond Index is a market value
weighted measure of treasury issues, agency issues, corporate bond issues and
mortgage securities. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not reflect
any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
16
<PAGE>
THE FUND'S INVESTMENT STRATEGY
During the past 12-month period, we increased our investment in corporate
securities, which included issues from some of the country's leading consumer
staples, durable goods manufacturing, financial, and transportation companies.
We also continued to add income to the portfolio from attractively priced
mortgage-backed securities. We maintained a large portion of the Fund's assets
in mortgage-backed securities (approximately 20% as of September 30, 1996)
because of their high quality, income potential, and attractive prices.
CALLOUT: The Fund attempts to reduce share price fluctuation by investing in
a variety of different sectors.
The Fund continued to maintain its objective of investing in high-quality
securities. As of September 30, 1996, 63% of the portfolio was invested in
government, AAA-rated or AA-rated securities; 18% of the Fund was invested in
A-rated bonds; and 19% was invested in AAA-rated cash equivalents.
We believe that the AARP High Quality Bond Fund's current portfolio is
well positioned for the current economic environment and we will always be
looking for new opportunities to add returns to the portfolio. We believe the
Fund should continue to provide shareholders with high income and less share
price fluctuation than a long-term bond. Our emphasis remains on delivering both
competitive yields with potential price appreciation, as well as maintaining
high credit quality and diversification across various types of issues.
PIE CHART TITLE: ASSET ALLOCATION
CHART PERIOD: As of September 30, 1996
CHART DATA:
U.S. Treasury Obligations 26%
Corporate Bonds 24%
Cash Equivalents 21%
U.S. Government Agency Pass-Thrus 19%
Foreign Bonds--U.S. $ Denominated 5%
Asset Backed 5%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors who want competitive returns from a portfolio
of high credit quality. Investors should be seeking to invest for the longer
term (at least one to three years) and be comfortable with fluctuation in the
value of their principal and yield.
PORTFOLIO
MANAGEMENT TEAM
David H. Glen
Lead Portfolio Manager
William M. Hutchinson
Stephen A. Wohler
Portfolio Managers
17
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
FUND OVERVIEW
The AARP Insured Tax Free General Bond Fund seeks to pay high monthly income
that is free from federal taxes. The Fund invests in a portfolio consisting
primarily of high-grade municipal securities that are insured against default.
This insurance does not apply to the value of your shares or the yield of the
Fund, both of which will fluctuate daily.*The Fund also aims to keep the value
of its shares more stable than that of a long-term municipal bond.
Total Return
CUMULATIVE
FUND INDEX^+
---- -------
1 yr. 5.88% 6.04%
5 yr. 40.20% 43.23%
10 yr. 105.67% 113.71%
AVERAGE ANNUAL
FUND INDEX^+
---- -------
1 yr. 5.88% 6.04%
5 yr. 6.99% 7.44%
10 yr. 7.48% 7.88%
*It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Gains on sales of Fund
shares and distributions of capital gains generally will be subject to federal,
state and local taxes.
HOW THE FUND HAS PERFORMED
As stated in the Letter to Shareholders, the past year has been a
disappointing time for bond investors, including those in the municipal market.
Long-term interest rates rose and as a result, the value of the securities held
by the Fund decreased. When we look at the total return, as illustrated in the
chart below, the AARP Insured Tax Free General Bond Fund's one-year total return
of 5.88% underperformed the unmanaged Lehman Brothers Municipal Bond Index's
return of 6.04%. However, it outperformed the unmanaged Lehman Brothers
Municipal Bond 10 Year Index return of 4.88%. Over the past year, the portfolio
managers have tried to reduce the Fund's volatility by shortening the average
maturity. As of September 30, 1996, the Fund's average maturity was 11 years.
This helps explain the Fund's underperformance of the Lehman Brothers Municipal
Bond Index, which has an average maturity of 14 years.
It is important to note that 12-month returns for the Fund will vary from
year to year. However, by maintaining a long-term focus and staying invested
through good and bad times, your investment has the opportunity to earn income
free from federal taxes and grow over time and overcome down periods in the
market. As the graph to the right shows, if you invested $10,000 in the Fund on
September 30, 1986, your investment would have grown to $20,567, assuming all
distributions were reinvested. If you took your dividends in cash, your
investment would have grown to $10,725, and you would have received $6,665 in
distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP Insured Tax Free General Lehman Brothers
Bond Fund Municipal Bond Index^+
------------------------------ ----------------------
1986 $ 10000 $ 10000
1987 9706 10053
1988 11102 11357
1989 12286 12343
1990 12886 13182
1991 14670 14921
1992 16140 16480
1993 18450 18580
1994 17625 18127
1995 19424 20154
1996 20567 21371
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return%)
CHART DATA:
AARP Insured Tax Free General Lehman Brothers
Bond Fund Municipal Bond Index^+
----------------------------- ----------------------
1992 10.01 % 10.45 %
1993 14.31 % 12.74 %
1994 -4.88 % -2.44 %
1995 10.21 % 11.18 %
1996 5.88 % 6.04 %
- --------------------------------------------------------------------------------
^+ The unmanaged Lehman Brothers Municipal Bond Index is a market value weighted
measure of municipal bonds with a maturity of at least two years. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
18
<PAGE>
THE FUND'S INVESTMENT STRATEGY
Purchasing bonds with call protection remained a fundamental part of
the Fund's investment strategy over the past year. Generally, a bond is called
in by its issuer so that it can be refinanced at a lower prevailing rate. Our
call-protection strategy provided a more reliable income stream than would have
existed if the Fund held a significant amount of bonds that could be called in
before their stated maturity. As of September 30, 1996, 84% of the portfolio was
invested in non-callable bonds.
CALLOUT: Investing in insured securities of varying maturities helps dampen the
share price volatility of this Fund.
We also continued to favor intermediate-term bonds, with 41% of the Fund
invested in bonds maturing in 10 to 15 years. This strategy added to the Fund's
performance because bonds with maturities in the 15-year range that were
non-callable performed better than longer-term bonds. In addition, 22% of the
portfolio was invested in the hospital sector, 16% in municipal bonds of large
urban cities, and 16% in electric utilities.
As of September 30, 1996, 90% of the portfolio was invested in insured
securities (or securities escrowed in U.S. Treasurys that provide the backing of
the U.S. Government). Remember that this insurance protects the bond from
default but does not apply to the value of your shares or to the yield of the
Fund, both of which will fluctuate daily.
We believe that the Fund's strategy outlined above reflects our commitment
to providing high tax-free income while seeking to keep its share price more
stable than that of a long-term municipal bond.
PIE CHART TITLE: ASSET ALLOCATION -- MUNICIPAL BOND EFFECTIVE MATURITIES
CHART PERIOD: As of September 30, 1996
CHART DATA:
Less than 1 year 8%
1 to less than 5 years 10%
5 to less than 10 years 21%
10 to less than 15 years 41%
Greater than 15 years 20%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors in higher tax brackets who want income that
is free from federal income taxes. Investors should be seeking to invest for the
longer term (at least one to three years) and be comfortable with fluctuation in
the value of their principal and yield.
PORTFOLIO
MANAGEMENT TEAM
Donald C. Carleton
Lead Portfolio Manager
Philip G. Condon
Portfolio Manager
19
<PAGE>
AARP BALANCED STOCK AND BOND FUND
FUND OVERVIEW
Through a combination of stocks, bonds, and cash reserves, the AARP Balanced
Stock and Bond Fund seeks to offer you long-term growth of capital and quarterly
income. The Fund attempts to keep the value of its shares more stable than other
potentially higher returning, higher risk balanced mutual funds.
Total Return
CUMULATIVE
BLENDED
FUND INDEX^+
---- -------
1 yr. 13.08% 14.50%
Life of
Fund* 31.04% 36.84%
AVERAGE ANNUAL
BLENDED
FUND INDEX^+
---- -------
1 yr. 13.08% 14.50%
Life of
Fund* 10.69% 12.49%
HOW THE FUND HAS PERFORMED
The AARP Balanced Stock and Bond Fund performed well. The Fund's solid
one-year total return of 13.08% underperformed the blended index's total return
of 14.50%, primarily because of the Fund's conservative investment strategy to
reduce share price volatility. The blended index is made up of the unmanaged
Standard & Poor's 500 Index 50%, the unmanaged Lehman Brothers Aggregate Bond
Index 40%, and the 3-month Treasury Bill Index 10%. Please note that the Fund
was introduced on February 1, 1994. Therefore, five-year and ten-year data are
not available.
We would also like to note that by maintaining a long-term focus and
staying invested through good and bad times, your investment has the opportunity
to grow significantly over time. As the graph to the right shows, if you
invested $10,000 in the Fund when it was introduced in February of 1994, your
investment would have grown to $13,104 by September 30, 1996, assuming all
distributions were reinvested. If you took your distributions as cash, your
investment would have grown to $11,753, and you would have received $1,166 in
distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Semiannual Periods from February 1, 1994
to September 30, 1996
CHART DATA:
<TABLE>
<CAPTION>
Standard & Poor's Lehman
AARP Balanced Stock 500 Stock Price Brothers Blended
and Bond Fund Index Aggregate Bond Index Index^+
------------------- ----------------- -------------------- ------------
<S> <C> <C> <C> <C>
2/1/94* $ 10000 $ 10000 $ 10000 $ 10000
3/31/94 9642 9304 9584 9452
9/30/94 10050 9800 9543 9742
3/31/95 10467 10753 10062 10498
9/30/95 11738 12716 10885 11951
3/31/96 12669 14205 11147 12930
9/30/96 13272 15302 11418 13684
</TABLE>
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return%)
CHART DATA:
AARP Balanced Stock Blended
and Bond Fund Index^+
------------------- -------
2/1/94*- -0.78% -3.83%
9/30/94
1995 16.80% 20.43%
1996 13.08% 14.50%
THE FUND'S INVESTMENT STRATEGY
In general, the stock portion of the Fund (representing 57% of the
- --------------------------------------------------------------------------------
^+ The performance of the blended benchmark is a weighting comprised of 50%
Standard & Poor's 500 Stock Price Index (S&P), 40% Lehman Brothers Aggregate
Bond Index (LBAB), and the 3-Month Treasury Bill Index (10%). The 50/40/10
measure is meant to reflect the anticipated long range asset mix of the Fund,
which may change over time. The unmanaged Standard & Poor's 500 Stock Price
Index is a market value-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange, American Stock Exchange, and
Over-the-Counter market. The unmanaged Lehman Brothers Aggregate Bond Index
is a market value-weighted measure of treasury issues, agency issues,
corporate bond issues and mortgage securities. Index returns are calculated
monthly and assume reinvestment of dividends. Unlike Fund returns, Index
returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1994.
20
<PAGE>
portfolio as of September, 30 1996) uses an approach similar to the AARP Growth
and Income Fund. The Fund will usually invest in stocks that are believed to
have favorable long-term capital appreciation outlooks and have above-average
dividend yields. Since the stock portion of the Fund is managed by the same team
and with the same strategy as the AARP Growth and Income Fund, refer to the AARP
Growth and Income Fund Report on page 60 for details on specific stock
selection. (The Fund may invest up to 70% of its assets in stocks.)
CALLOUT: The Fund attempts to reduce share price fluctuation by following a
strict discipline for stocks, by investing in bonds with varying
maturities, and by maintaining a significant cash position.
The portion of the Fund invested in bonds (representing 40% of the
portfolio as of September 30, 1996) can include corporate issues, U.S.
Government securities, mortgage-backed obligations, and other fixed-income
securities. At least 75% of these securities will be securities rated within the
three highest quality ratings (AAA, AA, and A) by Moody's or S&P, independent
rating organizations. (At all times, at least 30% of the Fund's assets will be a
combination of bonds and cash equivalents.) Over this period, we favored
corporate debt issues whose values stand to benefit from signs of economic
strength and the accompanying perception of lower credit risk. We also focused
on mortgage-backed securities, which had experienced price weakness and
presented relative value. Corporates and mortgage-backed securities represented
12% and 13% of the portfolio as of September 30, 1996. The remaining 3% of the
Fund's assets were invested in cash equivalents.
We continue to believe that stocks will outperform bonds and cash over the
longer term and therefore a majority of the portfolio will continue to be
invested in stocks. While we are comfortable with our current asset allocation
of 57% stocks, 40% bonds, and 3% cash equivalents, this allocation may be
gradually changed depending upon our expectations for the financial markets.
PIE CHART TITLE: ASSET ALLOCATION
CHART PERIOD: As of September 30, 1996
CHART DATA:
Stocks 57%
Bonds 40%
Cash Equivalents 3%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
This Fund is designed for investors who are seeking long-term growth of their
assets, but who want less risk than an investment solely in stocks. Investors
should be able to invest for the longer term (three or more years) and be
comfortable with the value of their principal fluctuating up and down.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
William M. Hutchinson
Benjamin W. Thorndike
Portfolio Managers
21
<PAGE>
AARP GROWTH AND INCOME FUND
FUND OVERVIEW
The AARP Growth and Income Fund is a conservatively managed stock fund that
provides the potential for long-term growth and quarterly income, while still
seeking to moderate share price volatility. It invests in stocks with
above-average dividend yields that may offer the opportunity for long-term
growth of capital.
Total Return
CUMULATIVE
FUND INDEX^+
---- -------
1 yr. 20.20% 20.34%
5 yr. 108.24% 103.15%
10 yr. 262.51% 304.29%
AVERAGE ANNUAL
FUND INDEX^+
---- -------
1 yr. 20.20% 20.34%
5 yr. 15.80% 15.21%
10 yr. 13.74% 14.98%
HOW THE FUND HAS PERFORMED
The AARP Growth and Income Fund performed well over the past year. Its
one-year total return of 20.20% (representing 3.22% in distributions of income
and 16.98% in capital change) slightly underperformed the unmanaged Standard &
Poor's Stock Price Index of 20.34%. Due to the Fund's conservative investment
strategy, the Fund will often lag the index when the stock market rallies
strongly, as it did over the past 12 months, and outperform when the market
declines.
It is important to note that 12-month returns for the Fund will vary from
year to year. However, by maintaining a long-term focus of staying invested
through good and bad times, your investment has the opportunity to grow
significantly over time. As the graph to the right shows, if you invested
$10,000 in the Fund on September 30, 1986, your investment would have grown to
$36,251 by September 30, 1996, assuming reinvestment of any distributions. If
you took your distributions as cash, your investment would have grown to
$21,044, and you would have received $7,145 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP Growth and Standard & Poor's
Income Fund 500 Stock Price Index^+
--------------- -----------------------
1986 $ 10000 $ 10000
1987 13089 14342
1988 11677 12569
1989 15241 16717
1990 13687 15173
1991 17408 19901
1992 19425 22100
1993 23189 24974
1994 25041 25894
1995 30158 33596
1996 36251 40429
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return%)
CHART DATA:
AARP Growth and Standard & Poor's
Income Fund 500 Stock Price Index^+
--------------- -----------------------
1992 11.59 % 11.04 %
1993 19.38 % 12.97 %
1994 7.99 % 3.68 %
1995 20.43 % 29.75 %
1996 20.20 % 20.34 %
THE FUND'S INVESTMENT STRATEGY
Stocks had a much higher degree of volatility over the period covered by
this Report than we have seen in the recent past, but yet closer to historical
norm. Because of the volatile nature of the stock market, we did not make great
strategic shifts in the portfolio over this period. Instead, we continued to
employ some of the strategies we initiated late last year. We favored cyclical
stocks that we believe were historically undervalued. New or increased portfolio
- --------------------------------------------------------------------------------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a market value
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
22
<PAGE>
positions in cyclicals include Ford Motor Company, PACCAR (a heavy duty truck
manufacturer), Weyerhaeuser and Westvaco (two paper/forest product stocks), and
Phelps Dodge and Allegheny Teledyne (two metals companies). We also continued to
look for opportunities in consumer cyclicals, namely in retail-oriented stocks.
Valuations in this group have looked appealing for quite some time given the
sector's less-than-favorable performance in 1994 and 1995. We added to existing
holdings of May Department Stores and Sears. We also established a position in
KMart, via its new convertible preferred issue. This offered us an attractive
way to participate in the anticipated turnaround of this company.
CALLOUT: The Fund focuses on stocks with above-average dividends and sound
fundamentals to help reduce share price volatility.
We were able to buy these cyclical stocks by taking profits from many of
the non-economically sensitive consumer stocks that have done well for the Fund.
We also took profits in several strong-performing consumer staples such as Avon,
Colgate, and Clorox, and redirected proceeds into more attractively valued
stocks in the same sector such as Duracell. Duracell's stock had fallen as
investors questioned the sustainability of the company's historical growth rate.
The stock subsequently moved up sharply after the company announced in
mid-September that it plans to merge with Gillette. (Please note that portfolio
changes should not be considered recommendations for action by individual
investors.)
Over the near term, we do not envision any radical shifts in the Fund's
composition. In general, our focus on high dividend-paying stocks tends to lead
us in the direction of value investing. This has and should continue to benefit
the Fund over time.
PIE CHART TITLE: ASSET ALLOCATION -- SECTORS OF EQUITY HOLDINGS
CHART PERIOD: As of September 30, 1996
CHART DATA:
Financial 20%
Manufacturing 19%
Health 11%
Consumer Staples 9%
Durables 8%
Energy 8%
Communications 6%
Consumer Discretionary 6%
Utilities 5%
Other 8%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is suitable for investors who are seeking long-term growth of their
assets and the opportunity to keep ahead of inflation. Investors should be able
to invest for at least three years or more and be comfortable with fluctuation
in the value of their principal that is associated with investing in stocks.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
Lori J. Ensinger
Kathleen T. Millard
Benjamin W. Thorndike
Portfolio Managers
23
<PAGE>
AARP GLOBAL GROWTH FUND
FUND OVERVIEW
The AARP Global Growth Fund seeks to offer long-term capital growth in a
globally diversified portfolio, and to keep the value of its shares more stable
than other global stock funds.
Total Return
FUND INDEX^+
---- -------
Life of
Fund* 3.27% 6.60%
HOW THE FUND HAS PERFORMED
CALLOUT: The Fund seeks to offer less share price volatility than many global
growth funds by maintaining core holdings that are from
well-established companies in mature countries.
The AARP Global Growth Fund was introduced to shareholders on February 1,
1996. For the life of the Fund -- February 1, 1996 through September 30, 1996 --
the total return of 3.27% (not annualized) underperformed the MSCI World Index
of 6.60% for the same time period. This underperformance was due to the high
cash flows into this new Fund, occurring simultaneously with rapidly rising
markets, especially in the U.S. The short-term impact of these conditions was
reinforced by the Fund's underweighting in the U.S. relative to the Index and to
the Fund's peers. This relative underweighting reflects the view of the
portfolio management team that more long-term investment values lie in other
markets, which have not appreciated as much. We expect this short-term
performance distortion to wash out over time.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Monthly Periods from February 1, 1996*
to September 30, 1996
CHART DATA:
AARP Global MSCI World
Growth Fund Index^+
----------- -------
2/1/96^* $ 10000 $ 10000
10000 10059
3/31/96 10180 10224
10320 10462
5/31/96 10407 10469
10280 10520
7/31/96 9980 10146
10213 10261
9/30/96 10327 10660
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return%)
CHART DATA:
AARP Global MSCI World
Growth Fund Index^+
----------- ----------
2/1/96^*-
9/30/96 3.27 % 6.6 %
THE FUND'S INVESTMENT STRATEGY
Since the Fund was introduced in February, we have adhered to a "theme
approach" of investing. What this means is that we develop global themes and
search for the appropriate stock values to represent them, rather than weight
the portfolio according to countries or economic sectors. For example, we
targeted companies with new technologies and secure large market shares.
Portfolio examples include Reuters, and First Data. Another theme focuses on the
world's demographics. Due to an aging population, we believe pharmaceutical
- --------------------------------------------------------------------------------
^+ The MSCI (Morgan Stanley Capital International) World Index is an unmanaged
capitalization-weighted measure of global stock markets, including the U.S.,
Canada, Europe, Australia, and the Far East. Index returns assume dividends
reinvested net of withholding tax and, unlike Fund returns, do not reflect
any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
* The Fund commenced operations on February 1, 1996.
24
<PAGE>
products and health providers will continue to thrive. We therefore favor
companies such as Astra, Sandoz, and Ciba-Geigy. A third theme focuses on German
and French companies that are restructuring and joining the global capital
markets. We believe stocks such as Daimler-Benz (an automobile and truck
manufacturer) and Hoechst (a chemical producer) should benefit from this trend.
(Please note that portfolio changes should not be considered recommendations for
action by individual investors.)
The portfolio is currently broadly invested among more than 20 countries
and over 110 different companies. The largest allocations by country are the
United States, Germany, and the United Kingdom. We expect this diversified
portfolio to benefit from many global trends underway: the global economy and
capital markets in aggregate are functioning well; growth is being achieved
without inflation; and new technologies are emerging and old industries are
restructuring.
PIE CHART TITLE: ASSET ALLOCATION -- COUNTRIES OF EQUITY HOLDINGS
CHART PERIOD: As of September 30, 1996
CHART DATA:
United States 23%
Germany 18%
United Kingdom 11%
Switzerland 9%
Japan 9%
Sweden 8%
Canada 4%
France 4%
Australia 3%
Other 11%
----
100%
====
PIE CHART TITLE: ASSET ALLOCATION -- SECTORS OF EQUITY HOLDINGS
CHART PERIOD: As of September 30, 1996
CHART DATA:
Manufacturing 26%
Financial 19%
Metals and Minerals 10%
Consumer Staples 8%
Technology 6%
Energy 5%
Construction 5%
Service Industries 5%
Durables 4%
Other 12%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The new Fund, which commenced operations on February 1, 1996, is suitable for
investors who want to add worldwide stock opportunities to their portfolio.
Investors should invest for the longer term (at least 5 years or more) and be
comfortable with the value of their principal fluctuating up and down. Because
the Fund invests globally, it will be affected by up and down movements in U.S.
and international stock markets. The Fund will also be subject to international
investment risks such as currency exchange risk.
PORTFOLIO
MANAGEMENT TEAM
William E. Holzer
Lead Portfolio Manager
Nicholas Bratt
Alice Ho
Portfolio Managers
25
<PAGE>
AARP Capital Growth Fund
FUND OVERVIEW
The AARP Capital Growth Fund is designed to help investors take advantage of the
high growth potential of stocks while attempting to keep the value of its shares
more stable than other potentially higher returning, higher risk capital growth
mutual funds.
Total Return
CUMULATIVE
FUND INDEX^+
---- -------
1 yr. 15.97% 20.34%
5 yr. 76.63% 103.15%
10 yr. 242.55% 304.29%
AVERAGE ANNUAL
FUND INDEX^+
---- -------
1 yr. 15.97% 20.34%
5 yr. 12.05% 15.21%
10 yr. 13.10% 14.98%
HOW THE FUND HAS PERFORMED
The AARP Capital Growth Fund performed well over the past year. It
provided a one-year total return of 15.97%, (representing 1.15% in distributions
of income and 14.82% in capital change), although it underperformed the
unmanaged Standard & Poor's 500 Stock Price Index of 20.34%. The Fund's
valuation disciplines and focused diversification kept it from participating
more fully in the strong rise of the broad market index.
It is important to note that 12-month returns for the Fund will vary
from year to year. However, by maintaining a long-term focus and staying
invested through good and bad times, your investment has the opportunity to grow
significantly over time. As the graph to the right shows, if you invested
$10,000 in the Fund on September 30, 1986, your investment would have grown to
$34,255 by September 30, 1996, assuming you reinvested any distributions. If you
took your distributions as cash, your investment would have grown to $20,573,
and you would have received $6,865 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended September 30
CHART DATA:
AARP Capital Standard & Poor's
Growth Fund 500 Stock Price Index^+
----------- -----------------------
1986 $ 10000 $ 10000
1987 13697 14342
1988 12946 12569
1989 18593 16717
1990 13580 15173
1991 19393 19901
1992 20158 22100
1993 25102 24974
1994 23923 25894
1995 29538 33596
1996 34255 40429
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended September 30
(Total Return%)
CHART DATA:
AARP Capital Standard & Poor's
Growth Fund 500 Stock Price Index^+
----------- -----------------------
1992 3.94 % 11.04 %
1993 24.53 % 12.97 %
1994 -4.70 % 3.68 %
1995 23.47 % 29.75 %
1996 15.97 % 20.34 %
THE FUND'S INVESTMENT STRATEGY
We continued to emphasize our strategy of maintaining a quality
portfolio diversified across many sectors of the market. The top sectors include
technology, health care, and finance. We believe technology has been and will
continue to be a fruitful sector for above-average growth opportunities. Since
technology stocks are characterized by a high degree of share price volatility,
- --------------------------------------------------------------------------------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a market value
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
26
<PAGE>
we have focused our investments in quality companies such as Hewlett-Packard and
Intel -- market leaders in their particular market segment.
CALLOUT: Through a broadly diversified portfolio consisting primarily of
quality, medium- to large-sized companies with strong competitive
positions in their industries, the Fund seeks to offer less share
price volatility than many growth funds.
Over the past few months, we began to focus on aerospace stocks due to the
restructuring throughout the industry as a whole. We see strong growth potential
in companies such as Rockwell, Lockheed Martin, and Textron. We also continued
to favor the financial sector of the market. We believe that many financial
stocks were attractively priced with price earnings multiples equal to or less
than their earnings growth rates. We anticipate attractive earnings growth from
stocks such as Federal National Mortgage Assn., American Express, and Citicorp
- -- three of the Fund's top five holdings. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)
Given the uncertain outlook for economic growth and individual company
profits, we continue to emphasize quality companies such as Pfizer and
McDonalds, in addition to those mentioned above, whose profits in our opinion
are sustainable through varying market conditions.
PIE CHART TITLE: ASSET ALLOCATION -- Sectors of Equity Holdings
CHART PERIOD: As of September 30, 1996
CHART DATA:
Financial 17%
Technology 16%
Health 15%
Manufacturing 12%
Energy 11%
Consumer Staples 7%
Consumer Discretionary 7%
Durables 5%
Service Industries 4%
Other 6%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors seeking long-term growth of their principal.
Investors should be able to invest for the longer term (five years or more) and
be comfortable with the fluctuation of their principal that is associated with
investing in stocks.
PORTFOLIO
MANAGEMENT TEAM
William F. Gadsden
Lead Portfolio Manager
Bruce F. Beaty
Portfolio Manager
27
<PAGE>
I N V E S T M E N T P O R T F O L I O S,
F I N A N C I A L S T A T E M E N T S
A N D A D D I T I O N A L
I N F O R M A T I O N
28
<PAGE>
AARP HIGH QUALITY MONEY FUND
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal
Amount($) Value($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 9.7%
- --------------------------------------------------------------------------------------------------------------------
35,000,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/96 at 5.7%
to be repurchased at $35,005,542 on 10/1/96 collateralized by a $32,832,000
U.S. Treasury Note, 8.5%, 2/15/00 .............................................. 35,000,000
4,998,000 Repurchase Agreement with State Street Bank dated 9/30/96 at 5.3%
to be repurchased at $4,998,736 on 10/1/96 collateralized by a $5,065,000
U.S. Treasury Note, 6%, 8/31/97 ................................................ 4,998,000
-----------
TOTAL REPURCHASE AGREEMENTS (COST $39,998,000) ................................... 39,998,000
-----------
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 50.0%
- --------------------------------------------------------------------------------------------------------------------
HEALTH 3.4%
Pharmaceuticals
14,000,000 Eli Lilly & Co., 5.38%, 12/11/96 ................................................. 13,850,964
-----------
FINANCIAL 41.3%
Business Finance 3.6%
15,000,000 CIT Group Holdings Inc., 5.16%, 10/9/96 .......................................... 14,980,680
-----------
Other Financial Companies 37.7%
16,000,000 AIG Funding Inc., 5.51%, 1/7/97 .................................................. 15,761,080
10,000,000 American Express Credit Corp., 3.51%, 10/3/96 .................................... 9,997,072
14,000,000 American General Finance Corp., 5.38%, 12/18/96 .................................. 13,836,643
16,000,000 Associates Corp. of North America, 5.38%, 12/18/96 ............................... 15,813,306
10,000,000 Beneficial Corp., 5.59%, 4/9/97 .................................................. 9,711,908
10,000,000 Chevron Oil Finance Co., 5.14%, 10/9/96 .......................................... 9,987,168
10,000,000 Ciesco L.P., 4.61%, 10/7/96 ...................................................... 9,991,050
13,000,000 Credit Agricole USA Inc., 5.43%, 12/5/96 ......................................... 12,871,777
10,000,000 Dresdner U.S. Finance Inc., 4.91%, 10/2/96 ....................................... 9,997,271
10,000,000 General Electric Capital Corp., 5.32%, 3/19/97 ................................... 9,743,583
5,000,000 General Electric Capital Services Inc., 5.59%, 4/7/97 ............................ 4,857,463
17,000,000 New Center Asset Trust, 5.14%, 10/23/96 .......................................... 16,944,369
16,000,000 Private Export Funding Corp., 5.39%, 11/14/96 .................................... 15,892,979
-----------
155,405,669
-----------
MEDIA 1.5%
Broadcasting & Entertainment
6,100,000 Walt Disney Co., 5.38%, 12/10/96 ................................................. 6,035,955
-----------
DURABLES 3.8%
Automobiles
16,000,000 Ford Motor Credit Co., 5.40%, 11/26/96 ........................................... 15,864,467
-----------
TOTAL COMMERCIAL PAPER (COST $206,154,345) ....................................... 206,137,735
-----------
- --------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 4.9%
- --------------------------------------------------------------------------------------------------------------------
5,000,000 Mellon Bank Corp., 6.13%, 9/9/97 ................................................. 5,025,415
15,000,000 United States National Bank of Oregon, 5.36%, 10/22/96 ........................... 15,000,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (COST $20,000,000) ................................. 20,025,415
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
29
<PAGE>
AARP HIGH QUALITY MONEY FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Principal
Amount($) Value($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES 26.4%
- --------------------------------------------------------------------------------------------------------------------
5,000,000 Federal Home Loan Bank, 5.31%, 12/12/96 .......................................... 5,000,000
2,900,000 Federal Home Loan Mortgage Corp., 5.7%, 10/1/96 .................................. 2,900,000
17,000,000 Federal National Mortgage Association, 5.149%, 7/14/99* .......................... 16,872,500
20,000,000 Student Loan Marketing Association, 5.695%, 11/27/96* ............................ 20,026,813
38,690,000 Student Loan Marketing Association, 5.56%, 1/23/97* .............................. 38,760,416
10,000,000 Student Loan Marketing Association, 5.51%, 10/30/97* ............................. 10,013,900
15,500,000 Student Loan Marketing Association, 5.14%, 7/12/99* .............................. 15,377,550
-----------
TOTAL U.S. GOVERNMENT AGENCIES (COST $109,098,204) ............................... 108,951,179
-----------
- --------------------------------------------------------------------------------------------------------------------
SHORT_TERM NOTES 8.4%
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL 6.8%
Banks 5.6%
5,000,000 Bank of America Illinois, 5.7%, 5/28/97 .......................................... 5,001,291
8,000,000 FCC National Bank Note, 5.8%, 10/10/96 ........................................... 7,999,959
10,000,000 Pittsburgh National Bank, 5.322%, 7/1/97* ........................................ 9,992,000
-----------
22,993,250
-----------
Other Financial Companies 1.2%
5,000,000 General Electric Capital Corp., 5.35%, 10/22/96 .................................. 5,000,000
-----------
AUTOMOBILE RECEIVABLES 1.6%
6,605,783 Ford Motor Credit Co., 5.67%, 7/15/97 ............................................ 6,605,584
-----------
TOTAL SHORT_TERM NOTES (COST $34,595,734) ........................................ 34,598,834
-----------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $409,846,283)(a) .......... 99.4 409,711,163
OTHER ASSETS AND LIABILITIES, NET .......................... 0.6 2,415,030
----- -----------
NET ASSETS ................................................. 100.0 412,126,193
===== ===========
- --------------------------------------------------------------------------------------------------------------------
* Floating rate notes are securities whose interest rates vary with a designated market index or market rate,
such as the coupon equivalent of the U.S. Treasury bill rate. These securities are shown at their rate as of
September 30, 1996.
(a) At September 30, 1996, the net unrealized depreciation on investments based on cost for federal income tax
purposes of $409,846,283 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost ......................................................... $ 142,758
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value ......................................................... (277,878)
---------
Net unrealized depreciation ................................................................. $(135,120)
=========
- --------------------------------------------------------------------------------------------------------------------
At September 30, 1996, and to the extent provided in regulations, the Fund had capital loss carryforwards of
approximately $74,841 which expire September 30, 2004. In addition, from November 1, 1995 through September
30, 1996, the Fund incurred approximately $57,258 of net realized capital losses which the Fund intends to
elect to defer and treat as arising in the fiscal year ended September 30, 1997.
- --------------------------------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the
Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion of the Fund's assets and
liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
30
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principle Credit
Amount($) Rating(b) Value($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
MUNICIPAL INVESTMENTS 99.3%
- -----------------------------------------------------------------------------------------------------------------------
ALASKA
Alaska Housing Finance Corp., General Mortgage Revenue, Series 1991-A, Weekly
Demand Note, 3.85%, 6/1/26* ...................................................... 3,000,000 A-1+ 3,000,000
ARIZONA
Apache County, AZ, Industrial Development Authority, Tucson Electric Power Co.,
Series 1983 C, Weekly Demand Note, 3.85%, 12/15/18* .............................. 1,000,000 A-1 1,000,000
Maricopa County, AZ, Pollution Control Revenue, Palos Verde Project,
Series 1985 G, Tax Exempt Commercial Paper, 3.6%, 10/16/96 ....................... 2,000,000 A-1 2,000,000
Maricopa County, AZ, Pollution Control Revenue, Public Service of New Mexico,
Weekly Demand Note, 3.9%, 11/1/22* ............................................... 4,000,000 A-1+ 4,000,000
Pima County, AZ, Industrial Development Authority, Tucson Electric Power Co.,
Weekly Demand Note, 3.8%, 10/1/22* ............................................... 3,900,000 A-1+ 3,900,000
Pima County, AZ, Industrial Development Authority, Tucson Electric Power Co.
Series 1982 A, Weekly Demand Note, 3.8%, 7/1/22* ................................. 1,000,000 A-1+ 1,000,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper, Weekly Demand
Note, 3.9%, 12/1/11* ............................................................. 1,900,000 A-1 1,900,000
CALIFORNIA
Anaheim, CA, Multi-Family Housing Revenue, Harbor Cliff Project,
Variable Rate Demand Note, 3.55%, 7/1/06* ........................................ 1,000,000 MIG1 1,000,000
California State Revenue Anticipation Note, Series 1996, 4.5%, 6/30/97 ............ 1,000,000 SP1+ 1,003,798
Orange County, CA, Irvine Ranch Water District, Series 1985 B,
Variable Rate Demand Bond, 3.65%, 10/1/05* ....................................... 1,000,000 A-1 1,000,000
Los Angeles County, CA, Tax and Revenue Anticipation Notes, Series 1996 A,
4.5%, 6/30/97 .................................................................... 2,000,000 MIG1 2,009,326
Southern California Pollution Control Revenue, Edison Co., Series 1986 A,
Daily Demand Note, 3.85%, 2/28/08* ............................................... 1,000,000 A-1+ 1,000,000
COLORADO
Clear Creek County, CO, Colorado Counties Financing Program, Series 1988,
Weekly Demand Note, 3.9%, 6/1/98* ................................................ 155,000 A-1+ 155,000
Colorado Health Facilities Authority, Composite Issue for Kaiser Permanente,
Series 1995 A, Weekly Demand Note, 3.9%, 8/1/15* ................................. 3,000,000 A-1+ 3,000,000
FLORIDA
Dade County, FL, Industrial Development Authority Revenue, Dolphins
Stadium Project:
Series C, Weekly Demand Note, 3.85%, 1/1/16* ................................... 1,000,000 A-1+ 1,000,000
Series D, Weekly Demand Note, 3.85%, 1/1/16* ................................... 1,300,000 A-1+ 1,300,000
Jacksonville, FL, Pollution Control Revenue, Florida Power and Light, Series 1994,
Tax Exempt Commercial Paper, 3.6%, 10/10/96 ...................................... 1,000,000 MIG1 1,000,000
Orlando, FL, Wastewater Systems Revenue, Series 1990 A, Tax Exempt
Commercial Paper, 3.5%, 11/19/96 ................................................. 2,000,000 A-1+ 2,000,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric, Cooperative
Finance Corp., Series 1984 H-1, Weekly Demand Note, 3.4%, 3/15/14* ............... 4,250,000 A-1+ 4,250,000
Sarasota County, FL, Public Hospital District, Sarasota Memorial, Series 1985 A
Tax Exempt Commercial Paper, 3.6%, 10/18/96 ...................................... 2,500,000 P1 2,500,000
GEORGIA
Gordon County, GA, Industrial Development Authority Revenue, Sara Lee Corp.
Project, Series 1989, Weekly Demand Note, 3.85%, 3/1/02* ......................... 1,400,000 A-1+ 1,400,000
INDIANA
City of Sullivan, IN, National Rural Utilities Cooperative Finance Corp.,
Hoosier Energy Rural Electric, Tax Exempt Commercial Paper, 3.5%, 11/21/96 ........ 2,000,000 A-1+ 2,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements
31
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Principle Credit
Amount($) Rating(b) Value($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hoosier City of Sullivan, IN, Cooperative Finance Corporation, Series, 1985 L4,
Tax Exempt Commercial Paper, 3.55%, 10/8/96 ...................................... 2,200,000 A-1+ 2,200,000
IOWA
Iowa School Corporation Warrant Certificates, Iowa Schools Cash Anticipation
Program, Series B, 4.25%, 1/30/97(c) ............................................. 1,750,000 SP1+ 1,754,764
West Des Moines, IA, Commercial Development Revenue, Greyhound Lines,
Weekly Demand Note, 3.8%, 12/1/14* ............................................... 6,400,000 A-1+ 6,400,000
KENTUCKY
Kentucky Development Finance Authority, Health Care System, Appalachian
Regional Health Care, Series 1991, Weekly Demand Note, 3.85%, 9/1/06* ............ 6,800,000 MIG1 6,800,000
MARYLAND
Ann Arrundel County, MD, Baltimore Electric & Gas Company, Tax Exempt
Commercial Paper, 3.65%, 12/10/96 ................................................ 900,000 A-1 900,000
MASSACHUSETTS
Massachusetts Bay Transportation Authority, MA, Series B, 4.75%, 9/5/97 ........... 2,000,000 SP-1 2,014,284
MINNESOTA
Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982,
Weekly Demand Note, 3.79%, 8/1/12* ............................................... 300,000 A-1+ 300,000
MISSISSIPPI
Jackson County, MS, Pollution Control Revenue Refunding, Chevron USA Project,
Series 1993, Daily Demand Note 3.7%, 6/1/23* ..................................... 900,000 P1 900,000
Perry County, MS, Pollution Control Revenue, Leaf River Forest Products,
Daily Demand Note, 3.75%, 3/1/02* ................................................ 800,000 P1 800,000
MISSOURI
Missouri HEFA School District Advance Funding Note, Series 1996 C, Kansas City
School District, 4.5%, 9/8/97 .................................................... 1,000,000 SP1+ 1,005,416
NEVADA
Clark County, NV, Airport System, McCarran International Airport, Series A,
Weekly Demand Note, 3.8%, 7/1/12*(c) ............................................. 3,000,000 A-1+ 3,000,000
NEW HAMPSHIRE
New Hampshire Business Finance Authority, Connecticut Light & Power,
Weekly Demand Note, 3.9%, 12/1/22* ............................................... 1,700,000 A-1+ 1,700,000
NEW MEXICO
Albuquerque, NM, Gross Receipts/Lodger's Tax, Series 19991 A, Weekly Demand
Note, 3.9%, 7/1/22* .............................................................. 2,000,000 A-1+ 2,000,000
Farmington, NM, Pollution Control Revenue, Arizona Public Service Co.,
Series 1994 B, Daily Demand Note, 3.75%, 9/1/24* ................................. 300,000 P1 300,000
NEW YORK
New York State Energy Research & Development Authority, Pollution Control,
NYS Electric and Gas, Daily Demand Note, 3.75%, 6/1/29* .......................... 500,000 A-1+ 500,000
New York Municipal Water Authority, Series 1994 G, 3.75%, 6/15/24*(c) ............. 350,000 MIG1 350,000
New York City General Obligation, Series 1994 H-3, Tax Exempt
Commercial Paper, 3.75%, 11/12/96(c) ............................................. 1,000,000 A-1+ 1,000,000
New York City, NY, General Obligation, Series A-4, Daily Demand Note,
4%, 8/1/22* ...................................................................... 900,000 MIG1 900,000
PENNSYLVANIA
Allegheny County, PA, General Obligation, Tender Option Bond, Weekly Demand
Note, Series C38, 3.9%, 9/1/04*(c) ............................................... 1,000,000 MIG1 1,000,000
Emmaus, PA, General Authority, Local Government Revenue Bond Pool Program:
1989 Series E, Weekly Demand Note, 3.95%, 3/1/24* ................................ 1,800,000 A-1 1,800,000
1989 Series E-6, Weekly Demand Note, 3.95%, 3/1/24* .............................. 2,000,000 A-1+ 2,000,000
1989 Series E-8, Weekly Demand Note, 3.95%, 3/1/24* .............................. 1,200,000 A-1+ 1,200,000
</TABLE>
The accompanying notes are an integral part of the financial statements
32
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Principle Credit
Amount($) Rating(b) Value($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Langhorne, PA, Franciscan Health System Pooled Financing, Saint Mary Hospital
Authority, Series A, Daily Demand Note, 3.85%, 12/1/24* .......................... 200,000 A-1+ 200,000
Philadelphia, PA, Tax and Revenue Anticipation Notes, Series 1996 A, 4.5%,
6/30/97 .......................................................................... 2,000,000 MIG1 2,007,874
Philadelphia, PA, School District, Tax and Revenue Anticipation Notes,
Series 1996-1997, 4.5%, 6/30/97 .................................................. 3,000,000 SP1 3,010,763
TENNESSEE
Franklin, TN, Industrial Development Revenue, Franklin Oaks Apartments,
Weekly Demand Note, 3.65%, 12/1/07* .............................................. 5,000,000 MIG1 5,000,000
TEXAS
Brazos, TX, Harbor Institutional Project, Series 1986, Tax Exempt
Commercial Paper, 3.6%, 10/9/96 .................................................. 960,000 A-1 960,000
Grapevine, TX, Industrial Development Corp., American Airlines, Series B2
Daily Demand Note, 3.9%, 12/1/24* ................................................ 500,000 P1 500,000
Grapevine, TX, Industrial Development Corp., American Airlines, Series B4,
Daily Demand Note, 3.9%, 12/1/24* ................................................ 600,000 P1 600,000
Harris County, TX, Tax Anticipation Notes, Series 1996, 4.5%, 2/28/97 ............. 1,000,000 MIG1 1,002,973
Lone Star, TX, Airport Improvement Authority, 1995 Series A-3, Daily Demand
Note, 3.9%, 12/1/14* ............................................................. 200,000 MIG1 200,000
San Antonio, TX, Electric and Gas, City Public Services, Series 1995 A, Tax Exempt
Commercial Paper, 3.1%, 10/25/96 ................................................. 1,500,000 A-1+ 1,500,000
Texas General Obligation, Veterans Housing Assistance Refunding Bonds,
Series 1995, Weekly Demand Note, 3.8%, 12/1/16* .................................. 1,500,000 A-1+ 1,500,000
State of Texas, Tax and Revenue Anticipation Notes, Series 1996, 4.75%, 8/29/97 ... 2,000,000 SP1+ 2,014,612
UTAH
Salt Lake City UT, Pooled Hospital Financing, Tax Exempt Commercial Paper,
3.5%, 10/15/96 ................................................................... 1,000,000 A-1+ 1,000,000
VERMONT
Vermont Educational and Health Buildings Financing Agency, Revenue
Capital Asset Financing, Series 2005 A, 3.8%, 8/1/05* ............................ 3,600,000 MIG1 3,600,000
WASHINGTON
Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand Note,
3.9%, 11/1/18* ................................................................... 1,900,000 A-1+ 1,900,000
Washington Health Care Facilities Authority:
Sisters of Providence, Series 1985-E, Daily Demand Note, 3.75%, 10/1/05* ......... 1,000,000 A-1+ 1,000,000
Yakima Valley Memorial Hospital Association, Series 1996, 3.6%, 12/1/96 .......... 800,000 AAA 800,000
WISCONSIN
Milwaukee, WI, Promissory Notes, General Obligation, Series 1996 B-6,
3.8%, 2/15/97 .................................................................... 1,495,000 AA 1,498,545
WYOMING
Sweetwater County, WY, Pollution Control Revenue Refunding, Pacificorp Project,
Series 1990 A, Weekly Demand Note, 3.8%, 7/1/15* ................................. 2,000,000 MIG1 2,000,000
-----------
TOTAL MUNICIPAL INVESTMENTS (COST $110,537,355) ................................... 110,537,355
-----------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $110,537,355)(a) .................... 99.3 110,537,355
OTHER ASSETS AND LIABILITIES, NET .................................... 0.7 727,373
----- -----------
NET ASSETS ........................................................... 100.0 111,264,728
===== ===========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
33
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Floating rate demand notes are securities whose interest rates vary with
a designated market index or market rate, such as the coupon-equivalent
of the U.S. Treasury bill rate. Variable rate demand notes are securities
whose interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable
on demand within seven calendar days and normally incorporate an
irrevocable letter of credit or line of credit from a major bank. Since
these securities are payable on demand, they are valued at 100% of their
principal.
(a) At September 30, 1996, the net unrealized depreciation on investments
based on cost for federal income tax purposes of $110,631,317 was as
follows:
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ......... $(93,962)
========
(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings
Group, Moody's Investors Service, Inc. or Fitch Investors Service, Inc.
Unrated securities (NR) and securities rated by Scudder (SS&C) have been
determined to be of comparable quality to rated eligible securities.
(c) (Unaudited) Bond is insured by one of these companies: AMBAC, FGIC, FSA,
or MBIA.
- --------------------------------------------------------------------------------
At September 30, 1996, and to the extent provided in regulations, the
Fund had capital loss carryforwards of approximately $608,379 of which
$170,432 expires September 30, 1997, $19,559 expires September 30, 1999,
$323,801 expires September 30, 2000, $401 expires September 30, 2001,
$89,046 expires September 30, 2003, $5,140 expires September 30, 2004. In
addition, from November 1, 1995 through September 30, 1996, the Fund
incurred approximately $217,594 of net realized capital losses which the
Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1997.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
34
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- ----------------------------------------------------------------------------------------------------------------------
Principal Market
Amount($) Value($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.5%
- ----------------------------------------------------------------------------------------------------------------------
26,622,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/96 at 5.70%
to be repurchased at $26,626,215 on 10/1/96, collateralized by a $27,114,000
U.S. Treasury Note, 6.125%, 9/30/00, (COST $26,622,000) ...................... 26,622,000
-------------
- ----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 33.1%
- ----------------------------------------------------------------------------------------------------------------------
150,000,000 U.S. Treasury Note, 5.625%, 10/31/97 ............................................ 149,649,000
300,000,000 U.S. Treasury Note, 5.25%, 12/31/97 ............................................. 297,609,000
175,000,000 U.S. Treasury Note, 6.125%, 5/15/98 ............................................. 175,218,750
200,000,000 U.S. Treasury Note, 5.0%, 1/31/99 ............................................... 194,938,000
250,000,000 U.S. Treasury Note, 5.50%, 2/28/99 .............................................. 246,132,500
200,000,000 U.S. Treasury Note, 6.875%, 7/31/99 ............................................. 202,968,000
360,000,000 U.S. Treasury Note, 6.0%, 8/15/99 ............................................... 357,469,200
-------------
TOTAL U.S. TREASURY OBLIGATIONS (COST $1,630,584,011) ........................... 1,623,984,450
-------------
- ----------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 65.9%
- ----------------------------------------------------------------------------------------------------------------------
618,529,061 6.50% with various maturities to 5/15/26 ........................................ 580,354,367
673,093,309 7.00% with various maturities to 7/15/25 ........................................ 651,628,516
207,213,441 7.50% with various maturities to 6/15/26 ........................................ 205,020,978
188,611,417 8.00% with various maturities to 11/15/23 ....................................... 191,260,566
444,138,044 8.50% with various maturities to 9/15/26 ........................................ 458,101,856
496,933,743 9.00% with various maturities to 4/15/26 ........................................ 525,485,170
299,492,348 9.50% with various maturities to 9/15/24 ........................................ 322,676,078
227,243,557 10.00% with various maturities to 12/15/24 ...................................... 248,342,764
141,203 10.25% with a maturity of 12/15/98 .............................................. 148,087
19,246,842 10.50% with various maturities to 1/20/21 ....................................... 21,319,891
4,025,582 11.50% with various maturities to 2/15/16 ....................................... 4,593,671
7,952,389 12.00% with various maturities to 7/15/15 ....................................... 9,258,471
6,109,038 12.50% with various maturities to 8/15/15 ....................................... 7,171,566
1,441,856 13.00% with various maturities to 8/20/15 ....................................... 1,707,313
865,092 13.50% with various maturities to 10/15/14 ...................................... 1,041,010
331,829 14.00% with various maturities to 12/15/14 ...................................... 404,767
95,793 14.50% with a maturity of 10/15/14 .............................................. 118,214
237,143 15.00% with various maturities to 10/15/12 ...................................... 292,642
276,833 16.00% with a maturity of 2/15/12 ............................................... 344,458
-------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(COST $3,225,098,366) ......................................................... 3,229,270,385
-------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $4,882,304,377)(a) ................ 99.5 4,879,876,835
OTHER ASSETS AND LIABILITIES, NET .................................. 0.5 24,563,009
----- -------------
NET ASSETS ......................................................... 100.0 4,904,439,844
===== =============
</TABLE>
The accompanying notes are an integral part of the financial statements
35
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Effective maturities will be shorter due to prepayments.
<TABLE>
(a) At September 30, 1996, the net unrealized depreciation on investments
based on cost for federal income tax purposes of $4,882,304,377 was as
follows:
<CAPTION>
<S> <C>
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ........ $ 33,904,328
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ........ (36,331,870)
------------
Net unrealized depreciation ............................... $ (2,427,542)
============
</TABLE>
- --------------------------------------------------------------------------------
Purchases and sales of investment securities, all of which were U.S.
Government obligations and U.S. Government Agencies (excluding short-term
investments), for the year ended September 30, 1996, aggregated
$5,937,809,268 and $4,285,162,696, respectively.
- --------------------------------------------------------------------------------
At September 30, 1996, and to the extent provided in regulations, the
Fund had capital loss carryforwards of approximately $322,435,519 all of
which expires September 30, 2003.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
36
<PAGE>
AARP HIGH QUALITY BOND FUND
<TABLE>
- ----------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- ----------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount($) Value($)
- ----------------------------------------------------------------------------------------------
<S> <C>
- ----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 9.7%
- ----------------------------------------------------------------------------------------------
27,994,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/96 at 5.7% to be repurchased at
$27,998,432 on 10/1/96 collateralized by a
$26,773,000 U.S. Treasury Note, 7.75%, 1/31/00 ............... 27,994,000
21,940,000 Repurchase Agreement with State Street Bank dated
9/30/96 at 5.3% to be repurchased at $21,943,230
on 10/1/96 collateralized by a $22,233,000 U.S.
Treasury Note, 6%, 8/31/97 ................................... 21,940,000
-----------
TOTAL REPURCHASE AGREEMENTS (COST $49,934,000) ................. 49,934,000
-----------
- ----------------------------------------------------------------------------------------------
SHORT-TERM NOTES 7.6%
- ----------------------------------------------------------------------------------------------
20,000,000 Federal Farm Credit Bank, 4.63%, 10/9/96 ....................... 19,976,889
19,000,000 Federal Home Loan Bank, 2.59%, 10/2/96 ......................... 18,997,271
-----------
TOTAL SHORT-TERM NOTES (COST $38,974,160) ...................... 38,974,160
-----------
- ----------------------------------------------------------------------------------------------
COMMERCIAL PAPER 3.9%
- ----------------------------------------------------------------------------------------------
20,000,000 Associates Corp. of North America, 5.21%, 10/29/96
(COST $19,916,000) ........................................... 19,916,000
-----------
- ----------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 25.9%
- ----------------------------------------------------------------------------------------------
40,000,000 U.S. Treasury Note, 5.75%, 10/31/97 (c) ........................ 39,962,400
30,000,000 U.S. Treasury Note, 6.75%, 5/31/99 (c) ......................... 30,360,900
12,500,000 U.S. Treasury Note, 6.875%, 7/31/99 ............................ 12,685,500
25,000,000 U.S. Treasury Note, 5.75%, 8/15/03 ............................. 23,847,750
25,000,000 U.S. Treasury Note, 7.25%, 8/15/04 (c) ......................... 25,898,500
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $133,291,993) ............ 132,755,050
-----------
- ----------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 19.9%
- ----------------------------------------------------------------------------------------------
10,122,945 Federal Home Loan Mortgage Corp., 8%, 4/1/08 ................... 10,355,570
6,576,814 Federal National Mortgage Association, 8%, 5/1/07 .............. 6,725,910
9,025,211 Federal National Mortgage Association, 8.5%, 11/1/09 ........... 9,372,049
8,718,803 Federal National Mortgage Association, 8%, 12/1/09 ............. 8,916,459
6,822,599 Federal National Mortgage Association, 6.5%, 10/1/25 ........... 6,413,243
24,106,730 Federal National Mortgage Association, 6.5%, 11/1/25 ........... 22,660,327
2,440,099 Federal National Mortgage Association, 6.5%, 11/1/25 ........... 2,291,400
2,381,781 Federal National Mortgage Association, 6.5%, 11/1/25 ........... 2,238,875
32,000,000 Federal National Mortgage Association, 8.5%, TBA (b) ........... 32,819,840
-----------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS (COST $103,052,596) .... 101,793,673
-----------
- ----------------------------------------------------------------------------------------------
FOREIGN BONDS - U.S.$ DENOMINATED 5.5%
- ----------------------------------------------------------------------------------------------
15,000,000 Abbey National PLC Global Medium Term Note, 6.69%, 10/17/05 .... 14,441,250
15,000,000 Province of Ontario Global, 6%, 2/21/06 ........................ 13,829,100
-----------
TOTAL FOREIGN BONDS - U.S.$ DENOMINATED (COST $29,928,700) ..... 28,270,350
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
37
<PAGE>
AARP HIGH QUALITY BOND FUND
<TABLE>
<CAPTION>
Principal Market
Amount($) Value($)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
ASSET BACKED 5.4%
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
HOME EQUITY LOANS 4.5%
22,727,121 The Money Store Inc. Home Equity Trust Series
1996-B A1, 6.72%, 3/15/10 ................................... 22,762,632
MANUFACTURED HOUSING 0.9%
4,500,000 Merrill Lynch Mortgage Investors Inc., "B", Series
1991-D, 9.85%, 7/15/11 ...................................... 4,734,810
-----------
TOTAL ASSET BACKED (COST $27,186,340) ......................... 27,497,442
-----------
- ----------------------------------------------------------------------------------------------
CORPORATE BONDS 24.0%
- ----------------------------------------------------------------------------------------------
CONSUMER STAPLES 3.2%
15,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/1/22 ..................... 16,362,450
-----------
FINANCIAL 9.9%
1,500,000 American Express Credit Corp., 11.625%, 12/12/00 .............. 1,606,875
15,000,000 Associates Corp. of North America, 6.625%, 5/15/01 ............ 14,849,400
7,550,000 BankAmerica Corp., 7.125%, 5/1/06 ............................. 7,431,465
20,000,000 Fleet Financial Group Inc., 6%, 10/26/98 ...................... 19,842,400
7,450,000 Wells Fargo & Co., 6.875%, 4/1/06 ............................. 7,193,869
-----------
50,924,009
-----------
TECHNOLOGY 2.7%
15,000,000 In-ternational Business Machines Corp., 7%, 10/30/45 .......... 13,704,600
-----------
ENERGY 6.4%
15,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 ........................ 17,619,000
15,000,000 Norsk Hydro AS, 7.75%, 6/15/23 ................................ 14,919,300
-----------
32,538,300
-----------
UTILITIES 1.8%
10,000,000 Public Service Electric & Gas Co. 1st Refunding
Mortgage, 6.25%, 1/1/07 ..................................... 9,145,800
-----------
TOTAL CORPORATE BONDS (COST $124,101,989) ..................... 122,675,159
-----------
- ----------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO (COST $526,385,778) (a) ... 101.9 521,815,834
OTHER ASSETS AND LIABILITIES, NET .................... (1.9) (9,910,668)
----- -----------
NET ASSETS ........................................... 100.0 511,905,166
===== ===========
- ----------------------------------------------------------------------------------------------
* Effective maturities will be shorter due to prepayments.
TBA To be announced
<CAPTION>
<S> <C>
(a) At September 30, 1996, the net unrealized depreciation on investments based
on cost for federal income tax purposes of $526,385,778 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost ....................................... $ 1,610,998
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value ....................................... (6,180,942)
-----------
Net unrealized depreciation ............................................... $(4,569,944)
===========
(b) Security purchased on a when-issued basis (See Note 1 of Notes to the Financial Statements).
</TABLE>
The accompanying notes are an integral part of the financial statements
38
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(c) At September 30, 1996, these securities, in whole or in part, have been
segregated to cover when-issued securities.
- -------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1996 was $2,745,543,197 and $2,745,543,197,
respectively.
- -------------------------------------------------------------------------------
For the year ended September 30, 1996, purchases and sales of investment
securities (excluding short-term and U.S. Government obligations and U.S.
Government agencies) aggregated $135,968,590 and $74,784,828, respectively.
Purchases and sales of U.S. Government obligations and U.S. Government
Agencies aggregated $639,930,969 and $725,671,135, respectively. In
addition, the Fund wrote and closed options on U.S. Treasury Bonds
(premiums received $268,688).
- -------------------------------------------------------------------------------
At September 30, 1996, and to the extent provided in regulations, the Fund
had a capital loss carryforward of approximately $7,897,530 which expires
September 30, 2003. In addition, from November 1, 1995 through September
30, 1996, the Fund incurred approximately $860,534 of net realized capital
losses which the Fund intends to elect to defer and treat as arising in the
fiscal year ended September 30, 1997.
- -------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
39
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
- -------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL INVESTMENTS (Under 1 year) - 6.6%
- -------------------------------------------------------------------------------------------------------------
ALABAMA
Phoenix City, AL, Industrial Development Bond, Mead Coated
Board Project, Daily Demand Note, 4.1%, 10/1/25* ....................... 3,100,000 A1 3,100,000
CALIFORNIA
San Diego County, California, Water Authority, Certificate of Participation:
5.632%, 4/25/07*(c) .................................................... 6,300,000 AAA 6,481,629
5.681%, 4/22/09*(c) .................................................... 4,500,000 AAA 4,605,795
DISTRICT OF COLUMBIA
District of Columbia, General Obligation, Refunding Bonds,
Series A6, Daily Demand Note, 4.1%, 10/1/07* ........................... 400,000 A 400,000
FLORIDA
Halifax Hospital Medical Center, FL, Hospital Revenue, Auction
Reset Security, Series A, 3.7%, 10/1/19*(c) ............................ 11,000,000 AAA 11,000,000
Volusia County, FL, Health Facility Authority Revenue Health
FAC-S Alliance Community, Variable Rate Demand Note, 4%, 9/1/20* ....... 1,000,000 A1+ 1,000,000
ILLINOIS
Illinois Educational Facilities Authority, University Pooled
Finance Program, Weekly Demand Note, 3.9%, 12/1/05*(c) ................. 5,000,000 MIG1 5,000,000
Illinois Health Facilities Authority, Rush Presbyterian St.
Luke's Hospital, Tax Exempt Commercial Paper,
Series 1989, 3.5%, 10/22/96 ............................................ 1,100,000 A1+ 1,100,000
INDIANA
Trustees of Purdue University Student Fee Revenue Bonds,
Series 1995K, Weekly Demand Bond, 3.8%, 7/1/20* ........................ 5,000,000 MIG1 5,000,000
KANSAS
Burlington, KS, Environmental Improvement Revenue, Kansas City
Power & Light, Municipal Auction Security,
Series B, 3.64%, 12/1/23* .............................................. 16,000,000 A 16,000,000
MASSACHUSETTS
Massachusetts Education Loan Authority Revenues, Issue E,
Series 1996A, Weekly Demand Note, 3.8%, 7/1/14* ........................ 1,000,000 A1+ 1,000,000
Massachusetts Health & Educational Facilities Authority, Capital
Asset Program:
Series 1989G-1, Weekly Demand Note, 3.7%, 1/1/19*(c) ................... 800,000 AAA 800,000
Series D, Weekly Demand Note, 3.75%, 1/1/35*(c) ........................ 100,000 SP1+ 100,000
Massachusetts Industrial Finance Agency, Resource Recovery,
Ogden Haverhill Project, Weekly Demand Note, 3.8%, 12/1/06* ............ 1,600,000 MIG1 1,600,000
Massachusetts State Health and Educational Facilities,
Boston University, Select Auction Variable Rate
Securities, 3.53%, 10/1/31*(c) ......................................... 1,000,000 AAA 1,000,000
MICHIGAN
Grand Rapids, MI, Water Supply Revenue Bonds, Series 1993,
Weekly Demand Note, 3.7%, 1/1/20*(c) .................................. 3,000,000 MIG1 3,000,000
NEW YORK
New York City Municipal Water Finance Authority, Series 1994G
Variable Rate Demand Note, 3.75%, 6/15/24*(c) ......................... 300,000 MIG1 300,000
New York City, NY, General Obligation, Unlimited Tax
Series A4, 3.9%, 8/1/21* .............................................. 7,600,000 MIG1 7,600,000
New York State Energy, Brooklyn Union Gas, Select Auction
Variable Rate Securities, 3.59%, 4/1/20* .............................. 10,000,000 A 10,000,000
New York State General Obligation, Tax Exempt Commercial Paper,
Series R, 3.45%, 10/9/96 .............................................. 4,000,000 A 4,000,000
NORTH CAROLINA
Durham, NC, General Obligation, Variable Rate
Demand Note, 3.8%, 2/1/12* ............................................ 100,000 A1 100,000
</TABLE>
The accompanying notes are an integral part of the financial statements
40
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OHIO
Cuyahoga County, OH, Health & Education, University Hospital
of Cleveland, Daily Demand Note, 3.95%, 1/1/16* ........................ 1,300,000 MIG1 1,300,000
PENNSYLVANIA
Philadelphia, PA, Hospital and Higher Education Facilities Authority, Daily
Demand Note, 4%, 3/1/27* .................................................. 5,300,000 A1+ 5,300,000
PUERTO RICO
Puerto Rico, Series 1996, Variable Rate Demand Bond, 3.65%, 7/1/01*(c) .... 3,000,000 AAA 3,000,000
SOUTH CAROLINA
Charleston, SC, Industrial Refunding Revenue Bonds, Massey Coal
Terminal, Daily Demand Bond, 3.75%, 1/1/07* ............................ 450,000 P1 450,000
TEXAS
Grapevine, TX, Industrial Development Authority Corp., Series A4,
Daily Demand Note, 3.9%, 12/1/24* ...................................... 1,700,000 P1 1,700,000
UTAH
Intermountain Power Agency, UT, Power Supply Revenue,
Series 1993, 5.55%, 7/1/11* ............................................ 7,000,000 AAA 6,760,250
VIRGINIA
Peninsula Port Authority, VA, Shell Oil, Daily
Demand Note, 3.75%, 12/1/05* ........................................... 3,600,000 SS&C 3,600,000
Winchester County, VA, Industrial Development Authority,
Hospital Revenue, 6.3%, 1/1/15*(c) ..................................... 5,700,000 AAA 5,432,442
WASHINGTON
Tacoma, WA, Electric System Revenue, 6.51%, 1/2/15*(c) .................... 6,000,000 AAA 6,268,620
-----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS (COST $116,519,925) ................ 116,998,736
-----------
- -------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL INVESTMENTS (Over 1 year) - 92.5%
- -------------------------------------------------------------------------------------------------------------
ALASKA
Alaska State Housing Finance Corp., Veterans Mortgage, First
Program, Series F, GNMA Collateralized, 8.1%, 9/1/20 ................... 4,340,000 AAA 4,455,227
Anchorage, AK, Electric Utility Revenue, Senior Lien, 6.5%, 12/1/07 (c) ... 2,620,000 AAA 2,910,296
North Slope Borough, AK, General Obligation:
Capital Appreciation, Series A, Zero Coupon, 6/30/06 (c) .............. 4,000,000 AAA 2,343,360
Capital Appreciation, Series B, Zero Coupon:
6/30/05 (c) ........................................................ 25,600,000 AAA 15,978,496
6/30/04 (c) ........................................................ 15,500,000 AAA 10,287,350
Series B, Zero Coupon, 1/1/03 (c) ..................................... 16,000,000 AAA 11,557,440
ARIZONA
Arizona State, Municipal Finance Program, Certificate of
Participation, Series 25, 7.875%, 8/1/14 (c) .......................... 3,500,000 AAA 4,436,740
Maricopa County, AZ:
School District #28, Kyrene Elementary,
Series B, Zero Coupon, 1/1/04(c) .................................. 6,000,000 AAA 4,152,360
School District #6, Washington Elementary,
Series B, 4.1%, 7/1/13 (c) ........................................ 2,950,000 AAA 2,443,574
Unified School District #41, Gilbert School,
Zero Coupon, 1/1/05 (c) ........................................... 5,280,000 AAA 3,445,411
Unified School District #68, Alhambra Elementary,
Zero Coupon, 7/1/05 (c) ........................................... 2,850,000 AAA 1,812,258
Scottsdale, AZ, Industrial Development Authority, Scottsdale Memorial
Hospital, 8.5%, 9/1/17 (c) ........................................ 1,050,000 AAA 1,114,050
CALIFORNIA
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/1/09 .................................................... 10,415,000 AAA 10,385,734
Banning, CA, Water System, Certificate of Participation, 8%, 1/1/19 (c) ... 960,000 AAA 1,245,053
Banning, CA, Wastewater, Certificate of Participation, 8%, 1/1/19 (c) ..... 1,080,000 AAA 1,400,684
</TABLE>
The accompanying notes are an integral part of the financial statements
41
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Big Bear Lake, California Department of Water and Power, Series 1996,
6%, 4/1/11 (c) .................................................... 3,800,000 AAA 4,015,498
State of California, General Obligation, 6.4%, 2/1/06 (c) ................. 4,500,000 AAA 4,936,860
California Housing Finance Agency Revenue, 5.7%, 8/1/16 ................... 7,210,000 AAA 7,083,392
California Housing Finance Authority Revenue, 5.3%, 8/1/14 (c) ............ 4,000,000 AAA 4,002,120
California State Public Works Board, Lease Revenue,
Series A, 6.3%, 12/1/06 (c) ........................................... 8,095,000 AAA 8,918,504
Irvine Ranch, California Water District, Joint Powers Agency
Local Pool Revenue, 7.875%, 2/15/23 ................................... 3,000,000 AA 3,128,820
Los Angeles County, CA, Convention & Exhibition Center Authority,
Certificate of Participation:
Zero Coupon, 8/15/02 (c) ......................................... 5,000,000 AAA 3,738,650
Zero Coupon, 8/15/03 (c) ......................................... 6,270,000 AAA 4,435,085
Los Angeles County, CA, Public Works Financing Authority Lease Revenue,
Series 1996B, 5.25%, 9/1/11 (c) ................................... 3,000,000 AAA 2,921,220
Los Angeles County, CA, Capital Asset Leasing, 6%, 12/1/06 (c) ............ 9,000,000 AAA 9,702,450
Los Angeles County, CA, Public Works Finance Authority, Lease Revenue,
Multiple Projects IV, 4.75%, 12/1/10 (c) .......................... 11,140,000 AAA 10,201,009
Madera, CA, Certificates of Participation, Valley Children's
Hospital Project, Series 1995, 6.5%, 3/15/10 (c) ...................... 2,840,000 AAA 3,127,408
Oakland, CA, Redevelopment Agency, Tax Allocation, Central District,
6%, 2/1/07 (c) ........................................................ 2,000,000 AAA 2,138,080
Riverside, CA, Transportation Commission, Sales Tax Revenue:
Series A, 5.7%, 6/1/06 (c) ............................................ 5,400,000 AAA 5,648,670
Series A, 5.75%, 6/1/07 (c) ........................................... 3,000,000 AAA 3,146,100
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax,
Revenue Refunding, 6.75%, 7/1/10 (c) .................................. 2,000,000 AAA 2,263,660
San Joaquin, CA, Certificates of Participation, County Public
Facilities Project, 5.5%, 11/15/13 (c) ................................ 2,000,000 AAA 1,997,660
Sweetwater, CA, Water Revenue, 5.25%, 4/1/10 (c) .......................... 13,240,000 AAA 13,051,330
Three Valleys, CA, Municipal Water District, Certificates
of Participation, 5%, 11/1/14 (c) ..................................... 3,000,000 AAA 2,774,310
Whittier, CA, Presbyterian Intercommunity Hospital, Health
Facilities Revenue, 6.25%, 6/1/08 (c) ................................. 1,780,000 AAA 1,936,943
COLORADO
Castle Rock Ranch Colorado Public Improvements Authority,
Public Facilities Revenue:
Series 1996, 6.3%, 12/1/07 ......................................... 3,115,000 AA 3,286,014
Series 1996, 6.4%, 12/1/08 ......................................... 3,310,000 AA 3,502,079
Series 1996, 6.375%, 12/1/11 ....................................... 2,000,000 AA 2,088,020
CONNECTICUT
Connecticut Resource Recovery Authority:
Series 1996, 6.25%, 11/15/05 (c) ...................................... 2,000,000 AAA 2,166,000
Series 1996A, 6.25%, 11/15/06 (c) ..................................... 4,525,000 AAA 4,895,009
Connecticut State Housing Authority, Housing Mortgage
Finance Program, Series 1992B, 6.15%, 11/15/04 ........................ 5,000,000 AA 5,194,000
DISTRICT OF COLUMBIA
District of Columbia, General Obligation:
Series A1, 6.5%, 6/1/10 (c) ........................................... 2,270,000 AAA 2,483,630
Refunding, 1993 Series A, 5.875%, 6/1/05 (c) .......................... 4,750,000 AAA 4,924,135
Series A, Prerefunded 6/1/99 at 102, 7.5%, 6/1/09***(c) ............... 5,000,000 AAA 5,481,600
Series B, Zero Coupon, 6/1/00 (c) ..................................... 3,500,000 AAA 2,929,325
Series B, 6.125%, 6/1/03 (c) .......................................... 4,000,000 AAA 4,219,760
Series B, 5.4%, 6/1/06 (c) ............................................ 18,905,000 AAA 18,861,329
Series B3, 5.4%, 6/1/06 (c) ........................................... 10,000,000 AAA 9,976,900
</TABLE>
The accompanying notes are an integral part of the financial statements
42
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series B, 5.5%, 6/1/07 (c) ............................................. 25,000,000 AAA 25,058,000
Series B, 5.5%, 6/1/08 (c) ............................................. 21,300,000 AAA 21,279,978
Series B, 5.5%, 6/1/09 (c) ............................................. 15,150,000 AAA 15,039,708
Series B, 5.5%, 6/1/09 (c) ............................................. 2,840,000 AAA 2,819,325
Series B, 5.5%, 6/1/10 (c) ............................................. 15,590,000 AAA 15,382,653
Series B, 5.5%, 6/1/12 (c) ............................................. 1,050,000 AAA 1,024,097
District of Columbia, Georgetown University, Series B, 7.1%, 4/1/12 ....... 3,000,000 AAA 3,202,440
FLORIDA
Florida State Department of Natural Resources, Preservation 2000-A,
4.75%, 7/1/12 (c) ...................................................... 10,000,000 AAA 9,039,400
Florida Municipal Power Agency, Stanton II Project, Refunding
Revenue Bonds, Series 1993, 4.5%, 10/1/16 (c) .......................... 4,400,000 AAA 3,732,652
Orange County, FL, Health Facilities Authority Refunding Program,
Series A, 7.875%, 12/1/25 (c) .......................................... 16,830,000 AAA 17,545,107
Sarasota County, FL, School Board Finance Corp., Lease Revenue,
Refunding, 5%, 7/1/09 (c) .............................................. 5,595,000 AAA 5,355,366
GEORGIA
Cobb County, GA, Kennestone Hospital Authority,
Series A, 5.625%, 4/1/11 (c) ........................................... 5,305,000 AAA 5,370,676
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central
Georgia, Series C, 5.25%, 8/1/11 (c) ................................... 8,225,000 AAA 8,074,894
Municipal Electric Authority of Georgia, 5th Crossover,
Project #1, 6.4%, 1/1/13 (c) ........................................... 3,500,000 AAA 3,807,615
ILLINOIS
Central Lake County, IL, Joint Action Water Agency,
Refunding Revenue, Zero Coupon, 5/1/02 (c) ............................. 2,245,000 AAA 1,698,185
Chicago O'Hare International Airport, IL, Refunding Revenue:
Series 1996A, Passenger Facilities Charge, 6%, 1/1/06 (c) .............. 2,000,000 AAA 2,104,140
Series C, 5%, 1/1/11 (c) ............................................... 6,500,000 AAA 6,071,520
Chicago, IL, Board of Education, Certificate of Participation,
Series 1992A, Non Callable, 6.125% 1/1/06 (c) .......................... 4,000,000 AAA 4,268,640
Chicago, IL, Wastewater Transmission Revenue:
5.5%, 1/1/09 (c) ....................................................... 11,990,000 AAA 12,010,023
5.5%, 1/1/10 (c) ....................................................... 7,220,000 AAA 7,212,563
Chicago, IL, General Obligation:
6.25%, 1/1/11 (c) ...................................................... 3,000,000 AAA 3,201,600
Series A, 5.375%, 1/1/13 (c) ........................................... 15,410,000 AAA 15,009,648
Series B, 5%, 1/1/08 (c) ............................................... 3,485,000 AAA 3,374,003
Series B, 5%, 1/1/10 (c) ............................................... 5,200,000 AAA 4,910,360
Series B, 5%, 1/1/11 ................................................... 1,620,000 AAA 1,528,324
Series B, 5%, 1/1/12 (c) ............................................... 5,000,000 AAA 4,679,950
Series B, 5.125%, 1/1/15 (c)(d) ........................................ 9,550,000 AAA 8,993,044
Emergency Telephone System, 5.55%, 1/1/08 .............................. 5,820,000 AAA 5,898,279
Chicago, IL, General Obligation Lease, Board of Education:
Series 1996, 6.25%, 12/1/11 (c) ........................................ 1,600,000 AAA 1,711,984
Series A, 6.25%, 1/1/15 (c) ............................................ 23,000,000 AAA 24,583,780
Series A, 6.25%, 1/1/10 (c) ............................................ 11,550,000 AAA 12,345,218
Series A 6%, 1/1/16 (c) ................................................ 11,025,000 AAA 11,473,166
Series A, 6%, 1/1/20 (c)(d) ............................................ 36,625,000 AAA 38,027,005
Chicago, IL, Motor Fuel Tax Revenue, Prerefunded 1/1/01 at
100, 6.5%, 1/1/16***(c) ................................................ 2,000,000 AAA 2,138,720
Chicago, IL, Public Building Commission, Building Revenue:
Series A, 5.25%, 12/1/07 (c) ........................................... 3,500,000 AAA 3,482,220
Series A, 5.25%, 12/1/09 (c) ........................................... 10,420,000 AAA 10,158,250
</TABLE>
The accompanying notes are an integral part of the financial statements
43
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A, 5.25%, 12/1/11 (c) ........................................... 9,705,000 AAA 9,331,358
Series A, Zero Coupon, 1/1/06 (c) 2,430,000 AAA 1,478,849
Cook & Dupage Counties, Illinois High School District Number 210, Zero Coupon:
12/1/07 (c) ............................................................ 2,550,000 AAA 1,385,033
12/1/08 (c) ............................................................ 2,625,000 AAA 1,334,051
12/1/09 (c) ............................................................ 2,860,000 AAA 1,357,356
Cook County, IL, General Obligation:
Zero Coupon, 11/1/04 (c) ............................................... 3,205,000 AAA 2,132,928
Series C, 6%, 11/15/07 (c) ............................................. 5,000,000 AAA 5,334,350
Decatur, IL, General Obligation, Series 1991:
Zero Coupon, 10/1/03 (c) ............................................... 1,455,000 AAA 1,019,111
Zero Coupon, 10/1/04 (c) ............................................... 1,415,000 AAA 935,372
Decatur, IL, Public Building Commission, Certificate of Participation:
6.5%, 1/1/03 (c) ....................................................... 1,725,000 AAA 1,871,936
6.5%, 1/1/06 (c) ....................................................... 1,500,000 AAA 1,641,630
Evergreen Park, Illinois Hospital Facilities, Little County
Mary's Hospital, 7.75%, 2/15/09 (c) .................................... 2,935,000 AAA 3,120,257
Illinois State, Dedicated Tax Revenue, Civic Center Project:
6.25%, 12/15/11 (c) .................................................... 3,000,000 AAA 3,229,530
6.25%, 12/15/20 (c) .................................................... 6,975,000 AAA 7,493,801
Series A, 6.5%, 12/15/07 ............................................... 4,765,000 AAA 5,285,719
Series A, 6.5%, 12/15/08 (c) ........................................... 5,255,000 AAA 5,816,024
Illinois Educational Facilities Authority, Loyola University:
Zero Coupon, 7/1/05 (c) ................................................ 4,000,000 AAA 2,521,920
Revenue Refunding, Series 1991A, Zero Coupon, 7/1/04 (c) ............... 2,860,000 AAA 1,915,170
Illinois Health Facilities Authority:
Brokaw-Mennonite Healthcare:
6%, 8/15/06 (c) .................................................... 1,380,000 AAA 1,450,187
6%, 8/15/07 (c) .................................................... 1,460,000 AAA 1,526,342
6%, 8/15/08 (c) .................................................... 1,550,000 AAA 1,611,318
6%, 8/15/09 (c) .................................................... 1,640,000 AAA 1,694,924
Children's Memorial Hospital, 6.25%, 8/15/13 (c) ....................... 3,400,000 AAA 3,593,120
Felician Healthcare Inc., Series A, 6.25%, 1/1/15 (c) .................. 17,000,000 AAA 18,050,430
Memorial Medical Center, 6.75%, 10/1/11 (c) ............................ 2,135,000 AAA 2,311,351
Methodist Health Service, Series 1985G, 8%, 8/1/15 (c) ................. 10,015,000 AAA 11,025,614
Sherman Hospital, 6.75%, 8/1/11 (c) .................................... 2,700,000 AAA 2,960,172
SSM Healthcare System, Series AA, 6.4%, 6/1/08 (c) ..................... 1,350,000 AAA 1,474,200
Joliet, IL, Junior College Assistance Corp., Lease Revenue, North Campus
Extension Center, 6.7%, 9/1/12 (c) ..................................... 2,500,000 AAA 2,809,675
Kane County, Illinois School District -129 Aurora West Side,
Series 1996A, 6.5%, 2/1/10 (c) ......................................... 1,775,000 AAA 1,939,276
Kendall, Kane and Will Counties, IL, Community Unit School
District Number 308, Oswego:
Zero Coupon, 3/1/02 (c) ............................................ 1,055,000 AAA 804,712
Zero Coupon, 3/1/05 (c) ............................................ 1,540,000 AAA 988,156
Zero Coupon, 3/1/06 (c) ............................................ 1,595,000 AAA 962,040
Metropolitan Pier & Exposition Authority, IL, McCormick Place Expansion
Project:
Zero Coupon, 12/15/03 (c) .......................................... 3,200,000 AAA 2,218,048
Zero Coupon, 6/15/04 (c) ........................................... 10,300,000 AAA 6,913,154
State of Illinois, Northwest Suburban Municipal Joint Action
Water Agency, Supply System Revenue, 6.45%, 5/1/07 (c) ................. 2,575,000 AAA 2,812,415
Rosemont, IL, Tax Increment, Series C:
Zero Coupon, 12/1/05 (c) ............................................... 4,455,000 AAA 2,747,799
</TABLE>
The accompanying notes are an integral part of the financial statements
44
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zero Coupon, 12/1/07 (c) ............................................... 2,655,000 AAA 1,442,063
State University Retirement System, IL, Special Revenue,
Zero Coupon, 10/1/03 (c) ............................................... 2,750,000 AAA 1,926,155
University of Illinois, Board of Trustees, Series 1991:
Zero Coupon, 4/1/03 (c) ................................................ 3,890,000 AAA 2,794,771
Zero Coupon, 4/1/05 (c) ................................................ 3,830,000 AAA 2,446,796
Will County, IL, Community Unit School District #201-U, Crete-Monee,
Capital Appreciation:
Zero Coupon, 12/15/00 (c) .......................................... 1,325,000 AAA 1,087,017
Zero Coupon, 12/15/01 (c) .......................................... 1,730,000 AAA 1,340,369
INDIANA
Fort Wayne, IN, Parkview Memorial Hospital, 6.5%, 11/15/12 (c) ............ 1,400,000 AAA 1,488,564
Indiana Health Facility Finance Authority, Hospital Revenue:
Ancilla Systems Inc., Series A, 6%, 7/1/18 (c) ......................... 27,635,000 AAA 28,588,131
Community Hospital Project, 6.4%, 5/1/12 (c) ........................... 5,000,000 AAA 5,275,750
Indiana Municipal Power Agency, Power Supply System,
Series B, 6%, 1/1/12 (c) ............................................... 2,000,000 AAA 2,095,800
Indiana University:
Student Fees Revenue, Series H, Zero Coupon, 8/1/06 (c) ................ 8,500,000 AAA 5,013,470
Series H, Zero Coupon, 8/1/08 (c) ...................................... 10,000,000 AAA 5,177,200
Student Fee Bonds, Series J, 5%, 8/1/18 (c) ............................ 4,200,000 AAA 3,801,042
Madison County, IN, Community Hospital of Anderson,
Prerefunded 1/1/98 at 102, 8%, 1/1/14***(c) ............................ 7,055,000 AAA 7,530,366
Merrillville, IN, Multiple School Building Corp., First Mortgage,
Zero Coupon, 1/15/11 (c) ............................................... 4,000,000 AAA 1,757,000
IOWA
Polk County, IA, Mercy Hospital, 6.75%, 11/1/05 (c) ....................... 5,000,000 AAA 5,462,600
KANSAS
Kansas City, KS, Utility System Revenue:
ETM, Zero Coupon, 9/1/04** ............................................. 3,575,000 AAA 2,421,562
ETM, Zero Coupon, 9/1/05** ............................................. 5,300,000 AAA 3,393,961
ETM, Zero Coupon, 9/1/06** ............................................. 1,875,000 AAA 1,130,081
Zero Coupon, 9/1/04 .................................................... 2,640,000 AAA 1,766,266
Zero Coupon, 9/1/05 .................................................... 3,950,000 AAA 2,490,159
Zero Coupon, 9/1/06 .................................................... 1,375,000 AAA 815,224
LOUISIANA
Louisiana Public Facilities Authority, Prerefunded 2/15/08
at 100, 4.75%, 5/1/16***(c) ............................................ 5,765,000 AAA 5,548,813
New Orleans, Louisiana Exhibition Hall Authority, Series 1993,
Zero Coupon, 7/15/06 ................................................... 4,350,000 AAA 2,392,457
New Orleans, LA, General Obligation, Zero Coupon, 9/1/07 (c) .............. 10,000,000 AAA 5,565,000
Orleans, LA, Levee District, Levee Improvement Bonds,
Series 1986, 5.95%, 11/1/14 (c) ........................................ 2,000,000 AAA 2,034,480
MASSACHUSETTS
Commonwealth of Massachusetts, General Obligation:
Series A, 7%, 3/1/99 (c) ............................................... 4,850,000 AAA 5,143,037
Series D, 7%, 10/1/03 (c) .............................................. 7,000,000 AAA 7,631,680
Massachusetts Municipal Wholesale Electric Company,
Power Supply System Revenue, Series A, 5.1%, 7/1/07 (c) ................ 1,640,000 AAA 1,610,611
MICHIGAN
Brighton, MI, Area School District, Series I, Zero Coupon,
Prerefunded 5/1/05 at 34.134, 5/1/20***(c) ............................. 22,000,000 AAA 4,861,120
Detroit, MI, General Obligation, Distributable State
Aid Refunding, 5.2%, 5/1/07 (c) ........................................ 3,000,000 AAA 2,971,470
</TABLE>
The accompanying notes are an integral part of the financial statements
45
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Detroit, MI, Unlimited Tax, General Obligation, Distributable
State Aid, 5.25%, 5/1/08 (c) .......................................... 1,500,000 AAA 1,478,190
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue,
Borgess Medical Center, Series A, 6%, 7/1/09 (c) ...................... 8,250,000 AAA 8,585,858
Michigan State Hospital Finance Authority, Sisters of Mercy
Healthcorp Obligated Group, Series P, 5.25%, 8/15/08 (c) .............. 8,655,000 AAA 8,571,566
Michigan State Housing Development Authority, Rental Revenue,
Series B, 5.7%, 4/1/12 ................................................ 6,275,000 AAA 6,161,109
MINNESOTA
Northern Minnesota Municipal Power Agency, Series A, 7.25%, 1/1/16 ........ 7,500,000 AAA 7,998,675
MISSOURI
MissouriHealth & Educational Facilities Authority, SSM Healthcare,
1992 Series 1992AA:
6.35%, 6/1/08 (c) .................................................. 8,125,000 AAA 8,837,481
6.4%, 6/1/09 (c) ................................................... 8,640,000 AAA 9,408,010
NEVADA
Clark County, NV, School District, General Obligation,
Zero Coupon, 3/1/05 (c) ................................................ 8,070,000 AAA 5,199,420
NEW JERSEY
New Jersey Highway Authority, Garden State Parkway
General Revenue, ETM 6.5%, 1/1/11** .................................... 5,055,000 AAA 5,404,048
New Jersey Housing and Mortgage Finance Agency, Home
Mortgage Purchase Revenue, Zero Coupon, 10/1/16 (c) .................... 5,155,000 AAA 648,138
New Jersey Turnpike Authority:
6.5%, 1/1/09 (c) ....................................................... 5,000,000 AAA 5,501,950
IBC Series 1991A, 6.3%, 1/1/01 (c) ..................................... 1,250,000 AAA 1,329,638
NEW YORK
New York City, New York, General Obligation:
Unlimited Series 1987A, 8%, 11/1/01 (c) ................................ 760,000 AAA 804,559
Unlimited Series 1994H, Subseries H-1, 5.8%, 8/1/04 (c) ................ 5,000,000 AAA 5,270,250
Series G, 5.9%, 2/1/05 ................................................. 5,500,000 AAA 5,772,470
Series 1989E, 7%, 12/1/07 .............................................. 115,000 AAA 120,791
8.125%, 11/1/05 (c) .................................................... 1,400,000 AAA 1,483,930
Series A, ETM, 8%, 11/1/01** ........................................... 740,000 AAA 803,892
Series A, 3%, 8/15/02 (c) .............................................. 9,000,000 AAA 8,230,860
Series C, 6.4%, 8/1/04 (c) ............................................. 500,000 AAA 541,955
Series C, 6.4%, 8/1/05 (c) ............................................. 430,000 AAA 463,811
Series C, Prerefunded 8/1/02 at 101.50, 6.4%, 8/1/05***(c) ............. 10,000,000 AAA 11,004,800
Series D, 8%, 8/1/05 (c) ............................................... 170,000 AAA 178,826
Series D, Prerefunded 8/1/97 at 102, 8%, 8/1/05***(c) .................. 830,000 AAA 874,803
Series D, 6%, 8/1/06 (c) ............................................... 140,000 AAA 143,760
Series D, 6%, 8/1/08 (c) ............................................... 370,000 AAA 377,777
Series E, ETM, 7%, 12/1/07**(c) ........................................ 1,385,000 AAA 1,429,486
New York State Dormitory Authority:
College and University Pooled Capital Program, 7.8%, 12/1/05 (c) ....... 9,905,000 AAA 10,728,106
Revenue, City University, 7%, 7/1/09 (c) ............................... 4,000,000 AAA 4,604,000
Revenue, City University, 7.5%, 7/1/10 (c) ............................. 5,750,000 AAA 6,898,333
Lease Revenue Bonds, Dormitory Facilities, Series A, 6%, 7/1/09 (c) .... 2,000,000 AAA 2,101,840
New York State Energy Research and Development Authority, Pollution
Control Revenue, Electric and Gas, 5.9%, 12/1/06 (c) ................... 5,300,000 AAA 5,622,399
New York State, Urban Development Corporation Revenue,
Correctional Capital Facilities, Series A, 6.5%, 1/1/11 ................ 4,500,000 AAA 4,935,420
Suffolk County, NY, Industrial Development Agency, Southwest Sewer
System, 6%, 2/1/07 (c) ................................................. 8,000,000 AAA 8,585,520
</TABLE>
The accompanying notes are an integral part of the financial statements
46
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency:
Refunding Link Certificate, 5.5%, 1/1/07 (c) ........................... 2,000,000 AAA 2,024,840
Refunding Link Certificate, 6%, 1/1/18 (c) ............................. 8,775,000 AAA 9,195,849
Power System Revenue Bond, 7.25%, 1/1/21 ............................... 1,505,000 AAA 1,541,782
North Carolina Municipal Power Agency, Catawba Electric Revenue:
7.5%, 1/1/17 ........................................................... 4,520,000 A 4,740,621
5.25%, 1/1/08 (c) ...................................................... 2,500,000 AAA 2,497,675
6%, 1/1/11 (c) ......................................................... 8,235,000 AAA 8,687,431
NORTH DAKOTA
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center, Series 1991,
Zero Coupon, 5/1/02 (c) ................................................ 2,850,000 AAA 2,161,725
OHIO
Cleveland, OH, Water Works Revenue, Series 1993G,
5.5%, 1/1/13 (c) ....................................................... 10,000,000 AAA 9,988,400
Hamilton County, OH, Electric System Mortgage Revenue,
Series B, Prerefunded 10/15/98 at 102, 8%, 10/15/22***(c) .............. 3,720,000 AAA 4,060,826
Ohio Air Quality Development Authority, Ohio Power Company,
Series B, 7.4%, 8/1/09 (c) ............................................. 5,000,000 AAA 5,475,350
OKLAHOMA
Tulsa, OK, Industrial Development Authority:
Hospital Revenue, St. John's Medical Center, Zero Coupon, 12/1/04 (c) .. 5,430,000 AAA 3,558,605
St. John's Medical Center, Zero Coupon, 12/1/02 (c) .................... 3,930,000 AAA 2,887,371
PENNSYLVANIA
Pennsylvania Industrial Development Authority, Economic Development
Revenue:
5.8%, 1/1/08 (c) ................................................... 4,250,000 AAA 4,429,435
5.8%, 7/1/08 (c) ................................................... 4,875,000 AAA 5,087,501
5.8%, 1/1/09 (c) ................................................... 2,500,000 AAA 2,591,725
Philadelphia, PA, Water & Wastewater Refunding Revenue,
5.625%, 6/15/09 (c) .................................................... 20,000,000 AAA 20,398,800
Philadelphia, PA, Water & Wastewater Revenue:
5.625%, 6/15/08 (c) .................................................... 2,100,000 AAA 2,156,028
5.625%, 6/15/09 (c) .................................................... 10,855,000 AAA 11,071,449
5.5%, 6/15/07 (c) ...................................................... 5,000,000 AAA 5,088,650
Philadelphia, PA Municipal Authority Revenue, Justice Lease,
Series B, 6.9%, 11/15/03 (c) ........................................... 2,000,000 AAA 2,235,540
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health System, 5.375%, 7/1/11 (c) ......................... 7,300,000 AAA 7,164,585
PUERTO RICO
Commonwealth of Puerto Rico, Highway & Transportation
Authority Revenue, 5.5%, 7/1/09 ........................................ 10,940,000 AAA 11,089,331
RHODE ISLAND
Rhode Island Clean Water Protection Agency, Pollution Control Revenue,
Revolving Fund, Series A, 5.4%, 10/1/15 (c) ............................ 2,000,000 AAA 1,930,920
Rhode Island Convention Center Authority, Refunding Revenue:
Series 1993B, 5%, 5/15/10 (c) .......................................... 5,000,000 AAA 4,776,000
1993 Series B, 5.25%, 5/15/15 (c) ...................................... 22,000,000 AAA 20,871,400
Rhode Island Depositors Economic Protection Corp., Special Obligation:
Series B, 5.8%, 8/1/10 (c) ............................................. 6,200,000 AAA 6,380,420
Series B, 5.8%, 8/1/11 (c) ............................................. 4,525,000 AAA 4,639,799
Series B, 5.8%, 8/1/12 (c) ............................................. 2,500,000 AAA 2,560,825
Series B, 5.8%, 8/1/13 (c) ............................................. 7,340,000 AAA 7,493,259
Rhode Island Public Building Authority, Public Projects,
Series A, Prerefunded 2/1/98 at 102, 8.2%, 2/1/08***(c) ................ 2,200,000 AAA 2,354,330
</TABLE>
The accompanying notes are an integral part of the financial statements
47
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOUTH CAROLINA
Piedmont Municipal Power Agency, SC, Electric Revenue:
Series A, 6.5%, 1/1/16 (c) ............................................ 3,000,000 AAA 3,326,640
Series C, 5.5%, 1/1/12 (c) ............................................ 5,000,000 AAA 5,004,650
5.5%, 1/1/08 (c) ...................................................... 1,915,000 AAA 1,946,981
SOUTH DAKOTA
South Dakota Building Authority, Certificate of Participation,
Series A, 7.5%, 12/1/16 ............................................... 15,000,000 AAA 15,390,000
TENNESSEE
Knox County, TN, Health, Educational Hospital Housing Facilities Board,
Fort Sanders Alliance:
6.25%, 1/1/13 (c) ................................................. 4,000,000 AAA 4,301,320
7.25%, 1/1/09 (c) ................................................. 3,750,000 AAA 4,374,713
5.75%, 1/1/11 (c) ................................................. 15,405,000 AAA 15,780,574
5.75%, 1/1/12 (c) ................................................. 17,880,000 AAA 18,298,571
Knox County, TN, Health, Education and Housing Facilities
Board, Fort Sanders Alliance, Series 1995, 5.75%, 1/1/14 (c) .......... 2,000,000 AAA 2,039,380
TEXAS
Austin, TX, Combined Utility Systems Revenue, Series A,
Zero Coupon, 11/15/08 (c) ............................................. 3,460,000 AAA 1,783,665
Cedar Hill, Texas Independent School District, Zero Coupon:
Series 1996, 8/15/07 .................................................. 1,500,000 AAA 819,225
Series 1996, 8/15/09 .................................................. 1,500,000 AAA 714,855
Series 1996, 8/15/10 .................................................. 3,130,000 AAA 1,389,376
Dallas, TX, Housing Finance Corp., Single Family, Capital Appreciation,
Zero Coupon, 10/1/16 (c) .............................................. 6,805,000 AAA 855,593
Dallas-Fort Worth, TX, Airport Revenue:
7.75%, 11/1/03 (c) .................................................... 1,000,000 AAA 1,168,180
7.8%, 11/1/05 (c) ..................................................... 2,000,000 AAA 2,378,720
7.8%, 11/1/06 (c) ..................................................... 2,025,000 AAA 2,411,309
7.375%, 11/1/08 (c) ................................................... 4,500,000 AAA 5,223,285
7.375%, 11/1/10 (c) ................................................... 3,500,000 AAA 4,050,515
Harris County, TX, Health Facilities:
Texas Medical Center Project, Series 1996, 6.25%, 5/15/08 (c) ......... 2,785,000 AAA 2,972,319
6.25%, 5/15/09 (c) .................................................... 2,965,000 AAA 3,151,380
Harris County, TX, General Obligation;
Capital Appreciation Bond, Zero Coupon, 10/1/06 (c) ................... 9,035,000 AAA 5,333,270
Flood Control District, Zero Coupon, 10/1/00 (c) ...................... 1,000,000 AAA 831,610
Toll Road Authority, Subordinate Lien, Unlimited Tax,
Series A, Zero Coupon, 8/15/04 ................................... 2,050,000 AAA 1,374,628
Toll Road Authority, Subordinate Lien, Series A,
Zero Coupon, 8/15/05 ............................................. 4,025,000 AAA 2,543,317
Toll Road Revenue, Subordinate Lien, Series A,
Zero Coupon, 8/15/06 (c) ......................................... 4,010,000 AAA 2,383,063
Houston, TX, Water & Sewer System Authority, Series C:
Zero Coupon, 12/1/06 (c) .............................................. 14,575,000 AAA 8,528,270
Zero Coupon, 12/1/08 (c) .............................................. 19,000,000 AAA 9,770,940
Zero Coupon, 12/1/09 (c) .............................................. 14,750,000 AAA 7,090,620
Houston,TX, Water & Sewer System Revenue Compound Interest,
Junior Lien, Zero Coupon, Series 1991C:
12/1/10 (c) ...................................................... 5,000,000 AAA 2,242,450
12/1/12 (c) ...................................................... 3,350,000 AAA 1,331,156
</TABLE>
The accompanying notes are an integral part of the financial statements
48
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lubbock, TX, Health Facilities Development Corp., Methodist Hospital, Series B:
5.5%, 12/1/06 (c) ...................................................... 3,945,000 AAA 4,056,091
5.6%, 12/1/07 (c) ...................................................... 2,415,000 AAA 2,480,205
5.625%, 12/1/08 (c) .................................................... 4,400,000 AAA 4,504,852
5.625%, 12/1/09 (c) .................................................... 4,640,000 AAA 4,713,034
Montgomery County, TX, General Obligation, Library Refunding:
Zero Coupon, 9/1/03 (c) ................................................ 3,475,000 AAA 2,460,821
Zero Coupon, 9/1/04 (c) ................................................ 3,475,000 AAA 2,324,914
Zero Coupon, 9/1/05 (c) ................................................ 3,475,000 AAA 2,190,710
North Central Texas Health Facilities Development Corp. Hospital Revenue,
Presbyterian Hospital, Prerefunded 12/1/97 at 102,
8.75%, 12/1/15***(c) ............................................... 5,000,000 AAA 5,372,250
San Antonio, TX, Electric and Gas, Revenue Refunding, Series A:
Zero Coupon, 2/1/06 (c) ................................................ 17,900,000 AAA 10,944,060
Zero Coupon, 2/1/05 (c) ................................................ 2,500,000 AAA 1,624,350
Zero Coupon, 2/1/05 (c) ................................................ 8,000,000 AAA 5,197,920
San Antonio, TX, Hotel Revenue, Series 1996, 6%, 8/15/06 (c) .............. 2,000,000 AAA 2,125,400
San Antonio, TX, Electric and Gas, Series 1991B, Zero Coupon, 2/1/08 (c) .. 8,115,000 AAA 4,367,655
San Antonio, TX, Zero Coupon, 2/1/09 (c) .................................. 4,400,000 AAA 2,215,488
Tarrant County, TX, Health Facilities Development Corp., Hospital Refunding
Revenue, Fort Worth Osteopathic Hospital:
6%, 5/15/11 (c) .................................................... 4,615,000 AAA 4,830,244
6%, 5/15/21 (c) .................................................... 6,235,000 AAA 6,505,786
Texas General Obligation, Superconductor Revenue, Series C,
Zero Coupon, 4/1/05 (c) ................................................ 8,390,000 AAA 5,404,502
Texas General Obligation, Capital Appreciation Bond, Super Collider,
Series C, Zero Coupon, 4/1/06 (c) ...................................... 7,385,000 AAA 4,475,679
Texas Municipal Power Agency:
6.1%, 9/1/07 (c) ....................................................... 9,250,000 AAA 9,960,493
5.25%, 9/1/07 .......................................................... 1,500,000 AAA 1,509,855
6.1%, 9/1/09 ........................................................... 4,435,000 AAA 4,733,609
Texas State Public Finance Authority, Building Authority:
Zero Coupon, 2/1/06 (c) ................................................ 13,915,000 AAA 8,507,631
Series B, 6.25%, 2/1/08 (c) ............................................ 5,190,000 AAA 5,610,286
UTAH
Associated Municipal Power System, UT, Hunter Project, Refunding Revenue:
Zero Coupon, 7/1/00 (c) ................................................ 2,755,000 AAA 2,309,158
Zero Coupon, 7/1/02 (c) ................................................ 5,200,000 AAA 3,900,832
Zero Coupon, 7/1/04 (c) ................................................ 5,895,000 AAA 3,947,528
Zero Coupon, 7/1/05 (c) ................................................ 5,900,000 AAA 3,719,832
Zero Coupon, 7/1/06 (c) ................................................ 5,895,000 AAA 3,492,552
Zero Coupon, 7/1/07 (c) ................................................ 3,750,000 AAA 2,083,725
Intermountain Power Agency, UT, Power Supply Revenue:
5%, 7/1/12 (c) ......................................................... 1,000,000 AAA 927,770
Series A, Zero Coupon, 7/1/02 (c) ...................................... 1,655,000 AAA 1,245,007
Series A, Zero Coupon, 7/1/03 (c) ...................................... 1,000,000 AAA 711,720
Series A, Zero Coupon, 7/1/04 (c) ...................................... 1,730,000 AAA 1,162,854
Series B, Zero Coupon, 7/1/02 (c) ...................................... 8,230,000 AAA 6,191,182
Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15**(c) ............ 1,800,000 AAA 2,482,740
VIRGINIA
Roanoke, VA, Industrial Development Authority, Roanoke Memorial Hospital,
Series B, 6.125%, 7/1/17 (c) ........................................... 5,500,000 AAA 5,851,175
Southeastern Public Service Authority, VA, Refunding Revenue,
5.25%, 7/1/10 (c) ...................................................... 7,380,000 AAA 7,301,108
</TABLE>
The accompanying notes are an integral part of the financial statements
49
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia Beach, VA, Development Authority, Virginia Beach
General Hospital Project:
5%, 2/15/06 (c) ................................................... 1,750,000 AAA 1,748,600
5%, 2/15/07 (c) ................................................... 1,800,000 AAA 1,784,106
6%, 2/15/11 (c) ................................................... 1,595,000 AAA 1,679,902
5.125%, 2/15/18 (c) ............................................... 3,000,000 AAA 2,798,730
5.1%, 2/15/08 (c) ................................................. 1,345,000 AAA 1,330,071
WASHINGTON
Clark County, WA, Public Utility District #1:
6%, 1/1/06 (c) ........................................................ 7,500,000 AAA 7,935,525
6%, 1/1/08 (c) ........................................................ 2,200,000 AAA 2,306,238
King County, WA, Public Hospital District #1, Valley Medical Center,
Series 1992, 5.5%, 9/1/17 (c) ......................................... 3,500,000 AAA 3,332,840
North Shore, WA, General Obligation, School
District #417, 5.6%, 12/1/10 (c) ...................................... 1,650,000 AAA 1,668,876
Snohomish County, WA, School District #6, 6.5%, 12/1/07 (c) ............... 3,325,000 AAA 3,672,596
Washington Health Care Facilities Authority, Empire Health Services-Spokane:
5.65%, 11/1/05 (c) .................................................... 2,155,000 AAA 2,230,727
5.7%, 11/1/06 (c) ..................................................... 3,440,000 AAA 3,570,754
5.75%, 11/1/07 (c) .................................................... 7,350,000 AAA 7,605,486
5.8%, 11/1/09 (c) ..................................................... 4,595,000 AAA 4,736,894
5.8%, 11/1/10 (c) ..................................................... 2,100,000 AAA 2,168,166
Washington State Public Power Supply System, Revenue Refunding:
Nuclear Project #1, Series A, Prerefunded 7/1/99 at
102, 7.5%, 7/1/15***(c) ............................................ 2,405,000 AAA 2,638,093
Nuclear Project #1, Series A, 7%, 7/1/11 (c) .......................... 3,830,000 AAA 4,203,540
Nuclear Project #1, Series A, 7.5%, 7/1/15 (c) ........................ 1,595,000 AAA 1,746,956
Nuclear Project #1, Series B, 7.25%, 7/1/12 (c) ....................... 10,895,000 AAA 12,086,368
Nuclear Project #2, Series A, 7.25%, 7/1/03 (c) ....................... 2,000,000 AAA 2,216,500
Nuclear Project #2, Series A, 5.7%, 7/1/08 (c) ........................ 5,000,000 AAA 5,077,450
Nuclear Project #2, Series C, 7.375%, 7/1/11 (c) ...................... 1,370,000 AAA 1,533,263
Nuclear Project #2, Series C, 7%, 7/1/01 (c) .......................... 10,000,000 AAA 10,884,200
Nuclear Project #3, Series A, Prerefunded 7/1/99 at 102,
7.25%, 7/1/16***(c) ................................................ 3,630,000 AAA 3,958,551
Nuclear Project #3, Series A, Zero Coupon, 7/1/04 (c) ................. 3,625,000 AAA 2,427,445
Nuclear Project #3, Series A, Zero Coupon, 7/1/05 (c) ................. 4,125,000 AAA 2,600,730
Nuclear Project #3, 7.5%, 7/1/08 ...................................... 4,000,000 AAA 4,692,880
Washington Public Power Supply System, Nuclear Power Project #1,
6%, 7/1/08 (c) ........................................................ 5,000,000 AAA 5,187,450
Washington Public Power Supply System, Nuclear Project #1,
Series 1989A, 7.5%, 7/1/15 ............................................ 1,500,000 AAA 1,647,015
Washington State Housing Finance, Series A, 7.1%, 12/1/17 ................. 7,930,000 AAA 8,167,900
WEST VIRGINIA
West Virginia, School Building Authority Revenue,
Series B, 6.75%, 7/1/10 (c) ........................................... 4,000,000 AAA 4,340,160
WISCONSIN
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/1/04 (c) ........ 3,475,000 AAA 2,354,591
Wisconsin Health & Educational Facilities Authority Aurora Medical:
Series 1996, 5.75%, 11/15/06 (c) ...................................... 2,000,000 AAA 2,064,930
Series 1996, 5.75%, 11/15/07 (c) ...................................... 1,500,000 AAA 1,534,545
Series 1996, 6%, 11/15/08 (c) ......................................... 4,085,000 AAA 4,249,013
Series 1996, 6%, 11/15/09 (c) ......................................... 4,330,000 AAA 4,476,917
Felician Healthcare Inc., Series B, 6.25%, 1/1/22 (c) ................. 5,285,000 AAA 5,685,867
Hospital Sisters Services Inc. - Obligated Group, 5.375%, 6/1/18 ...... 4,800,000 AAA 4,527,168
6.1%, 8/15/09 (c) ..................................................... 2,000,000 AAA 2,092,580
Riverview Hospital Association Project, 9%, 5/1/11 .................... 2,500,000 AAA 2,560,900
</TABLE>
The accompanying notes are an integral part of the financial statements
50
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount($) Rating(b) Value($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SSM Healthcare:
Series 1992A, 6.4%, 6/1/08 ........................................ 2,335,000 AAA 2,543,445
Series 1992AA, 6.45%, 6/1/09 (c) .................................. 2,485,000 AAA 2,710,017
Series 1992AA, 6.45%, 6/1/10 (c) .................................. 2,650,000 AAA 2,886,778
Series 1992AA, 6.5%, 6/1/11 (c) ................................... 2,820,000 AAA 3,053,665
Series 1992AA, 6.5%, 6/1/12 (c) ................................... 3,000,000 AAA 3,312,060
St. Luke's Medical Center, 7.1%, 8/15/11 (c) .......................... 2,000,000 AAA 2,220,200
Villa St. Francis Inc., Series C, 6.25%, 1/1/22 (c) ................... 9,230,000 AAA 9,930,096
Wheaton Franciscan Services, Series 1993, 6.1%, 8/15/08 (c) ........... 4,580,000 AAA 4,862,174
-------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS (COST $1,544,992,355) ............... 1,623,395,173
-------------
- -------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO (COST $1,661,512,280) (a) .............. 99.1 1,740,393,909
OTHER ASSETS AND LIABILITIES, NET ................................. 0.9 15,018,313
----- -------------
NET ASSETS ........................................................ 100.0 1,755,412,222
===== =============
- -------------------------------------------------------------------------------------------------------------
* Floating rate demand notes are securities whose interest rates vary with a designated market index or market rate, such as the
coupon-equivalent of the U.S. Treasury bill rate. Variable rate demand notes are securities whose interest rates are reset
periodically at levels that are generally comparable to tax-exempt commercial paper. These securities are payable on demand
within seven calendar days and normally incorporate an irrevocable letter of credit or line of credit from a major bank. Since
these securities are payable on demand, they are valued at 100% of their principal.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are collateralized by U.S. Treasury securities which are held in
escrow by a trustee and used to pay principal and interest on bonds so designated.
*** Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury securities which are held in escrow and are used
to pay principal and interest on tax-exempt issues and to retire the bonds in full at the earliest refunding date.
(a) At September 30, 1996, the net unrealized appreciation on investments based on cost for federal income tax purposes of
$1,661,808,939 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost .................................................... $ 83,434,667
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value .................................................... (4,849,697)
------------
Net unrealized appreciation ............................................................ $ 78,584,970
============
(b) (Unaudited) All of the securities held have been determined to be of appropriate credit quality as required by the Fund's
investment objectives. Credit ratings shown are either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.
Unrated securities (NR) and securities rated by Scudder (SS&C) have been determined to be of comparable quality to rated
eligible securities.
(c) (Unaudited) Bond is insured by one of these companies: AMBAC, MBIA, FGIC, FSA or Capital Guaranty
(d) At September 30, 1996, this security, in whole or in part, has been pledged to cover initial margin requirements for open
futures contracts.
At September 30, 1996, open futures contracts sold short were as follows (Note 1):
Aggregate Market
Futures Expiration Contracts Face Value($) Value($)
- ------- ---------- --------- ------------- --------
U.S. Treasury Bond ..... December 1996 1,150 123,673,550 125,565,625
----------- -----------
Total net unrealized depreciation on open futures contracts sold short ...... (1,892,075)
===========
</TABLE>
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1996 was $730,013,519 and $777,225,705,
respectively.
- -------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended September 30, 1996, aggregated
$314,764,373 and $409,484,784, respectively.
- -------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
51
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
Principal Market
Amount($) Value($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 2.9%
- -----------------------------------------------------------------------------------------------------------------------
11,492,000 Repurchase Agreement with Donaldson, Lufkin, and Jenrette dated 9/30/96
at 5.7% to be repurchased at $11,493,820 on 10/1/96, collateralized by
a $11,336,000 U.S. Treasury Note, 7.125%, 9/30/99 (COST $11,492,000) ........... 11,492,000
----------
- -----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 11.0%
- -----------------------------------------------------------------------------------------------------------------------
8,000,000 U.S. Treasury Note, 5.5%, 9/30/97 ................................................ 7,980,000
5,000,000 U.S. Treasury Note, 5.13%, 4/30/98 ............................................... 4,932,800
2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 .............................................. 2,481,250
3,000,000 U.S. Treasury Note, 6.75%, 5/31/99 ............................................... 3,036,090
6,000,000 U.S. Treasury Note, 6.875%, 7/31/99 .............................................. 6,089,040
4,500,000 U.S. Treasury Note, 6%, 10/15/99 ................................................. 4,464,855
2,000,000 U.S. Treasury Note, 6.125%, 7/31/00 .............................................. 1,981,560
1,500,000 U.S. Treasury Note, 5.75%, 10/31/00 .............................................. 1,463,910
4,500,000 U.S. Treasury Note, 5.875%, 2/15/04 .............................................. 4,305,240
750,000 U.S. Treasury Bond, 7.875%, 2/15/21 .............................................. 819,143
6,000,000 U.S. Treasury Bond, 6.25%, 8/15/23 ............................................... 5,421,540
3,500,000 U.S. Treasury Separate Trading Registered Interest and Principal, 2/15/09
(7.01%***) ..................................................................... 1,492,295
----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $44,435,599) ............................... 44,467,723
----------
- -----------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION** 3.3%
- -----------------------------------------------------------------------------------------------------------------------
4,543,846 Government National Mortgage Association, 10%, with various maturities to
2/15/25 ........................................................................ 4,965,355
8,111,741 Government National Mortgage Association, 8.5%, 11/15/25 ......................... 8,342,358
----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $13,258,632) ................ 13,307,713
----------
- -----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS** 9.7%
- -----------------------------------------------------------------------------------------------------------------------
15,091,192 Federal National Mortgage Association, 6.5%, with various
maturities to 3/1/26 ........................................................... 14,175,178
26,015,434 Federal National Mortgage Association, 7%, with various
maturities to 8/1/26 ........................................................... 25,099,772
----------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS (COST $39,549,999) .............. 39,274,950
----------
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S.$ DENOMINATED 1.0%
- -----------------------------------------------------------------------------------------------------------------------
1,000,000 ABN-AMRO Bank NV, Subordinated Note, 7.13%, 10/15/93 ............................. 904,590
3,000,000 Province of Ontario, Global Medium Term Note, 6%, 2/21/06 ........................ 2,765,820
575,000 Royal Bank of Scotland, 6.375%, 2/1/11 ........................................... 515,223
----------
TOTAL FOREIGN BONDS -- U.S.$ DENOMINATED (COST $4,410,708) ....................... 4,185,633
----------
- -----------------------------------------------------------------------------------------------------------------------
ASSET BACKED 3.2%
- -----------------------------------------------------------------------------------------------------------------------
AUTOMOBILE RECEIVABLES 1.7%
4,000,000 Ford Credit Automobile Trust Series 1996-A A4, 6.75%, 9/15/00 ................... 4,027,480
3,000,000 Premier Auto Trust Asset Backed Certificate Series 1996-3 A4, 6.75%,
11/6/00 ........................................................................ 3,018,750
----------
7,046,230
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
52
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Principal Market
Amount($) Value($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CREDIT CARD RECEIVABLES 1.5%
4,000,000 Chase Manhattan Credit Card Master Trust, Series 1996-4A, 6.73%, 2/15/02 ......... 4,022,480
2,000,000 Sears Credit Account Master Trust Series 1995-4, 6.25%, 1/15/03 .................. 1,999,360
---------
6,021,840
----------
TOTAL ASSET BACKED (COST $12,997,645) ............................................ 13,068,070
----------
- -----------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 11.6%
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 0.9%
4,000,000 ITT Corp., 7.375%, 11/15/15 ...................................................... 3,720,640
----------
CONSUMER STAPLES 0.4%
2,000,000 Borden Inc., 7.875%, 2/15/23 ..................................................... 1,634,080
----------
FINANCIAL 4.7%
5,850,000 Associates Corp. of North America, 6.625%, 5/15/01 .............................. 5,791,266
4,000,000 Capital One Bank Medium Term Note, 5.95%, 2/15/01 ................................ 3,819,160
1,000,000 General Electric Capital Services Inc., 7.5%, 8/21/35 ............................ 990,780
2,500,000 Societe Generale, 7.4%, 6/1/06 ................................................... 2,497,075
4,000,000 Southern National Corp., 7.05%, 5/23/03 .......................................... 3,976,960
2,000,000 Wells Fargo & Co., 6.875%, 4/1/06 ................................................ 1,931,240
----------
19,006,481
----------
MEDIA 2.4%
2,000,000 News America Holdings Inc., 8.5%, 2/15/05 ........................................ 2,116,600
4,000,000 Tele-Communications, Inc., 8%, 8/1/05 ............................................ 3,909,360
3,500,000 Time Warner Inc., 9.125%, 1/15/13 ................................................ 3,710,420
----------
9,736,380
----------
DURABLES 2.0%
1,000,000 Boeing Co., 6.875%, 10/15/43 ..................................................... 907,820
3,000,000 Comdisco, Inc., Senior Note, 5.75%, 2/15/01 ...................................... 2,876,310
1,000,000 Ford Motor Co., 8.875%, 1/15/22 .................................................. 1,117,940
2,000,000 Lockheed Martin Corp., 7.75%, 5/1/26 ............................................. 2,011,540
1,000,000 McDonnell Douglas Corp., 9.75%, 4/1/12 ........................................... 1,190,960
----------
8,104,570
----------
TECHNOLOGY 0.4%
1,500,000 Loral Corp., 8.375%, 6/15/24 ..................................................... 1,604,520
----------
TRANSPORTATION 0.8%
2,500,000 AMR Corp., 9.75%, 8/15/21 ........................................................ 2,935,650
----------
TOTAL CORPORATE BONDS (COST $46,912,533) ......................................... 46,742,321
----------
- -----------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 0.4%
- -----------------------------------------------------------------------------------------------------------------------
HEALTH 0.1%
Pharmaceuticals
290,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 ............................................. 324,075
----------
FINANCIAL 0.1%
Other Financial Companies
200,000 First Financial Management Corp., 5%, 12/15/99 ................................... 384,000
----------
SERVICE INDUSTRIES 0.2%
Miscellaneous Commercial Services
1,000,000 ADT Operations Inc., Liquid Yield Option Note, 7/6/10 ............................ 567,500
260,000 Jardine Strategic Holdings Ltd., 7.5%, 5/7/49 .................................... 282,100
----------
849,600
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
53
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Principal Market
Amount($) Value($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSTRUCTION 0.0%
Homebuilding
30,000 Empresa ICA Sociedad Controladora S.A., 5%, 3/15/04 .................... 21,000
----------
TOTAL CONVERTIBLE BONDS (COST $1,201,871) .............................. 1,578,675
----------
- --------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 1.6%
- --------------------------------------------------------------------------------------------------------
Shares
- ---------
CONSUMER DISCRETIONARY 0.3%
Department & Chain Stores
23,500 Kmart 7.75% ............................................................ 1,148,563
----------
HEALTH 0.3%
Health Industry Services
45,600 FHP International Corp.,"A", Cum. $1.25 ................................ 1,419,300
----------
FINANCIAL 0.4%
Consumer Finance 0.3%
33,100 Advanta Corp. 6.75% .................................................... 1,381,925
----------
REAL ESTATE 0.1%
14,600 Security Capital Industrial Trust "B" 7% ............................... 357,700
----------
MANUFACTURING 0.5%
Containers & Paper 0.2%
3,300 Boise Cascade Corp. "G", Cum. $1.58 .................................... 92,400
15,400 Bowater, Inc. 7% "B" ................................................... 483,175
2,100 International Paper Co. 5.25% .......................................... 99,750
----------
675,325
----------
Industrial Specialty 0.2%
31,300 Cooper Industries, Inc. 6% ............................................. 641,650
----------
Wholesale Distributors 0.1%
4,700 Alco Standard Corp. 6.5% ............................................... 427,700
----------
ENERGY 0.1%
Oil & Gas Production
4,200 Parker & Parsley Capital Corp. 6.25% ................................... 227,325
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,563,150) ................... 6,279,488
----------
- --------------------------------------------------------------------------------------------------------
COMMON STOCKS 55.2%
- --------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 2.5%
Department & Chain Stores
54,200 J.C. Penney Co., Inc. .................................................. 2,933,575
38,000 May Department Stores .................................................. 1,847,750
89,800 Rite Aid Corp. ......................................................... 3,255,250
48,100 Sears, Roebuck & Co. ................................................... 2,152,475
----------
10,189,050
----------
CONSUMER STAPLES 5.4%
Alcohol 0.6%
67,600 Anheuser Busch Companies, Inc. ......................................... 2,543,450
----------
Consumer Electronic & Photographic Products 0.6%
11,700 Duracell International Inc. ............................................ 750,263
33,800 Whirlpool Corp. ........................................................ 1,711,125
----------
2,461,388
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
54
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Market
Shares Value($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Food & Beverage 2.0%
43,900 General Mills, Inc. .................................................. 2,650,463
114,550 H.J. Heinz Co. ....................................................... 3,866,063
9,200 Unilever NV (New York shares) ........................................ 1,450,150
----------
7,966,676
----------
Package Goods/Cosmetics 2.2%
36,000 Avon Products Inc. ................................................... 1,786,500
11,400 Clorox Co. ........................................................... 1,092,975
48,900 Kimberly-Clark Corp. ................................................. 4,309,313
37,700 Tambrands Inc. ....................................................... 1,588,113
----------
8,776,901
----------
HEALTH 7.0%
Medical Supply & Specialty 0.8%
84,200 Bausch & Lomb, Inc. .................................................. 3,094,350
----------
Pharmaceuticals 6.2%
47,600 American Home Products Corp. ......................................... 3,034,500
67,600 Baxter International Inc. ............................................ 3,160,300
32,600 Bristol-Myers Squibb Co. ............................................. 3,141,825
28,400 Eli Lilly & Co. ...................................................... 1,831,800
68,200 Schering-Plough Corp. ................................................ 4,194,300
39,200 SmithKline Beecham PLC (ADR) ......................................... 2,386,300
64,800 Warner-Lambert Co. ................................................... 4,276,800
122,100 Zeneca Group PLC ..................................................... 3,034,936
----------
25,060,761
----------
COMMUNICATIONS 3.6%
Telephone/Communications
72,700 Alltel Corp. ......................................................... 2,026,513
30,200 Bell Atlantic Corp. .................................................. 1,808,225
65,600 GTE Corp. ............................................................ 2,525,600
33,000 Hong Kong Telecommunications Ltd. (ADR) .............................. 594,000
40,400 Koninklijke PTT Nederland ............................................ 1,389,524
54,500 NYNEX Corp. .......................................................... 2,370,750
22,000 SBC Communications, Inc. ............................................. 1,058,750
56,600 Sprint Corp. ......................................................... 2,200,325
100,000 Telecom Corp. of New Zealand ......................................... 469,762
----------
14,443,449
----------
FINANCIAL 11.0%
Banks 4.5%
44,300 Bankers Trust New York Corp. ......................................... 3,483,088
41,100 Chase Manhattan Corp. (New) .......................................... 3,293,138
67,400 CoreStates Financial Corp. ........................................... 2,915,050
42,900 First Bank System Inc. ............................................... 2,868,938
34,100 J.P. Morgan & Co., Inc. .............................................. 3,030,638
54,200 KeyCorp (New) ........................................................ 2,384,800
----------
17,975,652
----------
Insurance 1.9%
30,728 Allstate Corp. ....................................................... 1,513,404
62,600 EXEL, Ltd. ........................................................... 2,175,345
17,400 Hartford Steam Boiler Inspection & Insurance Co. ..................... 778,650
73,300 Lincoln National Corp. ............................................... 3,216,038
----------
7,683,437
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
55
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Market
Shares Value($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other Financial Companies 1.7%
74,600 Federal National Mortgage Association .................................. 2,601,675
55,300 Student Loan Marketing Association ..................................... 4,126,763
----------
6,728,438
----------
Real Estate 2.9%
15,500 Developers Diversified Realty Corp. .................................... 497,938
46,800 Equity Residential Properties Trust (REIT) ............................. 1,673,100
66,600 Health Care Property Investment Inc. (REIT) ............................ 2,172,825
61,700 Meditrust SBI (REIT) ................................................... 2,136,363
101,600 Nationwide Health Properties Inc. (REIT) ............................... 2,235,200
26,000 Omega Healthcare Investors (REIT) ...................................... 780,000
53,083 Security Capital Industrial Trust ...................................... 968,765
54,128 Simon DeBartolo Group, Inc. ............................................ 1,380,264
----------
11,844,455
----------
MEDIA 0.2%
Print Media
20,900 Reader's Digest Association Inc. "A" ................................... 854,288
----------
SERVICE INDUSTRIES 0.2%
Printing/Publishing
13,900 Dun & Bradstreet Corp. ................................................. 828,788
----------
DURABLES 4.7%
Aerospace 2.9%
7,200 AAR Corp. .............................................................. 166,500
40,972 Lockheed Martin Corp. .................................................. 3,692,602
4,000 Northrop Grumman Corp. ................................................. 321,000
62,900 Rockwell International Corp. ........................................... 3,545,988
32,900 United Technologies Corp. .............................................. 3,952,113
----------
11,678,203
----------
Automobiles 1.5%
53,200 Dana Corp. ............................................................. 1,609,300
15,000 Eaton Corp. ............................................................ 905,625
70,700 Ford Motor Co. ......................................................... 2,209,375
28,900 Genuine Parts Co. ...................................................... 1,264,375
----------
5,988,675
----------
Construction/Agricultural Equipment 0.3%
20,300 PACCAR, Inc. ........................................................... 1,111,425
----------
MANUFACTURING 9.3%
Chemicals 2.8%
46,500 DSM NV (ADR) ........................................................... 1,139,250
22,800 Dow Chemical Co. ....................................................... 1,829,700
45,800 E.I. du Pont de Nemours & Co. .......................................... 4,041,850
26,400 Eastman Chemical Co. ................................................... 1,541,100
11,000 Imperial Chemical Industries PLC (ADR) (New) ........................... 580,250
93,300 Lyondell Petrochemical Co. ............................................. 2,169,225
----------
11,301,375
----------
Containers & Paper 0.7%
81,500 Stone Container Corp. .................................................. 1,273,438
48,400 Westvaco Corp. ......................................................... 1,433,850
----------
2,707,288
----------
Diversified Manufacturing 1.9%
47,100 Dresser Industries Inc. ................................................ 1,401,225
21,400 Olin Corp. ............................................................. 1,797,600
50,200 TRW Inc. ............................................................... 4,668,600
----------
7,867,425
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
56
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Market
Shares Value($)
- ------------------------------------------------------------------------------
<S><C> <C> <C>
Electrical Products 0.9%
32,200 Philips NV (New York shares) .......................... 1,155,175
57,100 Thomas & Betts Corp. .................................. 2,341,100
----------
3,496,275
----------
Industrial Specialty 0.2%
16,100 Corning Inc. .......................................... 627,900
----------
Machinery/Components/Controls 0.1%
10,400 Timken Co. ............................................ 408,200
----------
Office Equipment/Supplies 1.8%
135,900 Xerox Corp. ........................................... 7,287,633
----------
Specialty Chemicals 0.9%
55,300 Betz Laboratories Inc. ................................ 2,903,250
24,900 Witco Corp. ........................................... 818,583
----------
3,721,833
----------
ENERGY 4.6%
Oil Companies
20,400 Exxon Corp. ........................................... 1,698,300
55,500 Murphy Oil Corp. ...................................... 2,677,875
31,400 Pennzoil Co. .......................................... 1,660,275
39,900 Repsol SA (ADR) ....................................... 1,321,688
15,000 Royal Dutch Petroleum Co. (New York shares) ........... 2,341,875
61,981 Societe Nationale Elf Aquitaine (ADR) ................. 2,440,502
12,400 Texaco Inc. ........................................... 1,140,800
60,701 Total SA (ADR) ........................................ 2,374,927
123,500 YPF S.A. "D" (ADR) .................................... 2,825,061
----------
18,481,303
----------
METALS & MINERALS 1.9%
Steel & Metals
99,335 Allegheny Teledyne Inc. ............................... 2,247,454
84,000 Freeport McMoRan Copper & Gold, Inc. "A" .............. 2,478,000
101,500 Oregon Steel Mills, Inc. .............................. 1,560,563
21,900 Phelps Dodge Corp. .................................... 1,404,338
----------
7,690,355
----------
CONSTRUCTION 1.1%
Forest Products
30,700 Georgia Pacific Corp. ................................. 2,429,138
48,600 Louisiana-Pacific Corp. ............................... 1,105,650
22,400 Weyerhaeuser Co. ...................................... 1,033,200
----------
4,567,988
----------
TRANSPORTATION 0.7%
Railroads
59,100 Canadian National Railway Co. ......................... 1,211,550
19,500 Union Pacific Corp. ................................... 1,428,375
----------
2,639,925
----------
UTILITIES 3.0%
Electric Utilities
32,900 CINergy Corp. ......................................... 1,015,788
20,700 CMS Energy Corp. ...................................... 623,588
59,300 National Power PLC (GDR) .............................. 1,475,088
26,100 PacifiCorp ............................................ 538,313
50,800 Pacific Gas & Electric Co. ............................ 1,104,900
57,000 PowerGen PLC (ADR) .................................... 1,759,875
30,900 Southern Company ...................................... 699,113
</TABLE>
The accompanying notes are an integral part of the financial statements
57
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market
Shares Value($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
124,600 TNP Enterprises Inc. ................................. 3,083,850
10,500 Texas Utilities Co., Inc. ............................ 416,063
63,600 Unicom Corp. ......................................... 1,597,950
-----------
12,314,528
-----------
TOTAL COMMON STOCKS (COST $181,331,287) .............. 222,341,414
===========
<CAPTION>
- --------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Investment Portfolio (Cost
$361,153,424) (a) ....................... 99.9 402,737,987
Other Assets and Liabilities, Net ......... 0.1 441,952
----- -----------
Net Assets ................................ 100.0 403,179,939
===== ===========
- --------------------------------------------------------------------------------
REIT Real Estate Investment Trust
** Effective maturities will be shorter due to prepayments.
*** Yield (unaudited); bond equivalent yield to maturity; not a coupon
rate.
(a) At September 30, 1996, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $361,182,456 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ........................................... $44,701,820
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ......................................... (3,146,289)
-----------
Net unrealized appreciation ............................. $41,555,531
===========
- --------------------------------------------------------------------------------
For the year ended September 30, 1996, purchases and sales of
investment securities (excluding short-term investments, U.S.
Government obligations and U.S. Government Agencies) aggregated
$169,718,696 and $55,986,876, respectively. Purchases and sales of U.S.
Government obligations and U.S. Government Agencies aggregated
$96,989,449 and $44,895,774, respectively.
- --------------------------------------------------------------------------------
The aggregate face value of future contracts closed during the year
ended September 30, 1996 was $3,641,641.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financial statements
58
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount($) Value($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.1%
- --------------------------------------------------------------------------------------------------------------------
2,188,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/96
at 5.7% to be repurchased at $2,188,346 on 10/1/96, collateralized
by a $1,635,000 U.S. Treasury Note, 11.625%, 11/15/04 (COST $2,188,000) ........ 2,188,000
-----------
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 2.6%
- --------------------------------------------------------------------------------------------------------------------
35,000,000 American Express Credit Corp., 11/21/96 .......................................... 34,731,044
20,000,000 Associates Corp. of North America, 10/17/96 ...................................... 19,949,756
20,000,000 General Electric Capital Services Inc., 12/4/96 .................................. 19,805,722
15,300,000 Pitney Bowes Credit Corp., 10/15/96 .............................................. 15,266,085
20,000,000 Walt Disney Co. Discount Note, 10/23/96 .......................................... 19,932,022
-----------
TOTAL COMMERCIAL PAPER (COST $109,704,595) ....................................... 109,684,629
-----------
- --------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 0.1%
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL
4,500,000 Siemens Capital Corp. with warrants, 8%, 6/24/02 (COST $5,885,818) ............... 6,075,000
-----------
- --------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 3.3%
- --------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 1.0%
Department & Chain Stores
4,000,000 Federated Department Stores, Inc. debenture, 5%, 10/1/03 ......................... 4,480,000
34,500,000 Home Depot Inc. Convertible until 10/1/01, 3.25%, 10/1/01 ........................ 35,103,750
..................................................................................................... -----------
39,583,750
-----------
HEALTH 0.2%
Pharmaceuticals
6,260,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 ............................................. 6,995,550
-----------
COMMUNICATIONS 0.0%
Telephone/Communications
1,000,000 Compania de Telefonos de Chile, S.A., 4.5%, 1/15/03 .............................. 1,200,000
-----------
FINANCIAL 1.1%
Banks 0.5%
17,290,000 MBL International Finance Bermuda, 3.0%, 11/30/02 ................................ 19,624,150
-----------
Real Estate 0.4%
18,250,000 Security Capital Corp., 6.5%, 3/29/16(b)(c) ...................................... 18,250,000
-----------
Other Financial Companies 0.2%
5,200,000 First Financial Management Corp., 5.0%, 12/15/99 ................................. 9,984,000
-----------
SERVICE INDUSTRIES 0.5%
Miscellaneous Commercial Services
25,000,000 ADT Operations Inc., Liquid Yield Option Note, 7/6/10 ............................ 14,187,500
7,036,000 Jardine Strategic Holdings Ltd., 7.5%, 5/7/49 .................................... 7,634,060
-----------
21,821,560
-----------
DURABLES 0.1%
Automobiles
4,000,000 Magna International, Inc., 5.0%, 10/15/02 ........................................ 4,300,000
-----------
MANUFACTURING 0.1%
Diversified Manufacturing
5,000,000 Thermo Electron Corp., 4.25%, 1/1/03 ............................................. 6,000,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
59
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Principal Market
Amount($) Value($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY 0.1%
Electronic Data Processing
8,000,000 Silicon Graphics Inc., Zero Coupon, 11/2/13 ...................................... 3,980,000
-----------
CONSTRUCTION 0.2%
Homebuilding
10,670,000 Empresa ICA Sociedad Controladora S.A., 5.0%, 3/15/04 ............................ 7,469,000
-----------
TOTAL CONVERTIBLE BONDS (COST $127,964,368) ...................................... 139,208,010
-----------
- --------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 2.8%
- --------------------------------------------------------------------------------------------------------------------
Shares
- ---------------
CONSUMER DISCRETIONARY 0.5%
Department & Chain Stores
439,800 Kmart 7.75% ...................................................................... 21,495,225
-----------
HEALTH 0.7%
Health Industry Services 0.7%
848,700 FHP International Corp.,"A", Cum. $1.25 .......................................... 26,415,788
-----------
Medical Supply & Specialty 0.0%
25,000 U.S. Surgical Corp. "A", Cum. $2.20 .............................................. 1,034,375
-----------
FINANCIAL 0.3%
Consumer Finance 0.1%
129,000 Advanta Corp. 6.75% .............................................................. 5,385,750
-----------
Real Estate 0.2%
302,400 Security Capital Industrial Trust "B" 7% ......................................... 7,408,800
-----------
MANUFACTURING 0.6%
Containers & Paper 0.1%
61,900 Boise Cascade Corp. "G", Cum $1.58 ............................................... 1,733,200
50,200 International Paper Co. 5.25% .................................................... 2,384,500
-----------
4,117,700
-----------
Industrial Specialty 0.3%
652,400 Cooper Industries, Inc. 6.0% ..................................................... 13,374,200
-----------
Wholesale Distributors 0.2%
102,800 Alco Standard Corp. 6.5% ......................................................... 9,354,800
-----------
TECHNOLOGY 0.1%
Electronic Data Processing 0.1%
50,000 Ceridian Corp. 5.5% .............................................................. 5,462,500
-----------
ENERGY 0.3%
Oil & Gas Production
215,300 Parker & Parsley Capital Corp. 6.25% ............................................. 11,706,938
-----------
METALS & MINERALS 0.3%
Precious Metals
500,000 Freeport McMoRan Copper & Gold, Inc., Cum.$1.25 .................................. 13,875,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $102,560,937) ........................... 119,631,076
-----------
- --------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.7%
- --------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 4.3%
Department & Chain Stores
909,800 J.C. Penney Co., Inc. ............................................................ 49,242,925
577,200 May Department Stores ............................................................ 28,066,350
1,855,200 Rite Aid Corp. ................................................................... 67,251,000
</TABLE>
The accompanying notes are an integral part of the financial statements
60
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market
Shares Value($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
812,900 Sears, Roebuck & Co. ......................... 36,377,275
-----------
................................................................. 180,937,550
-----------
CONSUMER STAPLES 8.7%
Alcohol 1.1%
1,262,600 Anheuser-Busch Companies, Inc. ............... 47,505,325
-----------
Consumer Electronic & Photographic Products 1.1%
218,000 Duracell International Inc. .................. 13,979,250
605,600 Whirlpool Corp. .............................. 30,658,500
-----------
44,637,750
-----------
Consumer Specialties 0.0%
159,200 A.T. Cross Co. "A" ........................... 1,810,900
-----------
Food & Beverage 3.1%
598,400 General Mills, Inc. .......................... 36,128,400
2,064,900 H.J. Heinz Co. ............................... 69,690,375
165,200 Unilever NV (New York shares) ................ 26,039,650
-----------
131,858,425
-----------
Package Goods/Cosmetics 3.4%
618,100 Avon Products Inc. ........................... 30,673,213
215,300 Clorox Co. ................................... 20,641,888
701,300 Kimberly-Clark Corp. ......................... 61,802,063
713,000 Tambrands Inc. ............................... 30,035,125
-----------
143,152,289
-----------
HEALTH 10.4%
Medical Supply & Specialty 1.2%
1,347,200 Bausch & Lomb, Inc. .......................... 49,509,600
-----------
Pharmaceuticals 9.2%
772,800 American Home Products Corp. ................. 49,266,000
1,166,300 Baxter International Inc. .................... 53,816,300
577,000 Bristol-Myers Squibb Co. ..................... 55,608,375
546,600 Eli Lilly & Co. .............................. 35,255,700
905,500 Schering-Plough Corp. ........................ 55,688,250
661,300 SmithKline Beecham PLC (ADR) ................. 40,256,638
926,600 Warner-Lambert Co. ........................... 61,155,600
1,446,900 Zeneca Group PLC ............................. 35,964,369
300 Zeneca Group PLC (ADR) ....................... 22,275
-----------
387,033,507
-----------
COMMUNICATIONS 5.9%
Telephone/Communications
1,374,000 Alltel Corp. ................................. 38,300,250
502,700 Bell Atlantic Corp. .......................... 30,099,163
1,068,500 GTE Corp. .................................... 41,137,250
591,800 Hong Kong Telecommunications Ltd. (ADR) ...... 10,652,400
862,000 Koninklijke PTT Nederland .................... 29,647,766
1,043,100 NYNEX Corp. .................................. 45,374,850
1,127,000 Sprint Corp. ................................. 43,812,125
2,036,000 Telecom Corp. of New Zealand ................. 9,564,345
-----------
248,588,149
-----------
FINANCIAL 18.3%
Banks 8.9%
286,000 AmSouth Bancorp. ............................. 12,727,000
590,000 Argentaria Corporacion Bancaria de Espana .... 24,428,360
125,500 BankAmerica Corp. ............................ 10,306,688
</TABLE>
The accompanying notes are an integral part of the financial statements
61
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market
Shares Value($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
804,600 Bankers Trust New York Corp. .................... 63,261,675
649,200 Chase Manhattan Corp. (New) ..................... 52,017,150
983,800 CoreStates Financial Corp. ...................... 42,549,350
712,300 First Bank System Inc. .......................... 47,635,063
299,400 First Chicago NBD Corp. ......................... 13,547,850
574,800 J.P. Morgan & Co., Inc. ......................... 51,085,350
980,200 KeyCorp (New) ................................... 43,128,800
120,900 NationsBank Corp. ............................... 10,503,188
128,500 Nordbanken AB ................................... 3,293,630
-----------
374,484,104
-----------
Insurance 2.9%
477,423 Allstate Corp. .................................. 23,513,085
979,100 EXEL, Ltd. ...................................... 34,023,725
306,600 Hartford Steam Boiler Inspection &
Insurance Co. ................................. 13,720,350
1,110,200 Lincoln National Corp. .......................... 48,710,025
-----------
119,967,185
-----------
Other Financial Companies 2.8%
1,237,800 Federal National Mortgage Association ........... 43,168,275
1,045,000 Student Loan Marketing Association .............. 77,983,125
-----------
121,151,400
-----------
Real Estate 3.7%
245,800 Avalon Properties, Inc. (REIT) .................. 5,714,850
386,200 Camden Property Trust (REIT) .................... 9,896,375
88,500 Charles E. Smith Residential Realty, Inc. (REIT) 2,135,063
235,000 Developers Diversified Realty Corp. (REIT) ...... 7,549,375
28,000 Equity Residential Properties Trust (REIT) ...... 1,001,000
1,716,600 General Growth Properties, Inc. (REIT) .......... 42,700,425
409,800 Health Care Property Investment Inc. (REIT) ..... 13,369,725
31,100 Mark Centers Trust (REIT) ....................... 338,213
457,900 Meditrust SBI (REIT) ............................ 15,854,788
680,800 Nationwide Health Properties Inc. (REIT) ........ 14,977,600
71,200 Post Properties Inc. (REIT) ..................... 2,607,700
17,398 Security Capital Corp.(b)(c) .................... 18,510,962
431,708 Security Capital Industrial Trust (REIT) ........ 7,878,671
451,200 South West Property Trust Inc. (REIT) ........... 6,260,400
150,000 Spieker Properties, Inc. (REIT) ................. 4,406,250
102,100 Vornado Realty Trust (REIT) ..................... 4,135,050
-----------
157,336,447
-----------
MEDIA 0.3%
Print Media
336,400 Reader's Digest Association Inc. "A" ............ 13,750,350
-----------
SERVICE INDUSTRIES 0.3%
Printing/Publishing
242,200 Dun & Bradstreet Corp. .......................... 14,441,175
-----------
DURABLES 7.5%
Aerospace 4.3%
128,700 AAR Corp. ....................................... 2,976,188
604,700 Lockheed Martin Corp. ........................... 54,498,588
79,000 Northrop Grumman Corp. .......................... 6,339,750
934,300 Rockwell International Corp. .................... 52,671,163
546,900 United Technologies Corp. ....................... 65,696,363
-----------
182,182,052
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
62
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market
Shares Value($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Automobiles 2.7%
941,900 Dana Corp. ..................................... 28,492,475
444,100 Eaton Corp. .................................... 26,812,538
1,145,700 Ford Motor Co. ................................. 35,803,125
471,400 Genuine Parts Co. .............................. 20,623,750
-----------
111,731,888
-----------
Construction/Agricultural Equipment 0.5%
383,400 PACCAR, Inc. ................................... 20,991,150
-----------
MANUFACTURING 18.0%
Chemicals 5.2%
390,900 DSM Group NV ................................... 38,348,146
518,300 Dow Chemical Co. ............................... 41,593,575
823,600 E.I. du Pont de Nemours & Co. .................. 72,682,700
489,900 Eastman Chemical Co. ........................... 28,597,913
800,000 Imperial Chemical Industries PLC ............... 10,581,083
1,254,000 Lyondell Petrochemical Co. ..................... 29,155,500
-----------
220,958,917
-----------
Containers & Paper 1.9%
566,900 Bowater, Inc. .................................. 21,542,200
2,150,500 Stone Container Corp. .......................... 33,601,563
883,900 Westvaco Corp. ................................. 26,185,538
-----------
81,329,301
-----------
Diversified Manufacturing 3.1%
941,000 Dresser Industries Inc. ........................ 27,994,750
299,900 Olin Corp. ..................................... 25,191,600
833,100 TRW Inc. ....................................... 77,478,300
-----------
130,664,650
-----------
Electrical Products 2.0%
815,000 Philips Electronics N.V. ....................... 29,411,387
367,300 Philips NV (New York shares) ................... 13,176,888
1,014,600 Thomas & Betts Corp. ........................... 41,598,600
-----------
84,186,875
-----------
Industrial Specialty 0.5%
525,600 Corning Inc. ................................... 20,498,400
-----------
Machinery/Components/Controls 0.7%
925,000 S.K.F. AB "B" (Free)* .......................... 22,244,629
214,500 Timken Co. ..................................... 8,419,125
-----------
30,663,754
-----------
Office Equipment/Supplies 2.8%
2,192,100 Xerox Corp. .................................... 117,551,363
-----------
Specialty Chemicals 1.8%
204,800 ARCO Chemical Co. .............................. 10,240,000
709,000 Betz Laboratories Inc. ......................... 37,222,500
306,400 Petrolite Corp. ................................ 10,264,400
501,600 Witco Corp. .................................... 16,490,100
-----------
74,217,000
-----------
ENERGY 7.2%
Oil Companies
309,500 Exxon Corp. .................................... 25,765,875
395,300 Murphy Oil Corp. ............................... 19,073,225
527,100 Pennzoil Co. ................................... 27,870,413
545,900 Repsol SA (ADR) ................................ 18,082,938
264,700 Royal Dutch Petroleum Co. (New York shares) .... 41,326,288
</TABLE>
The accompanying notes are an integral part of the financial statements
63
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market
Shares Value($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
488,800 Societe Nationale Elf Aquitaine .............. 38,220,176
255,900 Texaco Inc. .................................. 23,542,800
558,448 Total SA "B" ................................. 43,947,171
569,496 Total SA (ADR) ............................... 22,281,531
1,941,300 YPF S.A. "D" (ADR) ........................... 44,407,238
-------------
304,517,655
-------------
METALS & MINERALS 2.5%
Precious Metals 0.3%
405,000 De Beers Consolidated Mines Ltd. (ADR) ....... 12,555,000
-------------
STEEL & METALS 2.2%
1,815,310 Allegheny Teledyne Inc. ...................... 41,071,389
579,010 Freeport McMoRan Copper & Gold, Inc. "A" ..... 17,080,795
1,061,900 J & L Specialty Steel, Inc. .................. 14,468,388
297,500 Phelps Dodge Corp. ........................... 19,077,188
-------------
91,697,760
-------------
CONSTRUCTION 1.4%
Forest Products
509,600 Georgia Pacific Corp. ........................ 40,322,100
394,900 Weyerhaeuser Co. ............................. 18,214,763
-------------
58,536,863
-------------
TRANSPORTATION 1.8%
Airlines 0.3%
171,180 Delta Air Lines, Inc. ........................ 12,324,960
-------------
Railroads 1.5%
1,200,900 Canadian National Railway Co. ................ 24,618,450
141,100 Norfolk Southern Corp. ....................... 12,893,013
339,200 Union Pacific Corp. .......................... 24,846,400
-------------
62,357,863
-------------
UTILITIES 5.1%
Electric Utilities
519,300 CINergy Corp. ................................ 16,033,388
261,200 CMS Energy Corp. ............................. 7,868,650
1,468,800 China Light & Power Co. Ltd. (ADR) ........... 6,829,920
577,367 National Power PLC ........................... 3,560,669
250,000 National Power PLC (GDR) ..................... 6,218,750
553,600 PacifiCorp ................................... 11,418,000
824,500 Pacific Gas & Electric Co. ................... 17,932,875
8,586,000 PowerGen PLC ................................. 65,045,862
942,503 PowerGen PLC (Sponsored ADR) ................. 29,099,780
636,400 Southern Company ............................. 14,398,550
224,600 Texas Utilities Co., Inc. .................... 8,899,775
1,035,400 Unicom Corp. ................................. 26,014,410
-------------
213,320,629
-------------
TOTAL COMMON STOCKS (COST $2,933,400,128) .... 3,866,450,236
-------------
<CAPTION>
- --------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST
$3,281,703,846)(a) ................ 100.6 4,243,236,951
OTHER ASSETS AND LIABILITIES, NET ... (0.6) (24,253,553)
----- -------------
NET ASSETS .......................... 100.0 4,218,983,398
===== =============
</TABLE>
The accompanying notes are an integral part of the financial statements
64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REIT Real Estate Investment Trust
<TABLE>
(a) At September 30, 1996, the net unrealized appreciation on investments based on cost for federal income tax purposes of
$3,279,384,207 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is an excess of value
over tax cost ................................................................................... $989,964,050
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax
cost over value ................................................................................. (26,111,306)
------------
Net unrealized appreciation ....................................................................... $963,852,744
============
</TABLE>
(b) Securities valued in good faith by the Valuation Committee of the
Board of Trustees amounted to $36,760,962 (.87% of net assets). The
cost of these securities at September 30, 1996 was $36,500,000.
<TABLE>
(c) Restricted Securities -- securities which have not been registered
with the Securities and Exchange Commission under the Securities Act
of 1933. Information concerning such restricted securities at
September 30, 1996 is as follows:
<CAPTION>
Security Acquisition Date Cost ($)
-------- ---------------- --------
<S> <C> <C>
Security Capital Corp. 4/19/96 18,250,000
Security Capital Corp., 6.5%, 3/29/16 4/19/96 18,250,000
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
At September 30, 1996, outstanding written call options were as follows (Note 1):
<CAPTION>
Number of Expiration Strike Market
Contracts Date Price ($) Value ($)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Xerox Corp.
(Premiums received $19,199) ... 400 Nov. 96 60.00 20,000
</TABLE>
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short#term
investments) for the year ended September 30, 1996, aggregated
$1,515,643,194 and $863,095,769, respectively. In addition the Fund wrote a
call option on Xerox Corp. (premium received $19,199).
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
65
<PAGE>
AARP GLOBAL GROWTH FUND
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 8.4%
- ------------------------------------------------------------------------------------------------------------------------------------
6,496,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/96 at 5.7% to be
repurchased at $6,497,029 on 10/1/96, collateralized by a $6,488,000 U.S. Treasury Note,
5.875%, 7/31/97 (COST $6,496,000) ........................................................... 6,496,000
---------
- ------------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 0.0%
- ------------------------------------------------------------------------------------------------------------------------------------
GHANA
13,000 Ashanti Capital Corp., 5.5%, 3/15/03 (COST $13,000) ........................................... 11,765
---------
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 2.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------
GERMANY
36,582 RWE AG (Producer and marketer of petroleum and chemical products) ............................. 1,117,474
4,455 SAP AG (Computer software manufacturer) ....................................................... 748,261
---------
TOTAL PREFERRED STOCKS (COST $1,782,317) ...................................................... 1,865,735
---------
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.6%
- ------------------------------------------------------------------------------------------------------------------------------------
ARGENTINA 0.2%
8,300 YPF S.A. "D" (ADR) (Petroleum company) ........................................................ 189,863
---------
AUSTRALIA 2.9%
46,619 Broken Hill Proprietary Co. Ltd. (Petroleum, minerals and steel) .............................. 597,952
493,058 Fosters Brewing Group Ltd. (Leading brewery) .................................................. 886,160
118,000 Woodside Petroleum Ltd. (Major oil and gas producer) .......................................... 782,914
---------
2,267,026
---------
AUSTRIA 1.0%
14,100 Flughafen Wien AG (Operator of terminals and facilities at Vienna International Airport) ...... 743,003
---------
BERMUDA 0.2%
3,450 Mid Ocean Limited (Property and casualty insurance company) ................................... 147,052
---------
BRAZIL 2.2%
77,300 Aracruz Celulose S.A. (ADR) (Producer of eucalyptus kraft pulp) ............................... 676,375
3,071,000 Centrais Eletricas Brasileiras S/A "B" (pfd.) (Electric utility) .............................. 809,068
6,200,000 Companhia Energetica de Minas Gerais (Electric power utility) ................................. 210,097
771,000 Companhia Energetica de Minas Gerais (pfd.) (Electric power utility) .......................... 23,031
---------
1,718,571
---------
CANADA 3.6%
26,505 Barrick Gold Corp. (Gold exploration and production in North and South America) ............... 662,552
16,200 Canadian National Railway Co. (Operator of one of Canada's two principal railroads) ........... 332,100
49,650 Canadian Pacific Ltd. (Ord.) (Transportation and natural resource conglomerate) ............... 1,151,811
28,145 Placer Dome Inc. (Gold, silver and copper mining company) ..................................... 665,322
---------
2,811,785
---------
FRANCE 3.5%
5,051 Alcatel Alsthom (Manufacturer of transportation, telecommunication and energy equipment) ...... 425,847
9,328 Compagnie Financiere de Paribas (Finance and investment company) .............................. 599,535
11,800 Lafarge SA (Leading producer of cement, concrete and aggregates) .............................. 695,596
21,466 Schneider SA (Manufacturer of electronic components and automated manufacturing systems) ...... 1,009,822
---------
2,730,800
---------
</TABLE>
The accompanying notes are an integral part of the financial statements
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GERMANY 14.3%
365 Allianz AG Holding (Insurance holding company) ................................................ 643,886
51,510 BASF AG (Leading international chemical producer) ............................................. 1,619,016
43,320 Bayer AG (Leading chemical producer) .......................................................... 1,588,528
18,740 Bayerische Vereinsbank Girozentrale (Commercial bank) ......................................... 650,375
17,300 Daimler-Benz AG (Automobile and truck manufacturer)* .......................................... 950,444
43,550 Hoechst AG (Chemical producer) ................................................................ 1,587,836
2,537 Mannesmann AG (Bearer) (Diversified construction and technology) .............................. 950,243
525 Muenchener Rueckversicherungs AG (Insurance company) .......................................... 928,200
8,860 Schering AG (Pharmaceutical and chemical producer) ............................................ 684,595
12,350 Siemens AG (Leading electrical engineering and electronics company) ........................... 650,677
16,036 VEBA AG (Electric utility, distributor of oil and chemicals) .................................. 838,998
----------
11,092,798
----------
GHANA 1.1%
51,600 Ashanti Goldfields Co., Ltd. (ADS) (Leading gold producer) .................................... 864,300
----------
HONG KONG 1.8%
136,000 Hutchison Whampoa, Ltd. (Container terminal and real estate company) .......................... 914,522
131,000 Television Broadcasts, Ltd. (Television broadcasting) ......................................... 487,036
----------
1,401,558
----------
INDONESIA 0.9%
2,730 Asia Pulp & Paper Co., Ltd. (ADR) (Producer of pulp and paper)* ............................... 32,419
53,500 HM Sampoerna (Foreign registered) (Tobacco company) ........................................... 520,715
184,071 Indah Kiat Pulp & Paper (Foreign registered) (Producer of pulp and paper) ..................... 140,709
5,775 Indah Kiat Pulp & Paper Warrants* ............................................................. 2,363
18,000 Pabrik Kertas Tjiwi Kimia (Operator of pulp and paper factory) ................................ 17,636
----------
713,842
----------
JAPAN 8.1%
33,000 Bridgestone Corp. (Leading automobile tire manufacturer) ...................................... 594,302
46,000 Canon Inc. (Leading producer of visual image and information equipment) ....................... 902,607
44,000 Hitachi Ltd. (General electronics manufacturer) ............................................... 425,768
6,000 Japan Associated Finance Co. (Venture capital company) ........................................ 542,962
52,000 Matsushita Electrical Industrial Co., Ltd. (Leading manufacturer of consumer
electronic products) ........................................................................ 871,248
1,000 Nichiei Co., Ltd. (Finance company for small- and medium-sized firms) ......................... 65,765
10,300 SMC Corp. (Leading maker of pneumatic equipment) .............................................. 719,828
1,300 Shohkoh Fund & Co., Ltd. (Finance company for small- and medium-sized firms) .................. 292,357
10,000 Sony Corp. (Consumer electronic products manufacturer) ........................................ 629,872
128,000 Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) ..................... 362,405
101,000 Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and copper mining company) .............. 851,546
----------
6,258,660
----------
KOREA 2.1%
24,600 Korea Electric Power Co. (ADR) (Electric utility) ............................................. 464,325
25,250 Korea Express Co., Ltd. (EDR) ................................................................. 366,125
32,000 Yukong, Ltd. (Korea's leading oil refiner) .................................................... 813,559
752 Yukong, Ltd. Rights* .......................................................................... 4,916
----------
1,648,925
----------
NETHERLANDS 1.7%
13,299 AEGON Insurance Group NV (Insurance company) .................................................. 656,213
21,607 Internationale Nederland Groep NV (Insurance and financial services) .......................... 673,760
----------
1,329,973
----------
NEW ZEALAND 0.7%
108,700 Telecom Corp. of New Zealand (Telecommunication services) ..................................... 510,631
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
67
<PAGE>
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOUTH AFRICA 0.9%
24,343 Rustenburg Platinum Holdings, Ltd. (ADR) (Leading platinum producer) .......................... 374,274
29,030 Sasol Ltd. (Coal mining and processing, crude oil exploration and refining,
petrochemical production) ................................................................... 342,358
---------
716,632
---------
SWEDEN 7.2%
53,000 AGA AB Free "B" (Producer and distributor of industrial and medical gases) .................... 863,023
19,585 Astra AB "A" (Free) (Pharmaceutical company) .................................................. 826,807
10,600 Autoliv AB (Manufacturer of automobile safety bags) ........................................... 457,083
11,078 Diligentia AB (Real estate investment co.)* ................................................... 131,951
38,765 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ........................................ 932,230
33,252 Skandia Foersaekrings AB (Free) (Financial conglomerate) ...................................... 919,976
127,585 Skandinaviska Enskilda Banken (Commercial bank) ............................................... 1,115,708
15,100 Volvo AB "B" (Free) (Automobile manufacturer) ................................................. 324,425
---------
5,571,203
---------
SWITZERLAND 8.2%
11,748 CS Holdings (Registered) (Provider of bank services, management services and life insurance) .. 1,160,944
680 Ciba-Geigy AG (Bearer) (Pharmaceutical company) ............................................... 865,445
1,605 Holderbank Financiere Glaris AG (Bearer) (Cement producer) .................................... 1,163,970
1,257 Nestle SA (Registered) (Food manufacturer) .................................................... 1,400,451
2 Sandoz AG (Bearer) (Pharmaceutical company) ................................................... 2,391
702 Sandoz Ltd. AG (Registered) (Pharmaceutical company) .......................................... 842,534
226 Swiss Reinsurance (Registered) (Life, accident and health insurance company) .................. 238,103
2,354 Zurich Insurance Group (Registered) (Insurance company) ....................................... 650,971
---------
6,324,809
---------
UNITED KINGDOM 9.9%
66,700 BOC Group PLC (Producer of industrial gases) .................................................. 914,040
105,333 Carlton Communications PLC (Television post production products and services) ................. 796,334
96,800 General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) .......................................... 599,246
126,620 Grand Metropolitan PLC (Food and drink producer and retailer) ................................. 944,384
61,190 Kingfisher PLC (Retailer of wide range of consumer goods and merchandise) ..................... 606,751
224,915 Lonrho PLC (Widely diversified industrial holding company) .................................... 600,242
75,605 PowerGen PLC (Electric utility) ............................................................... 572,769
54,354 RTZ Corp., PLC (Mining and finance company) ................................................... 832,484
57,941 Reuters Holdings PLC (International news agency) .............................................. 669,761
76,300 Shell Transport & Trading PLC (Part owner of Royal Dutch Shell Co.) ........................... 1,165,735
---------
7,701,746
---------
UNITED STATES 21.1%
30,000 Anheuser-Busch Companies, Inc. (Leading brewery) .............................................. 1,128,750
4,100 Boeing Co. (Manufacturer of jet airplanes) .................................................... 387,450
15,000 Champion International Corp. (Manufacturer of wood-based products) ............................ 688,125
15,500 Charles Schwab Corp. (Discount brokerage services) ............................................ 358,438
30,520 EXEL, Ltd. (Provider of liability insurance) .................................................. 1,060,570
22,010 Enron Corp. (Major natural gas pipeline system) ............................................... 896,908
11,650 First Data Corp. (Credit-card processing services) ............................................ 950,931
1,700 General Re Corp. (Property and casualty reinsurance) .......................................... 240,975
39,250 Homestake Mining Co. (Major international gold producer) ...................................... 574,031
7,750 International Business Machines Corp. (Principal manufacturer and servicer of
business and computing machines) ............................................................ 964,875
8,800 J.P. Morgan & Co., Inc. (Commercial banking and financial services) ........................... 782,100
36,470 Louisiana-Pacific Corp. (Producer of lumber, plywood and pulp) ................................ 829,693
</TABLE>
The accompanying notes are an integral part of the financial statements
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
18,110 MBIA Inc. (Insurer of municipal bonds) ........................................................ 1,552,933
24,600 National Semiconductor Corp. (Manufacturer of integrated circuits and transistors)* ........... 495,075
14,200 Newmont Mining Corp. (International gold exploration and mining company) ...................... 670,950
7,800 Parametric Technology Corp. (Mechanical design software producer)* ............................ 385,125
8,700 Parker-Hannifin Group (Fluid control components) .............................................. 365,400
17,000 Praxair Inc. (Producer of industrial gases and specialized coatings) .......................... 731,000
32,400 Stillwater Mining Co. (Exploration and development of mines in Montana producing
platinum, palladium and associated metals)* ................................................. 607,500
14,900 UNUM Corp. (Provider of disability, health and life insurance and group pension products) ..... 955,463
25,650 WMX Technologies Inc. (Solid and chemical waste management services) .......................... 843,244
17,250 Xerox Corp. (Leading manufacturer of copiers and duplicators) ................................. 925,031
----------
16,394,567
----------
TOTAL COMMON STOCKS (COST $70,237,701) ........................................................ 71,137,744
----------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $78,529,018) (a) .......................... 102.4 79,511,244
OTHER ASSETS AND LIABILITIES, NET .......................................... (2.4) (1,859,266)
----- ----------
NET ASSETS ................................................................. 100.0 77,651,978
===== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
* Non income producing security.
</TABLE>
<TABLE>
(a) At September 30, 1996, the net unrealized appreciation on investments based on cost for federal income tax purposes of
$78,552,697 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is an excess of
value over tax cost ............................................................................ $ 3,538,505
Aggregate gross unrealized depreciation for all investments in which there is an excess of
tax cost over value ............................................................................ (2,579,958)
-----------
Net unrealized appreciation ...................................................................... $ 958,547
===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Purchases and sales of investment securities, (excluding short-term
investments) from February 1, 1996 through September 30, 1996, aggregated
$75,990,024 and $3,917,974, respectively.
- --------------------------------------------------------------------------------
From February 1, 1996 through September 30, 1996, the Fund incurred
approximately $33,467 of net realized capital losses which the Fund intends
to elect to defer and treat as arising in the fiscal year ended September
30, 1997.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
- --------------------------------------------------------------------------------
Sector breakdown of the Fund's equity securities is noted on page 25.
The accompanying notes are an integral part of the financial statements
69
<PAGE>
AARP CAPITAL GROWTH FUND
<TABLE>
- -----------------------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 2.0%
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
16,328,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/96 at 5.7% to be repurchased at $16,330,585
on 10/1/96, collateralized by a $15,967,000 U.S.
Treasury Note, 6.5%, 4/30/97 (COST $16,328,000) .......... 16,328,000
------------
- -----------------------------------------------------------------------------------------------
COMMON STOCKS 98.0%
- -----------------------------------------------------------------------------------------------
Shares
- ------
CONSUMER DISCRETIONARY 6.4%
Department & Chain Stores 3.6%
200,000 J.C. Penney Co., Inc. ...................................... 10,825,000
200,000 May Department Stores ...................................... 9,725,000
250,000 Walgreen Co. ............................................... 9,250,000
------------
29,800,000
------------
Restaurants 2.0%
350,000 McDonald's Corp. ........................................... 16,581,250
------------
Specialty Retail 0.8%
346,800 Intimate Brands, Inc. ...................................... 6,329,100
------------
CONSUMER STAPLES 7.1%
Alcohol 1.5%
330,000 Anheuser-Busch Companies, Inc. ............................. 12,416,250
------------
Food & Beverage 2.1%
185,000 Albertson's Inc. ........................................... 7,793,125
200,000 ConAgra Inc. ............................................... 9,850,000
------------
17,643,125
------------
Package Goods/Cosmetics 3.5%
130,000 Clorox Co. ................................................. 12,463,750
145,600 Estee Lauder Companies "A" ................................. 6,533,800
100,000 Procter & Gamble Co. ....................................... 9,750,000
------------
28,747,550
------------
HEALTH 14.3%
Health Industry Services 1.2%
300,000 Bergen Brunswig Corp. "A" .................................. 9,525,000
------------
Hospital Management 1.7%
250,000 Columbia/HCA Healthcare Corp. .............................. 14,218,750
------------
Medical Supply & Specialty 1.6%
308,000 Becton, Dickinson & Co. .................................... 13,629,000
------------
Pharmaceuticals 9.8%
180,000 American Home Products Corp. ............................... 11,475,000
180,000 Johnson & Johnson .......................................... 9,225,000
150,000 Merck & Co. Inc. ........................................... 10,556,250
215,000 Pfizer, Inc. ............................................... 17,011,875
197,100 Sandoz Ltd. AG (ADR) ....................................... 11,813,681
115,000 Schering-Plough Corp. ...................................... 7,072,500
210,000 Warner-Lambert Co. ......................................... 13,860,000
------------
81,014,306
------------
FINANCIAL 16.8%
Banks 5.0%
225,000 Citicorp ................................................... 20,390,625
125,000 First Chicago NBD Corp. .................................... 5,656,250
</TABLE>
The accompanying notes are an integral part of the financal statements.
70
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
80,000 J.P. Morgan & Co., Inc. .................................... 7,110,000
200,000 Norwest Corp. .............................................. 8,175,000
------------
41,331,875
------------
Insurance 5.5%
180,000 American International Group, Inc. ......................... 18,135,000
360,000 EXEL, Ltd. ................................................. 12,510,000
176,000 MBIA Inc. .................................................. 15,092,000
------------
45,737,000
------------
Consumer Finance 1.1%
211,700 Associates First Capital Corp. ............................. 8,679,700
------------
Other Financial Companies 5.2%
410,000 American Express Credit Corp. .............................. 18,962,500
700,000 Federal National Mortgage Association ...................... 24,412,500
------------
43,375,000
------------
MEDIA 1.0%
Broadcasting & Entertainment
130,000 Walt Disney Co. ............................................ 8,238,750
------------
SERVICE INDUSTRIES 3.7%
Investment 2.5%
200,000 Franklin Resources Inc. .................................... 13,275,000
120,000 Merrill Lynch & Co., Inc. .................................. 7,875,000
------------
21,150,000
------------
Miscellaneous Commercial Services 1.2%
291,000 Manpower, Inc. ............................................. 9,675,750
------------
DURABLES 4.9%
Aerospace 4.3%
100,000 Lockheed Martin Corp. ...................................... 9,012,500
235,000 Rockwell International Corp. ............................... 13,248,125
110,000 United Technologies Corp. .................................. 13,213,750
------------
35,474,375
------------
Telecommunications Equipment 0.6%
80,000 Ascend Communications, Inc.* ............................... 5,290,000
------------
MANUFACTURING 11.7%
Chemicals 3.5%
140,000 E.I. du Pont de Nemours & Co. .............................. 12,355,000
195,700 Praxair Inc. ............................................... 8,415,100
145,000 Sigma-Aldrich Corp. ........................................ 8,265,000
------------
29,035,100
------------
Diversified Manufacturing 3.6%
95,000 General Electric Co. ....................................... 8,645,000
120,000 TRW Inc. ................................................... 11,160,000
120,000 Textron, Inc. .............................................. 10,200,000
------------
30,005,000
------------
Electrical Products 1.9%
75,000 ABB AB (ADR) ............................................... 7,875,000
83,000 Emerson Electric Co. ....................................... 7,480,375
------------
15,355,375
------------
Machinery/Components/Controls 2.7%
200,000 Ingersoll-Rand Co. ......................................... 9,500,000
297,000 Parker-Hannifin Group ...................................... 12,474,000
------------
21,974,000
------------
</TABLE>
The accompanying notes are an integral part of the financal statements.
71
<PAGE>
AARP CAPITAL GROWTH FUND
<TABLE>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 16.1%
Diverse Electronic Products 3.5%
485,000 Applied Materials, Inc.* ................................... 13,398,125
270,000 General Motors Corp. "H" ................................... 15,592,500
------------
28,990,625
------------
Electronic Data Processing 5.5%
510,000 Hewlett-Packard Co. ........................................ 24,862,500
35,000 International Business Machines Corp. ...................... 4,357,500
260,000 Sun Microsystems, Inc. * ................................... 16,152,500
------------
45,372,500
------------
Military Electronics 1.0%
150,000 Raytheon Co. ............................................... 8,343,750
------------
Office/Plant Automation 2.0%
120,000 Cabletron Systems Inc.* .................................... 8,205,000
126,400 Cisco Systems, Inc.* ....................................... 7,844,700
------------
16,049,700
------------
Semiconductors 4.1%
410,000 Atmel Corp.* ............................................... 12,658,750
225,000 Intel Corp. ................................................ 21,473,438
------------
34,132,188
------------
ENERGY 11.1%
Engineering 0.8%
110,000 Fluor Corp. ................................................ 6,765,000
------------
Oil Companies 8.8%
125,000 Amoco Corp. ................................................ 8,812,500
100,000 Atlantic Richfield Co. ..................................... 12,750,000
143,000 Exxon Corp. ................................................ 11,904,750
105,000 Mobil Corp. ................................................ 12,153,750
254,800 Repsol SA (ADR) ............................................ 8,440,250
116,000 Royal Dutch Petroleum Co. (New York shares) ................ 18,110,500
------------
72,171,750
------------
Oil/Gas Transmission 1.5%
220,000 Enron Corp. ................................................ 8,965,000
70,000 Williams Cos., Inc. ........................................ 3,570,000
------------
12,535,000
------------
TRANSPORTATION 2.9%
Airlines 1.3%
135,000 AMR Corp.* ................................................. 10,749,375
------------
Railroads 1.6%
300,000 Canadian Pacific Ltd. ...................................... 6,937,500
173,300 Wisconsin Central Transportation Co.* ...................... 6,217,137
------------
13,154,637
------------
UTILITIES 2.0%
Electric Utilities
350,000 Eastern Utilities Association .............................. 5,906,250
60,000 Illinova Corp. ............................................. 1,590,000
285,000 PowerGen PLC (Sponsored ADR) ............................... 8,799,375
------------
16,295,625
------------
TOTAL COMMON STOCKS (COST $635,558,418) ................... 809,786,406
------------
</TABLE>
The accompanying notes are an integral part of the financal statements.
72
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<CAPTION>
Market
Value ($)
- -----------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $651,886,418) (a) ....... 100.0 826,114,406
OTHER ASSETS AND LIABILITIES, NET ........................ 0.0 22,307
----- -----------
NET ASSETS ............................................... 100.0 826,136,713
===== ===========
- -----------------------------------------------------------------------------------------------
* Nonincome producing security.
(a) At September 30, 1996, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $651,886,418 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost ......................................... $186,762,238
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value ......................................... (12,534,250)
------------
Net unrealized appreciation ................................................. $174,227,988
============
- -----------------------------------------------------------------------------------------------
Purchases and sales of investment securities, (excluding short-term investments), for the
year ended September 30, 1996, aggregated $505,361,929 and $477,699,166, respectively.
- -----------------------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the Fund. The total
net assets of the Fund are comprised of the Fund's investment portfolio, other assets and
liabilities. The percentage of the investment portfolio may be greater or less than 100%
due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's
other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
</TABLE>
The accompanying notes are an integral part of the financal statements.
73
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP HIGH AARP HIGH AARP GNMA AARP HIGH
QUALITY QUALITY TAX FREE AND U.S. QUALITY
SEPTEMBER 30, 1996 MONEY FUND MONEY FUND TREASURY FUND BOND FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Investments, at value (for identified cost, see
accompanying lists of investment portfolios). $409,711,163 $110,537,355 $4,879,876,835 $521,815,834
Cash .......................................... 615,980 94,688 713 396
Receivable on investments sold ................ -- -- -- 17,818,066
Dividends and interest receivable ............. 1,794,041 544,805 40,856,909 6,387,797
Receivable on Fund shares sold ................ 1,798,471 389,494 1,507,742 158,373
Daily variation margin on futures
contracts (Note 1) .......................... -- -- -- 32,687
Deferred organization expenses (Note 1) ....... -- -- -- --
Other assets .................................. 3,624 1,215 46,575 1,968
------------ ------------ -------------- ------------
Total assets .................................. 413,923,279 111,567,557 4,922,288,774 546,215,121
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
Investments purchased (Note 1) ................ -- -- -- 32,903,000
Fund shares redeemed .......................... 1,294,574 151,000 3,738,944 270,184
Dividends payable ............................. 144,916 49,223 11,149,116 704,498
Management fee (Note 2) ....................... 131,854 35,772 1,674,064 201,910
Transfer and dividend disbursing agent (Note 2) 128,559 24,379 583,890 127,309
Written options, at market (Note 1) ........... -- -- -- --
Other accrued expenses ........................ 97,183 42,455 702,916 103,054
------------ ------------ -------------- ------------
Total liabilities ............................. 1,797,086 302,829 17,848,930 34,309,955
- ------------------------------------------------------------------------------------------------------------------------
Net assets at value ........................... $412,126,193 $111,264,728 $4,904,439,844 $511,905,166
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net
investment income ..................... $ -- $ -- $ -- $ 176,290
Net unrealized appreciation (depreciation) on:
Investments ................................. (135,120) -- (2,427,542) (4,569,944)
Futures contracts ........................... -- -- -- --
Options ..................................... -- -- -- --
Foreign currency related transactions ....... -- -- -- --
Accumulated net realized capital gain (loss) .. (64,326) (825,973) (322,435,519) (8,938,091)
Paid-in capital ............................... 412,325,639 112,090,701 5,229,302,905 525,236,911
- ------------------------------------------------------------------------------------------------------------------------
Net assets at value ........................... $412,126,193 $111,264,728 $4,904,439,844 $511,905,166
- ------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding, $.01
par value, unlimited number of shares
authorized. (Note) AARP High Quality Tax
Free Money Fund has a $.001 par value ....... 412,261,312 111,270,214 328,879,292 32,366,706
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, offering and redemption
price per share ............................. $ 1.00 $ 1.00 $ 14.91 $ 15.82
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
74
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AARP INSURED AARP BALANCED AARP GROWTH AARP GLOBAL AARP CAPITAL
TAX FREE GENERAL STOCK AND BOND AND INCOME GROWTH GROWTH
BOND FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
$1,740,393,909 $402,737,987 $4,243,236,951 $79,511,244 $826,114,406
34,236 505 19,171 954 688
3,256,885 1,755,752 36,747,825 -- 18,840,209
22,192,373 2,525,052 12,475,946 136,433 777,228
344,041 636,205 4,127,346 128,702 451,210
323,437 -- -- -- --
-- 21,057 -- 13,013 --
4,388 -- 4,287 -- 1,395
- -------------- ------------ -------------- ----------- ------------
1,766,549,269 407,676,558 4,296,611,526 79,790,346 846,185,136
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
6,074,420 3,870,932 72,648,281 1,671,784 18,645,035
1,258,613 267,646 2,262,116 70,499 711,333
2,783,961 -- -- -- --
691,980 156,076 1,633,200 91,130 404,190
153,812 65,804 341,417 178,759 99,288
-- -- 20,000 -- --
174,261 136,161 723,114 126,196 188,577
- -------------- ------------ -------------- ----------- ------------
11,137,047 4,496,619 77,628,128 2,138,368 20,048,423
- -------------------------------------------------------------------------------------------------------
$1,755,412,222 $403,179,939 $4,218,983,398 $77,651,978 $826,136,713
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
$ -- $ 535,899 $ 7,239,912 $ 288,631 $ 7,179,969
78,881,629 41,584,563 961,533,105 982,226 174,227,988
(1,892,075) -- -- -- --
-- -- (801) -- --
-- 163 (10,386) (336) 74
(10,611,830) 4,039,132 149,472,235 (33,467) 66,173,430
1,689,034,498 357,020,182 3,100,749,333 76,414,924 578,555,252
- -------------------------------------------------------------------------------------------------------
$1,755,412,222 $403,179,939 $4,218,983,398 $77,651,978 $826,136,713
- -------------------------------------------------------------------------------------------------------
98,088,821 22,865,594 96,018,596 5,012,508 19,005,749
- -------------------------------------------------------------------------------------------------------
$ 17.90 $ 17.63 $ 43.94 $ 15.49 $ 43.47
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
75
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP HIGH AARP HIGH AARP GNMA AARP HIGH
YEAR ENDED SEPTEMBER 30, 1996 QUALITY QUALITY TAX FREE AND U.S. QUALITY
MONEY FUND MONEY FUND TREASURY FUND BOND FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------------------
Income:
Interest .............................................. $21,267,455 $4,174,016 $ 366,995,391 $35,170,631
Dividends ............................................. -- -- -- --
----------- ---------- ------------- -----------
21,267,455 4,174,016 366,995,391 35,170,631
Less foreign taxes withheld ........................... -- -- -- --
----------- ---------- ------------- -----------
21,267,455 4,174,016 366,995,391 35,170,631
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
- ------------------------------------------------------------------------------------------------------------------------
Management fee (Note 2) ............................... 1,522,929 453,559 21,113,592 2,550,245
Services to shareholders:
Transfer and dividend disbursing
expense (Note 2) .................................. 1,526,580 304,924 7,340,012 1,586,232
Other expenses ...................................... 297,429 37,433 1,801,487 219,955
Trustees' fees and expenses (Note 2) .................. 19,028 25,712 29,609 29,612
Shareholder communications ............................ 150,104 43,965 1,211,761 173,354
Legal ................................................. 11,258 11,829 11,787 8,672
Auditing .............................................. 29,100 27,600 67,550 48,950
Custodian and accounting fees (Note 2) ................ 84,436 54,551 1,051,789 139,911
Registration expenses ................................. 61,916 13,885 42,116 16,194
Amortization of organization expenses
(Note 1) ............................................ -- -- -- --
Other ................................................. 21,199 9,303 174,069 21,990
----------- ---------- ------------- -----------
Total Expenses before reductions ........................ 3,723,979 982,761 32,843,772 4,795,115
Expense reductions (Note 2) ............................. -- -- -- --
----------- ---------- ------------- -----------
Expenses, net ........................................... 3,723,979 982,761 32,843,772 4,795,115
- ------------------------------------------------------------------------------------------------------------------------
Net investment income ................................... 17,543,476 3,191,255 334,151,619 30,375,516
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ......................................... 2,595 1,553 23,690,016 (2,756,840)
Futures contracts (Note 1) .......................... -- -- -- 4,190,615
Options (Note 1) .................................... -- -- -- (214,688)
Foreign currency related transactions
(Note 1) .......................................... -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ....................................... 355,595 -- (117,084,004) (7,844,325)
Futures contracts ................................. -- -- -- --
Options ........................................... -- -- -- --
Foreign currency related transactions ............. -- -- -- --
----------- ---------- ------------- -----------
Net gain (loss) on investments .......................... 358,190 1,553 (93,393,988) (6,625,238)
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations ....................................... $17,901,666 $3,192,808 $ 240,757,631 $23,750,278
- ------------------------------------------------------------------------------------------------------------------------
(a) The AARP Global Growth Fund commenced operations on February 1, 1996.
</TABLE>
The accompanying notes are an integral part of the financial statements
76
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AARP INSURED AARP BALANCED AARP GROWTH AARP GLOBAL AARP CAPITAL
TAX FREE GENERAL STOCK AND BOND AND INCOME GROWTH GROWTH
BOND FUND FUND FUND FUND (A) FUND
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
$ 98,356,689 $ 9,549,607 $ 13,744,132 $ 253,066 $ 1,040,466
-- 6,619,276 118,199,105 684,211 13,894,916
- ------------ ----------- ------------ ---------- ------------
98,356,689 16,168,883 131,943,237 937,277 14,935,382
-- (126,777) (1,440,225) (60,508) (291,581)
- ------------ ----------- ------------ ---------- ------------
98,356,689 16,042,106 130,503,012 876,769 14,643,801
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
8,665,253 1,560,129 17,423,770 266,155 4,626,894
1,925,762 724,796 3,850,612 178,759 1,176,990
308,444 208,777 1,515,869 43,414 435,337
25,715 24,005 24,002 15,157 24,009
336,591 114,481 851,852 23,459 212,913
7,957 8,292 18,364 8,015 11,779
60,000 33,550 49,000 8,000 46,200
344,648 132,564 740,183 121,145 189,744
33,718 19,409 187,847 59,009 7,837
-- 8,926 -- 1,995 --
64,193 8,886 94,181 1,212 19,991
- ------------ ----------- ------------ ---------- ------------
11,772,281 2,843,815 24,755,680 726,320 6,751,694
-- -- -- (175,025) --
- ------------ ----------- ------------ ---------- ------------
11,772,281 2,843,815 24,755,680 551,295 6,751,694
- -------------------------------------------------------------------------------------------------
86,584,408 13,198,291 105,747,332 325,474 7,892,107
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
15,073,015 4,984,143 161,815,047 (33,467) 71,644,200
3,404,797 34,436 -- -- --
-- -- -- -- --
-- 334,451 (411,014) (36,843) (38,602)
(1,155,352) 20,509,469 381,330,506 982,226 32,512,381
(1,262,186) 3,391 -- -- --
-- -- (801) -- --
-- (159,786) (16,214) (336) 4,863
- ------------ ----------- ------------ ---------- ------------
16,060,274 25,706,104 542,717,524 911,580 104,122,842
- -------------------------------------------------------------------------------------------------
$102,644,682 $38,904,395 $648,464,856 $1,237,054 $112,014,949
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
77
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP HIGH AARP HIGH
QUALITY QUALITY TAX FREE
MONEY FUND MONEY FUND
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended
Sept. 30, Sept. 30,
1996 1995 1996 1995
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 17,543,476 $ 18,316,417 $ 3,191,255 $ 3,691,193
Net realized gain (loss) from:
Investments ................................ 2,595 (2,594) 1,553 (5,140)
Futures contracts .......................... -- -- -- --
Options .................................... -- -- -- --
Foreign currency related transactions ...... -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ................................ 355,595 (235,013) -- --
Futures contracts .......................... -- -- -- --
Options .................................... -- -- -- --
Foreign currency related transactions ...... -- -- -- --
------------- ------------- ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................... 17,901,666 18,078,810 3,192,808 3,686,053
------------- ------------- ------------ ------------
Distributions to shareholders:
Net investment income ........................ (17,543,476) (18,316,417) (3,191,255) (3,691,193)
Net realized gains ........................... -- -- -- --
Tax return of capital ........................ -- -- -- --
------------- ------------- ------------ ------------
(17,543,476) (18,316,417) (3,191,255) (3,691,193)
------------- ------------- ------------ ------------
Fund share transactions:
Proceeds from sale of shares ................. 370,605,211 405,381,235 30,976,787 41,129,795
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 15,692,224 16,274,697 2,545,162 2,929,152
Cost of shares redeemed ...................... (358,425,484) (370,960,332) (42,004,745) (53,717,481)
------------- ------------- ------------ ------------
Net increase (decrease) in net assets from Fund
share transactions ........................... 27,871,951 50,695,600 (8,482,796) (9,658,534)
------------- ------------- ------------ ------------
Increase (decrease) in net assets .............. 28,230,141 50,457,993 (8,481,243) (9,663,674)
Net assets at beginning of period .............. 383,896,052 333,438,059 119,745,971 129,409,645
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) ................ $ 412,126,193 $ 383,896,052 $111,264,728 $119,745,971
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 384,389,361 333,693,761 119,753,010 129,411,544
------------- ------------- ------------ ------------
Shares sold .................................. 370,605,211 405,381,235 30,976,787 41,129,795
Shares issued to shareholders in
reinvestment of distributions ............. 15,692,224 16,274,697 2,545,162 2,929,152
Shares redeemed .............................. (358,425,484) (370,960,332) (42,004,745) (53,717,481)
------------- ------------- ------------ ------------
Net increase (decrease) in Fund shares ......... 27,871,951 50,695,600 (8,482,796) (9,658,534)
------------- ------------- ------------ ------------
Shares outstanding at end of period ............ 412,261,312 384,389,361 111,270,214 119,753,010
- ------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
net investment income .................... $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements
78
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP GNMA AARP HIGH AARP INSURED AARP BALANCED
AND U.S. QUALITY TAX FREE GENERAL STOCK AND BOND
TREASURY FUND BOND FUND BOND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended Years Ended Years Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995 1996 1995 1996 1995
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 334,151,619 $ 358,090,095 $ 30,375,516 $ 32,695,491 $ 86,584,408 $ 91,515,925 $ 13,198,291 $ 8,110,687
23,690,016 (68,679,536) (2,756,840) 6,264,433 15,073,015 1,141,498 4,984,143 2,922,966
-- -- 4,190,615 462,444 3,404,797 (22,927,127) 34,436 66,437
-- -- (214,688) -- -- -- -- --
-- -- -- -- -- -- 334,451 (8,944)
(117,084,004) 224,571,191 (7,844,325) 25,349,000 (1,155,352) 102,468,526 20,509,469 20,344,202
-- -- -- (235,464) (1,262,186) (843,714) 3,391 (3,391)
-- -- -- -- -- -- -- --
-- -- -- -- -- -- (159,786) 159,949
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
240,757,631 513,981,750 23,750,278 64,535,904 102,644,682 171,355,108 38,904,395 31,591,906
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
(334,151,619) (347,262,513) (30,375,516) (32,238,660) (86,584,408) (91,515,925) (12,975,460) (7,923,700)
-- -- -- -- -- -- (3,378,368) (479,306)
-- (10,827,582) -- -- -- -- -- --
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
(334,151,619) (358,090,095) (30,375,516) (32,238,660) (86,584,408) (91,515,925) (16,353,828) (8,403,006)
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
346,027,868 313,574,493 64,115,868 38,133,943 124,978,818 128,807,008 164,077,214 82,046,020
193,739,502 209,361,883 21,458,457 22,872,960 52,441,004 56,102,941 14,941,233 7,595,827
(793,984,012) (1,012,262,747) (100,466,218) (127,867,757) (245,115,196) (371,972,763) (45,596,030) (41,121,662)
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
(254,216,642) (489,326,371) (14,891,893) (66,860,854) (67,695,374) (187,062,814) 133,422,417 48,520,185
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
(347,610,630) (333,434,716) (21,517,131) (34,563,610) (51,635,100) (107,223,631) 155,972,984 71,709,085
5,252,050,474 5,585,485,190 533,422,297 567,985,907 1,807,047,322 1,914,270,953 247,206,955 175,497,870
- ---------------------------------------------------------------------------------------------------------------------------------
$4,904,439,844 $ 5,252,050,474 $ 511,905,166 $ 533,422,297 $1,755,412,222 $1,807,047,322 $403,179,939 $247,206,955
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
345,829,087 379,121,168 33,312,382 37,734,181 101,872,669 113,066,680 15,074,610 11,983,629
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
22,947,708 21,222,249 4,006,214 2,475,377 6,963,608 7,482,591 9,582,056 5,336,478
12,859,585 14,034,160 1,341,850 1,481,640 2,918,782 3,261,074 873,110 497,020
(52,757,088) (68,548,490) (6,293,740) (8,378,816) (13,666,268) (21,937,646) (2,664,182) (2,742,517)
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
(16,949,795) (33,292,081) (945,676) (4,421,799) (3,783,878) (11,193,981) 7,790,984 3,090,981
- -------------- --------------- ------------- ------------- -------------- -------------- ------------ ------------
328,879,292 345,829,087 32,366,706 33,312,382 98,088,821 101,872,699 22,865,594 15,074,610
- ---------------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $ 176,290 $ 304,913 $ -- $ -- $ 535,899 $ 321,966
</TABLE>
The accompanying notes are an integral part of the financial statements
79
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP GROWTH AARP GLOBAL AARP CAPITAL
AND INCOME GROWTH GROWTH
FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended For the Period Years Ended
Sept. 30, February 1, 1996 (b) to Sept. 30,
1996 1995 September 30, 1996 1996 1995
-------------- -------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 105,747,332 $ 83,288,031 $ 325,474 $ 7,892,107 $ 6,448,989
Net realized gain (loss) from:
Investments ................................ 161,815,047 82,525,735 (33,467) 71,644,200 3,854,142
Futures contracts .......................... -- -- -- -- --
Options .................................... -- -- -- -- --
Foreign currency related transactions ...... (411,014) 23,310 (36,843) (38,602) (49,230)
Net unrealized appreciation (depreciation) on:
Investments ................................ 381,330,506 331,251,054 982,226 32,512,381 124,391,488
Futures contracts .......................... -- -- -- -- --
Options .................................... (801) -- -- -- --
Foreign currency related transactions ...... (16,214) 5,828 (336) 4,863 (4,789)
-------------- -------------- ----------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations ............................. 648,464,856 497,093,958 1,237,054 112,014,949 134,640,600
-------------- -------------- ----------- ------------- -------------
Distributions to shareholders:
Net investment income ........................ (102,016,492) (81,086,105) -- (7,038,882) (216,094)
Net realized gains ........................... (67,064,704) (85,015,819) -- (9,204,690) (13,160,374)
Tax return of capital ........................ -- -- -- -- --
-------------- -------------- ----------- ------------- -------------
(169,081,196) (166,101,924) -- (16,243,572) (13,376,468)
-------------- -------------- ----------- ------------- -------------
Fund share transactions:
Proceeds from sale of shares ................. 960,952,133 589,883,371 82,274,150 133,269,510 68,276,671
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 153,099,566 149,554,221 -- 15,425,567 12,786,953
Cost of shares redeemed ...................... (380,970,538) (376,048,965) (5,860,726) (110,338,687) (193,118,723)
-------------- -------------- ----------- ------------- -------------
Net increase (decrease) in net assets from Fund
share transactions ........................... 733,081,161 363,388,627 76,413,424 38,356,390 (112,055,099)
-------------- -------------- ----------- ------------- -------------
Increase (decrease) in net assets .............. 1,212,464,821 694,380,661 77,650,478 134,127,767 9,209,033
Net assets at beginning of period .............. 3,006,518,577 2,312,137,916 1,500 692,008,946 682,799,913
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) ................ $4,218,983,398 $3,006,518,577 $77,651,978 $ 826,136,713 $ 692,008,946
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- -----------------------------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning of period ...... 78,371,684 67,740,274 100 18,041,977 21,513,985
-------------- -------------- ----------- ------------- -------------
Shares sold .................................. 23,131,229 17,103,571 5,395,570 3,299,011 2,055,946
Shares issued to shareholders in
reinvestment of distributions ............. 3,734,230 4,523,324 -- 400,664 424,681
Shares redeemed .............................. (9,218,547) (10,995,485) (383,162) (2,735,903) (5,952,635)
-------------- -------------- ----------- ------------- -------------
Net increase (decrease) in Fund shares ......... 17,646,912 10,631,410 5,012,408 963,772 (3,472,008)
-------------- -------------- ----------- ------------- -------------
Shares outstanding at end of period ............ 96,018,596 78,371,684 5,012,508 19,005,749 18,041,977
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
net investment income ...................... $ 7,239,912 $ 6,072,468 $ 288,631 $ 7,179,969 $ 6,365,346
(b) Commencement of Operations
</TABLE>
The accompanying notes are an integral part of the financial statements
80
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
- --------------------------------------------------------------------------------
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $1.000 $1.000 $1.000 $1.000 $1.000
---------------------------------------------------
Net investment income .................................... .045 .049 .028 .021 .040
Distributions from net investment income ................. (.045) (.049) (.028) (.021) (.040)(a)
---------------------------------------------------
Net asset value, end of period ............................... $1.000 $1.000 $1.000 $1.000 $1.000
---------------------------------------------------
TOTAL RETURN (%) (b) ......................................... 4.62 4.99 2.84 2.13 4.12
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ....................... 412 384 333 254 323
Ratio of operating expenses, net to average net assets (%) .963 .978 1.125 1.312 1.151
Ratio of operating expenses before expense reductions,
to average net assets (%) ................................ .963 .978 1.125 1.312 1.190
Ratio of net investment income to average net assets (%) ..... 4.535 4.887 2.889 2.123 3.613
(a) Includes approximately $.005 per share of net realized short-term capital gains.
(b) Total returns would have been lower had certain expenses not been reduced.
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $1.000 $1.000 $1.000 $1.000 $1.000
-------------------------------------------------
Net investment income .................................. .028 .029 .017 .016 .026
Distributions from net investment income ............... (.028) (.029) (.017) (.016) (.026)
-------------------------------------------------
Net asset value, end of period ............................. $1.000 $1.000 $1.000 $1.000 $1.000
-------------------------------------------------
TOTAL RETURN (%) (a) ....................................... 2.80 2.99 1.76 1.62 2.58
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ..................... 111 120 129 134 127
Ratio of operating expenses, net to average net assets (%) .85 .87 .90 .93 .95
Ratio of operating expenses before expense reductions,
to average net assets (%) .............................. .85 .87 .91 1.15 1.13
Ratio of net investment income to average net assets (%) ... 2.77 2.94 1.75 1.60 2.54
(a) Total returns would have been lower had certain expenses not been reduced.
</TABLE>
81
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
- --------------------------------------------------------------------------------
AARP GNMA AND U.S. TREASURY FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $15.19 $14.73 $15.96 $16.19 $15.72
------------------------------------------------------
Income from investment operations:
Net investment income ................................ .99 1.01 .93 1.15 1.22
Net realized and unrealized gain (loss) on investments (.28) .46 (1.23) (.23) .47
------------------------------------------------------
Total from investment operations ......................... .71 1.47 (.30) .92 1.69
------------------------------------------------------
Less distributions:
Net investment income ................................ (.99) (.98) (.93) (1.15) (1.22)
Tax return of capital ................................ -- (.03) -- -- --
------------------------------------------------------
Total distributions ...................................... (.99) (1.01) (.93) (1.15) (1.22)
------------------------------------------------------
Net asset value, end of period ........................... $14.91 $15.19 $14.73 $15.96 $16.19
------------------------------------------------------
TOTAL RETURN (%) ......................................... 4.79 10.31 (1.90) 5.89 11.19
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ................... 4,904 5,252 5,585 6,712 5,232
Ratio of operating expenses to average net assets (%) .64 .67 .66 .70 .72
Ratio of net investment income to average net assets (%) . 6.55 6.77 6.09 7.15 7.69
Portfolio turnover rate (%) .............................. 83.44 70.35 114.54 105.49 74.33
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
AARP HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $16.01 $15.05 $17.19 $16.44 $15.71
----------------------------------------------------------
Income from investment operations:
Net investment income ................................ .92 .94 .85 .93 1.03
Net realized and unrealized gain (loss) on investments (.19) .95 (1.76) .93 .73
----------------------------------------------------------
Total from investment operations ......................... .73 1.89 (.91) 1.86 1.76
----------------------------------------------------------
Less distributions:
Net investment income ................................ (.92) (.93) (.85) (.93) (1.03)
Net realized gains on investments .................... -- -- -- (.18) --
In excess of net realized gains on investments ....... -- -- (.38) -- --
----------------------------------------------------------
Total distributions ...................................... (.92) (.93) (1.23) (1.11) (1.03)
----------------------------------------------------------
Net asset value, end of period ........................... $15.82 $16.01 $15.05 $17.19 $16.44
----------------------------------------------------------
TOTAL RETURN (%) ......................................... 4.59 12.98 (5.55) 11.88 11.56
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ................... 512 533 568 604 384
Ratio of operating expenses to average net assets (%) .91 .95 .95 1.01 1.13
Ratio of net investment income to average net assets (%) . 5.76 6.13 5.31 5.64 6.40
Portfolio turnover rate (%) .............................. 169.96 201.07 63.75 100.98 63.00
</TABLE>
82
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $17.74 $16.93 $19.00 $17.88 $17.30
---------------------------------------------
Income from investment operations:
Net investment income ................................ .87 .87 .86 .90 .93
Net realized and unrealized gain (loss) on investments .16 .81 (1.67) 1.55 .75
---------------------------------------------
Total from investment operations ......................... 1.03 1.68 (.81) 2.45 1.68
---------------------------------------------
Less distributions:
Net investment income ................................ (.87) (.87) (.86) (.90) (.93)
Net realized gains on investments .................... -- -- (.34) (.43) (.17)
In excess of net realized gains on investments ....... -- -- (.06) -- --
---------------------------------------------
Total distributions ...................................... (.87) (.87) (1.26) (1.33) (1.10)
---------------------------------------------
Net asset value, end of period ........................... $17.90 $17.74 $16.93 $19.00 $17.88
---------------------------------------------
TOTAL RETURN (%) ......................................... 5.88 10.21 (4.48) 14.31 10.01
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ................... 1,755 1,807 1,914 2,087 1,487
Ratio of operating expenses to average net assets (%) .66 .69 .68 .72 .74
Ratio of net investment income to average net assets (%) . 4.83 5.06 4.80 4.90 5.31
Portfolio turnover rate (%) .............................. 18.69 17.45 38.39 47.96 62.45
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
FOR THE PERIOD
YEARS ENDED SEPTEMBER 30, FEBRUARY 1, 1994 (a)
------------------------- TO SEPTEMBER 30,
1996 1995 1994
------------------------- --------------------
<S> <C> <C> <C>
Net asset value, beginning of period ..................... $16.40 $14.64 $15.00
----------------------------------------------
Income from investment operations:
Net investment income ................................ .66 .61 .25
Net realized and unrealized gain (loss) on investments 1.44 1.79 (.37)(b)
----------------------------------------------
Total from investment operations ......................... 2.10 2.40 (.12)
----------------------------------------------
Less distributions:
Net investment income ................................ (.66) (.60) (.24)
Net realized gains on investments .................... (.21) (.04) --
----------------------------------------------
Total distributions ...................................... (.87) (.64) (.24)
----------------------------------------------
Net asset value, end of period ........................... $17.63 $16.40 $14.64
----------------------------------------------
TOTAL RETURN (%) ......................................... 13.08 16.80 (.78)(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ................... 403 247 175
Ratio of operating expenses to average net assets (%) .88 1.01 1.31(e)
Ratio of net investment income to average net assets (%) . 4.09 4.12 3.58(e)
Portfolio turnover rate (%) .............................. 35.22 63.77 49.32(e)
Average commission rate paid (c) ......................... $.0549 $ -- $ --
(a)Commencement of operations
(b)The amount shown for a share outstanding throughout the period does not accord with the change in the
aggregate gains and losses in the portfolio securities during the period because of the timing of sales
and repurchases of Fund shares in relation to fluctuating market values during the period.
(c)Average commission rate paid per share of common and preferred stocks is calculated for fiscal years
beginning on or after September 1, 1995.
(d)Not Annualized (e) Annualized
</TABLE>
83
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
- --------------------------------------------------------------------------------
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $38.36 $34.13 $32.91 $28.67 $26.97
------------------------------------------------
Income from investment operations:
Net investment income ................................ 1.17 1.11 .94 .83 .97
Net realized and unrealized gain on investments ...... 6.40 5.44 1.62 4.58 2.11
------------------------------------------------
Total from investment operations ......................... 7.57 6.55 2.56 5.41 3.08
------------------------------------------------
Less distributions from:
Net investment income ................................ (1.15) (1.09) (1.13) (.87) (.90)
Net realized gains on investments .................... (.84) (1.23) (.21) (.30) (.48)
------------------------------------------------
Total distributions ...................................... (1.99) (2.32) (1.34) (1.17) (1.38)
------------------------------------------------
Net asset value, end of period ........................... $43.94 $38.36 $34.13 $32.91 $28.67
------------------------------------------------
TOTAL RETURN (%) ......................................... 20.20 20.43 7.99 19.38 11.59
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ................... 4,219 3,007 2,312 1,560 748
Ratio of operating expenses to average net assets (%) .69 .72 .76 .84 .91
Ratio of net investment income to average net assets (%) . 2.94 3.28 3.00 3.08 3.84
Portfolio turnover rate (%) .............................. 25.02 31.26 31.82 17.44 36.40
Average commission rate paid (a) ......................... $.0542 $ -- $ -- $ -- $ --
(a)Average commission rate paid per share of common and preferred stocks is calculated for fiscal years beginning
on or after September 1, 1995.
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
FOR THE PERIOD
FEBRUARY 1, 1996
(COMMENCEMENT)
OF OPERATIONS)
TO SEPTEMBER 30, 1996
---------------------
<S> <C>
Net asset value, beginning of period ........................................... $15.00
------
Income from investment operations:
Net investment income ...................................................... .06
Net realized and unrealized gain (loss) on investments ..................... .43
------
Total from investment operations ............................................... .49
------
Net asset value, end of period ................................................. $15.49
------
TOTAL RETURN (%) (a) ........................................................... 3.27(c)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ......................................... 78
Ratio of operating expenses, net to average net assets (%) ..................... 1.75(d)
Ratio of operating expenses before expense reductions, to average net assets (%) 2.31(d)
Ratio of net investment income to average net assets (%) ....................... 1.03(d)
Portfolio turnover rate (%) .................................................... 12.56(d)
Average commission rate paid (b) ............................................... $.0150
(a)Total returns would have been lower had certain expenses not been reduced.
(b)Average commission rate paid per share of common and preferred stocks is calculated for fiscal
years beginning on or after September 1, 1995.
(c)Not Annualized (d) Annualized
</TABLE>
84
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $38.36 $31.74 $36.20 $ 30.30 $30.23
--------------------------------------------------------
Income from investment operations:
Net investment income ................................ .42 .36 .00 .06 .15
Net realized and unrealized gain (loss) on investments 5.59 6.91 (1.51) 7.19 1.09
--------------------------------------------------------
Total from investment operations ......................... 6.01 7.27 (1.51) 7.25 1.24
--------------------------------------------------------
Less distributions from:
Net investment income ................................ (.39) (.01) (.05) (.14) (.23)
Net realized gains on investments .................... (.51) (.64) (2.90) (1.21) (.94)
--------------------------------------------------------
Total distributions ...................................... (.90) (.65) (2.95) (1.35) (1.17)
--------------------------------------------------------
Net asset value, end of period ........................... $43.47 $38.36 $31.74 $ 36.20 $30.30
--------------------------------------------------------
TOTAL RETURN (%) ......................................... 15.97 23.47 (4.70) 24.53 3.94
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ................... 826 692 683 607 424
Ratio of operating expenses to average net assets (%) .90 .95 .97 1.05 1.13
Ratio of net investment income to average net assets (%) . 1.05 1.00 .02 .22 .61
Portfolio turnover rate (%) .............................. 64.84 98.44 79.65 100.63 89.20
Average commission rate paid (a) ......................... $.0614 $ -- $ -- $ -- $ --
(a)Average commission rate paid per share of common and preferred stocks is calculated for fiscal years beginning on or
after September 1, 1995.
</TABLE>
85
<PAGE>
NOTES TO FINANCIAL STATEMENT
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES.
The AARP Cash Investment Funds, consisting of the AARP High Quality Money
Fund, the AARP Income Trust, consisting of the AARP GNMA and U.S. Treasury Fund
and the AARP High Quality Bond Fund, the AARP Tax Free Income Trust, consisting
of the AARP High Quality Tax Free Money Fund, and the AARP Insured Tax Free
General Bond Fund, and the AARP Growth Trust, consisting of the AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, AARP Global Growth Fund, and
the AARP Capital Growth Fund are each Massachusetts business trusts and are
registered under the Investment Company Act of 1940, as amended, as open-end
management investment companies. All funds are diversified. The AARP Cash
Investment Funds, has one series, the AARP Growth Trust has four series and each
of the other Trusts have two series. The Declaration of Trust of each Trust
permits its Trustees to create an unlimited number of series and to issue an
unlimited number of full and fractional shares of each separate series.
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the funds in
preparation of their financial statements.
A. SECURITY VALUATION. The AARP High Quality Money Fund uses the penny
rounding method of security valuation as permitted under Rule 2a-7 of the
Investment Company Act of 1940. Under this method, securities for which market
quotations are readily available and which have remaining maturities of
sixty-one days or more from the date of valuation are valued at the mean between
the over-the-counter bid and asked prices by an independent registered
broker/dealer. On the sixtieth day prior to maturity and thereafter until
maturity, securities originally purchased with more than sixty days remaining to
maturity are valued at amortized cost calculated daily, based upon the market
valuation of the securities on the sixty-first day prior to maturity. The AARP
High Quality Tax Free Money Fund uses the amortized cost method of security
valuation as permitted under Rule 2a-7 of the Investment Company Act of 1940.
Under this method, the value of a security is determined by adjusting its
original cost to face value through the amortization of any acquisition discount
or premium at a constant rate until maturity, which approximates market.
Security valuation with respect to each of the remaining funds is performed in
the following manner:
Common and preferred stocks traded on U.S. or foreign securities exchanges
are valued at the most recent sale price on such exchange where the security is
principally traded. If no sale occurred, the security is valued at the mean
between the most recent bid and asked quotations on such exchanges. If there is
no such bid and asked quotations the most recent bid quotation is used. Unlisted
securities quoted on the National Association of Securities Dealers Automatic
Quotation ("NASDAQ") System, for which there have been sales, are valued at the
most recent sale price reported on such system. If there are no such sales, the
value is the high or "inside" bid quotation. Unlisted securities which are not
quoted on the NASDAQ System but are traded in another over-the-counter market
are valued at the most recent sale price on such market. If no sale occurred,
the security is valued at the mean between the most recent bid and asked
quotations. If there are no such bid and asked quotations the most recent bid
quotation is used.
Portfolio debt securities with remaining maturities greater than sixty days
are valued by pricing agents approved by the Trustees, which prices reflect
broker/dealer-supplied valuations and electronic data processing techniques. If
the pricing agents are unable to provide such quotations, the most recent bid
quotation supplied by a bona fide market maker shall be used.
Short-term investments with remaining maturities of 60 days or less are
valued at amortized cost. Variable rate demand notes are carried at cost which
together with
86
<PAGE>
accrued interest approximates market.
The value of all other securities is determined in good faith under the
direction of the Trustees.
B. REPURCHASE AGREEMENTS. The AARP High Quality Money Fund, AARP Growth
Funds and AARP GNMA and U.S. Treasury Fund regularly invest in repurchase
agreements. Each of the AARP funds may enter into repurchase agreements with
selected banks and broker/dealers whereby each fund, through its custodian,
receives delivery of the securities collateralizing repurchase agreements, the
amount of which at the time of purchase and each subsequent business day is
required to be maintained at such a level that the market value, depending on
the maturity of the underlying collateral, is equal to at least 101% of the
resale price.
C. FUTURES CONTRACTS. Each of the funds in the AARP Income Trust, the AARP
Insured Tax Free General Bond Fund, the AARP Balanced Stock and Bond Fund, and
AARP Global Growth Fund may enter into futures contracts. A futures contract is
an agreement between a buyer or seller and an established futures exchange or
its clearinghouse in which the buyer or seller agrees to take or make a delivery
of a specific amount of an item at a specified price on a specific date
(settlement date). During the period the AARP Balanced Stock and Bond Fund sold
interest rate futures as a temporary substitute for selling selected
investments. Also, during the period, the AARP High Quality Bond Fund and the
AARP Insured Tax Free General Bond Fund purchased and sold interest rate futures
to hedge against declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit with
a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the
risk that an illiquid secondary market will limit the Fund's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge, the Fund gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.
D. OPTIONS. Each of the Funds in the AARP Income Trust, the AARP Insured
Tax Free General Bond Fund, the AARP Balanced Stock and Bond Fund, and the AARP
Global Growth Fund may enter into options on futures contracts and may also
(except for the Insured Tax Free General Bond Fund) write covered call options.
Each of the Funds in the AARP Growth Trust may purchase put and call options on
stock indices. In an option contract, the writer of the option grants the buyer
of the option the right to purchase from (call option), or sell to (put option),
the writer a designated instrument at a specified price within a specified
period of time. Certain options, including options on indices, will require cash
settlement by the Fund if the option is exercised. During the period, the AARP
Growth and Income Fund and the AARP High Quality Bond Fund wrote call options on
securities as a hedge against potential adverse price movements in the value of
portfolio assets. Also, during the period, the AARP High Quality Bond Fund
purchased call options on securities as a temporary substitute for purchasing
selected investments and the AARP Insured Tax Free General Bond Fund purchased
put options on futures as a hedge against potential adverse price movements
in the value of portfolio assets.
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between
87
<PAGE>
NOTES TO FINANCIAL STATEMENTS
the cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
E. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of the Funds in the
AARP Growth Trust, in connection with portfolio purchases and sales of
securities denominated in a foreign currency, may enter into forward foreign
currency exchange contracts ("forward contracts"). Additionally, from time to
time, each fund may enter into contracts to hedge certain foreign currency
denominated assets. A forward contract is a commitment to purchase or sell a
foreign currency at the settlement date at a negotiated rate. During the period,
the AARP Balanced Stock and Bond Fund utilized forward contracts as a hedge
against changes in exchange rates relating to foreign currency denominated
assets. Also, during the period, the AARP Balanced Stock and Bond Fund, the AARP
Growth and Income Fund and the AARP Global Growth Fund utilized forward
contracts as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of their contracts.
Additionally, when utilizing forward contracts to hedge, the Fund gives up the
opportunity to profit from favorable exchange rate movements during the term of
the contract.
F. FOREIGN CURRENCY TRANSLATIONS. Foreign currency transactions from
foreign investment activity are translated into U.S. dollars on the following
basis:
(i) market value of investment securities, other assets and liabilities at
the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing
88
<PAGE>
on the respective dates of such transactions.
The Funds do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
G. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME. Securities
transactions are accounted for on the trade date basis and dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Original issue discount on securities purchased is accreted on an
effective yield basis over the life of the security. Acquisition discount is
accreted on taxable securities purchased with original maturity dates of one
year or less. Premium on securities purchased by the AARP Tax Free Income Trust
is amortized on an effective yield basis over the life of the security.
Each Fund uses the specific identification method for determining the
realized gain or loss on investments sold for both financial and federal income
tax reporting purposes.
H. FEDERAL INCOME TAXES. Each of the Funds is treated as a single entity
for federal income tax purposes. It is the policy of each fund to comply with
the requirements of the Internal Revenue Code as amended which are applicable to
regulated investment companies, and to distribute all of its taxable and tax
exempt income to its shareholders. Accordingly, the funds paid no U.S. federal
income taxes, and no provisions for federal income taxes were required.
I. DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of
each fund is declared as a dividend to shareholders. The dividends from AARP
High Quality Money Fund and each of the funds in the AARP Income Trust and the
AARP Tax Free Income Trust are declared daily and distributed monthly. The
dividends from AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund
are declared and paid quarterly. The dividends from AARP Global Growth Fund and
AARP Capital Growth Fund are declared and paid annually. During any particular
year, net realized gains from securities transactions for each fund which are in
excess of any available capital loss carryforwards, would be taxable to the fund
if not distributed and, therefore, will be distributed to shareholders in the
following fiscal year. The AARP High Quality Money Fund may take into account
realized gains and losses on the sales of securities in its daily distributions.
An additional distribution may be made by each fund to the extent necessary to
avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal income tax
rules and regulations which may differ from generally accepted accounting
principles. These differences relate primarily to investments in options,
futures, forward contracts, foreign denominated investments, mortgage backed
securities, REIT and certain securities sold at a loss. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ significantly from distributions during such period.
Accordingly, the Funds may periodically make reclassifications among certain of
its capital accounts without impacting the net asset value of the Fund.
J. EXPENSES. Each Fund is charged for those expenses that are directly
attributable to it, such as management, custodian, audit, and certain
shareholder service fees. Expenses that are not directly attributable to a fund,
such as reports to shareholders, portions of Trustees' and legal fees, are
allocated among all the funds.
K. ORGANIZATION COST. Costs incurred by the AARP Balanced Stock and Bond
Fund and the AARP Global Growth Fund in connection with its organization and
initial registration of shares have been deferred and are being
89
<PAGE>
NOTES TO FINANCIAL STATEMENTS
amortized on a straight-line basis over a five-year period.
L. PORTFOLIO INSURANCE. The cost of premiums paid by the AARP Insured Tax
Free General Bond Fund for insurance, which covers individual securities, is
non-cancellable and runs the life of such securities, is added to the cost basis
of such securities. This insurance provides for the timely payment of principal
and interest on these securities when due and protects the fund against loss
from default by the Municipal issuer. It does not protect the investor from
losses due to changes in market values.
M. SECURITIES PURCHASED ON A FORWARD DELIVERY OR WHEN-ISSUED BASIS. The
AARP High Quality Money Fund, each of the funds in the AARP Income Trust and
AARP Tax Free Income Trust, and AARP Balanced Stock and Bond Fund may purchase
securities on a forward delivery or when-issued basis. Municipal, corporate and
government securities are frequently offered on a forward delivery or
when-issued basis. At the time the fund makes the commitment to purchase a
security on a forward delivery or when-issued basis, the price of the underlying
security is fixed. The fund will record the transaction at the time of the
commitment and reflect the value of the security in determining its net asset
value. The settlement date of the transaction can occur within one month or more
after the date the commitment was made. During the period between purchase and
settlement date, no payment is made on behalf of the fund and no interest
accrues to the fund.
NOTE 2. MANAGEMENT FEE AND OTHER RELATED TRANSACTIONS.
Under the investment management and advisory agreement (the "Management
Agreement") between each Trust and Scudder, Stevens & Clark, Inc. (the "Fund
Manager") the management fee consists of two elements: a Base Fee and an
Individual Fund Fee. The Base Fee is calculated as a percentage of the combined
net assets of all of the AARP Funds ("Program Assets"). Each AARP Fund pays, as
its portion of the Base Fee, an amount equal to the ratio of its daily net
assets to the daily net assets of all of the AARP Funds. The Annual Base Fee is
calculated as follows: .35%, of the first $2.0 billion of such assets, .33% of
the next $2.0 billion of such assets, .30% of the next $2.0 billion of such
assets, .28% of the next $2.0 billion of such assets, .26% of the next $3.0
billion of such assets, .25% of the next $3.0 billion of such assets, .24% of
such assets thereafter.
In addition to the Base Fee Rate, each Fund agrees to pay the Fund Manager
a flat Individual Fund Fee based on the average daily net assets of that Fund.
The Individual Fund Fee Rate recognizes the different characteristics of each
Fund, the varying levels of complexity of investment research and securities
trading required to manage each Fund. The Individual Fund Fee Rate is calculated
at the following percentages of the average daily net assets of each fund: .10%
for AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund; .12%
for AARP GNMA and U.S. Treasury Fund; .19% for AARP High Quality Bond Fund, AARP
Insured Tax Free General Bond Fund, AARP Balanced Stock and Bond Fund and AARP
Growth and Income Fund; .55% for AARP Global Growth Fund; .32% for AARP Capital
Growth Fund. The amount for each fund is shown in the Statement of Operations as
Management Fee.
As manager of the assets of each Fund, the Fund Manager directs the
investments of each Fund in accordance with its investment objectives, policies
and restrictions. In addition to portfolio management services, the Fund Manager
under the Management Agreement will provide certain administrative services in
accordance with such Agreement. The Fund Manager has also entered into a Member
Services Agreement with AARP Financial Services Corp. ("AFSC"), a subsidiary of
AARP, and pays portions of its investment management and advisory fee to AFSC.
The Management Agreement also provides that the Fund Manager will reimburse
the funds for annual expenses in excess of the lowest state limitations imposed,
exclusive of taxes, brokerage commissions, interest and extraordinary expenses.
The Fund Manager agreed to maintain the annualized expenses of the
90
<PAGE>
AARP High Quality Tax Free Money Fund at not more than 0.90% of average daily
net assets until February 1, 1996. Effective February 1, 1996, the Fund Manager
agreed to maintain the annualized expenses of the AARP Global Growth Fund at not
more than 1.75% of average net assets until January 1, 1997. The amount of
expenses reimbursed by the Fund Manager, if any, for each fund has been shown in
the Statement of Operations as Expense Reductions.
Each Trust has a shareholder servicing agreement with Scudder Service
Corporation ("SSC"), a subsidiary of the Fund Manager. As shareholder servicing
agent, SSC provides various transfer agent, dividend disbursing, and shareholder
communication functions. The amount for each fund has been shown in the
Statement of Operations as Transfer and Dividend Disbursing Expense.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Fund
Manager, is responsible for determining the daily net asset value per share and
maintaining the portfolio and general accounting records of AARP Growth and
Income Fund, AARP Global Growth Fund and AARP Capital Growth Fund. For the year
ended September 30, 1996, the amount charged to the Funds by SFAC aggregated
$266,385, $43,116, and $103,618, respectively, of which $23,261, $43,116, and
$8,132, respectively, is unpaid at September 30, 1996. Effective October 6,
1995, for AARP High Quality Money Fund and AARP High Quality Tax Free Money
Fund; October 10, 1995, for AARP High Quality Bond Fund; October 20, 1995, for
AARP Balanced Stock and Bond Fund; November 10, 1995, for AARP GNMA and U.S.
Treasury Fund; and November 13, 1995 for AARP Insured Tax Free General Bond
Fund, SFAC assumed responsibility for determining the daily net asset value per
share and maintaining the portfolio and general accounting records. For the
period ended September 30, 1996, the amount charged to the Funds by SFAC
aggregated $48,622, $30,620, $84,969, $76,639, $480,771 and $150,802,
respectively, of which $4,253, $2,552, $6,867, $7,197, $41,759, and $14,015,
respectively, is unpaid at September 30, 1996.
Each fund pays each Trustee not affiliated with Scudder or AARP $2,000
annually, $270 for each Trustees' meeting, $200 for each audit committee meeting
attended, and $100 for other committee meetings, plus expenses, subject to
certain maximums per Trustee for meetings held jointly with other funds. The
amount for each fund has been shown in the Statement of Operations as Trustees'
fees and expenses.
91
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Trustees and Shareholders of
AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust and
AARP Growth Trust
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of each
of the funds constituting the AARP Cash Investment Funds, the AARP Income
Trust, the AARP Tax Free Income Trust and the AARP Growth Trust (hereafter
referred to as the "Trusts") at September 30, 1996, the results of each of
their operations, the changes in each of their net assets and the
financial highlights for the periods indicated, in conformity with
generally acepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trusts' management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material mistatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at September 30,
1996 by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were
not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
November 14, 1996
92
<PAGE>
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of the AARP Funds was held on Friday,
September 13, 1996, at the offices of Scudder, Stevens & Clark, Inc., Two
International Place, Boston, Massachusetts. The four matters voted upon by
Shareholders and the resulting votes for each matter are presented below.
<TABLE>
<CAPTION>
1. The election of 15 Trustees to hold office until their respective successors shall have been duly elected and qualified.
AARP Cash Investment Funds AARP Tax Free Income Trust
Trustee: Number of Votes: Number of Votes:
-------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Broker Broker
For Withheld Non-Votes* For Withheld Non-Votes*
--- -------- ---------- --- -------- ----------
Carole L. Anderson 216,925,576 4,141,954 0 118,843,284 1,685,682 0
Adelaide Attard 216,799,827 4,267,703 0 118,848,543 1,680,422 0
Cyril F. Brickfield 216,472,867 4,594,663 0 118,796,747 1,732,219 0
Robert N. Butler 216,701,084 4,366,446 0 118,708,693 1,820,273 0
Esther Canja 216,468,497 4,599,032 0 118,748,570 1,780,396 0
Linda C. Coughlin 216,720,499 4,347,030 0 118,827,130 1,701,836 0
Horace B. Deets 216,374,353 4,693,177 0 118,593,830 1,935,136 0
Edgar R. Fiedler 216,731,994 4,335,536 0 118,935,082 1,593,884 0
Cuyler W. Findlay 216,855,762 4,211,767 0 118,850,091 1,678,875 0
Eugene P. Forrester 216,656,850 4,410,680 0 118,850,506 1,678,460 0
Wayne F. Haefer 216,955,003 4,112,526 0 118,951,350 1,577,615 0
George L. Maddox, Jr. 216,846,314 4,221,215 0 118,751,209 1,777,757 0
Robert J. Myers 216,694,683 4,372,846 0 118,604,347 1,924,619 0
James H. Schulz 216,926,200 4,138,329 0 118,964,697 1,564,268 0
Gordon Shillinglaw 216,705,519 4,362,010 0 118,767,221 1,761,745 0
2. Ratification or rejection of the action taken by the Board of Trustees
in selecting Price Waterhouse LLP as independent accountants for the
fiscal year ending September 30, 1997.
AARP Cash Investment Funds AARP Tax Free Income Trust
Number of Votes: Number of Votes:
-------------------------- --------------------------
Broker Broker
For Against Abstain Non-Votes* For Against Abstain Non-Votes*
--- ------- ------- --------- --- ------- ------- ---------
215,375,499 1,703,689 3,988,341 0 117,630,211 531,450 2,367,304 0
3. Approval or disapproval of Amended and Restated Declarations of Trust.
AARP Cash Investment Funds AARP Tax Free Income Trust
Number of Votes: Number of Votes:
-------------------------- --------------------------
Broker Broker
For Against Abstain Non-Votes* For Against Abstain Non-Votes*
--- ------- ------- --------- --- ------- ------- ---------
202,397,479 10,317,597 8,352,452 0 110,916,660 4,866,055 4,727,112 19,138
4. Approval or disapproval of modifications to the current fundamental diversification policies.#
AARP High Quality Money Fund AARP High Quality Tax Free Money Fund
Number of Votes: Number of Votes:
-------------------------- -------------------------------------
Broker Broker
For Against Abstain Non-Votes* For Against Abstain Non-Votes*
--- ------- ------- --------- --- ------- ------- ---------
205,891,068 6,861,270 8,315,191 0 55,243,653 1,670,969 2,157,905 0
- -----------------------------------------------------------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
# For Shareholders of the AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund only.
</TABLE>
93
<PAGE>
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of the AARP Funds was held on Friday,
September 13, 1996, at the offices of Scudder, Stevens & Clark, Inc., Two
International Place, Boston, Massachusetts. The three matters voted upon by
Shareholders and the resulting votes for each matter are presented below.
<TABLE>
<CAPTION>
1. The election of 15 Trustees to hold office until their respective successors shall have been duly elected and qualified.
AARP Income Trust AARP Growth Trust
Trustee: Number of Votes: Number of Votes:
-------- ------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Broker Broker
For Withheld Non-Votes* For Withheld Non-Votes*
--- -------- ---------- --- -------- ----------
Carole L. Anderson 198,108,986 2,676,743 0 78,688,236 1,122,407 0
Adelaide Attard 198,022,054 2,763,675 0 78,643,514 1,167,129 0
Cyril F. Brickfield 197,880,680 2,905,049 0 78,541,412 1,269,231 0
Robert N. Butler 197,861,574 2,924,155 0 78,584,607 1,226,036 0
Esther Canja 197,771,606 3,014,123 0 78,536,178 1,274,465 0
Linda C. Coughlin 197,998,716 2,787,013 0 78,634,270 1,176,373 0
Horace B. Deets 197,509,529 3,276,200 0 78,463,163 1,347,480 0
Edgar R. Fiedler 198,038,088 2,747,641 0 78,594,205 1,216,438 0
Cuyler W. Findlay 197,986,735 2,798,994 0 78,666,715 1,143,928 0
Eugene P. Forrester 197,994,539 2,791,190 0 78,662,033 1,148,610 0
Wayne F. Haefer 198,150,546 2,635,183 0 78,713,230 1,097,413 0
George L. Maddox, Jr. 198,053,152 2,732,577 0 78,677,375 1,133,268 0
Robert J. Myers 197,782,143 3,003,586 0 78,550,076 1,260,567 0
James H. Schulz 198,208,487 2,577,242 0 78,762,753 1,047,890 0
Gordon Shillinglaw 197,909,746 2,875,983 0 78,567,180 1,243,463 0
2. Ratification or rejection of the action taken by the Board of Trustees
in selecting Price Waterhouse LLP as independent accountants for the
fiscal year ending September 30, 1997.
AARP Income Trust AARP Growth Trust
Number of Votes: Number of Votes:
-------------------------- --------------------------
Broker Broker
For Against Abstain Non-Votes* For Against Abstain Non-Votes*
--- ------- ------- --------- --- ------- ------- ---------
196,218,751 1,008,945 3,558,033 0 78,015,861 530,915 1,263,866 0
3. Approval or disapproval of Amended and Restated Declarations of Trust.
AARP Income Trust AARP Growth Trust
Number of Votes: Number of Votes:
-------------------------- --------------------------
Broker Broker
For Against Abstain Non-Votes* For Against Abstain Non-Votes*
--- ------- ------- --------- --- ------- ------- ---------
186,179,562 6,964,391 7,577,717 64,058 72,967,248 3,867,254 2,931,868 44,273
- -----------------------------------------------------------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
</TABLE>
94
<PAGE>
OFFICERS AND TRUSTEES
CAROLE LEWIS ANDERSON
Trustee of AARP Funds; President, MASDUN Capital Advisors; Formerly
Principal, Suburban Capital Markets; Director, VICORP Restaurants, Inc.;
Member of the Board, Association for Corporate Growth of Washington, D.C.;
Trustee, Hasbro Children's Foundation and Mary Baldwin College.
ADELAIDE ATTARD
Trustee of AARP Funds; Member, New York City Department of Aging Advisory
Council--Appointed by Mayor (1995); Consultant, Gerontology; Commissioner,
County of Nassau, NY, Department of Senior Citizen Affairs (1971-1991);
Board Member, American Association of International Aging (1981 to present);
Member, NYS Community Services for the Elderly Advisory Council--Appointed
by Governor (1987-1991); Chairperson, Federal Council on Aging (1981-1986);
U.S. Delegate to 1982 United Nations World Assembly on Aging.
CYRIL F. BRICKFIELD
Trustee of AARP Funds; Honorary President and Special Counsel, American
Association of Retired Persons; Former Board Member: American Association of
International Aging, National Alzheimer's Association, and American
Federation of Aging Research (AFAR).
ROBERT N. BUTLER, M.D.
Trustee of AARP Funds; Director, International Longevity Center and
Professor of Geriatrics and Adult Development; Chairman, Henry L. Schwartz
Department of Geriatrics and Adult Development, Mount Sinai Medical Center;
Formerly Director, National Institute on Aging, National Institute of Health
(1976-1982).
ESTHER CANJA
Trustee of AARP Funds; Vice President, American Association of Retired
Persons; Trustee and Chair, AARP Group Health Insurance Plan; Board Liaison,
National Volunteer Leadership Network Advisory Committee; Chair, Board
Operations Committee; AARP State Director of Florida (1990-1992).
LINDA C. COUGHLIN
President and Trustee of AARP Funds; Managing Director and Member, Board of
Directors of Scudder, Stevens & Clark, Inc.
HORACE B. DEETS
Vice Chairman and Trustee of AARP Funds; Executive Director, American
Association of Retired Persons; Member, Board of Councilors, Andrus
Gerontology Center; Member of the Board, HelpAge International.
EDGAR R. FIEDLER
Trustee of AARP Funds; Senior Fellow and Economic Counselor, The Conference
Board, Inc.; Director: The Stanley Works, Zurich-American Insurance Company,
HT Insight Funds, and Emerging Mexico Fund.
CUYLER W. FINDLAY
Chairman and Trustee of AARP Funds; Managing Director of Scudder, Stevens &
Clark, Inc., Senior Vice President and Director, Scudder Investor Services,
Inc.
EUGENE P. FORRESTER
Trustee of AARP Funds; Consultant; International Trade Counselor;
Lt. General (Retired), U.S. Army; Command General, U.S. Army Western
Command, Honolulu; Consultant: Digital Equipment Corp., DHI, Philip Morris,
PICS Previews, and Whittle Communications.
95
<PAGE>
OFFICERS AND TRUSTEES
WAYNE F. HAEFER
Trustee of AARP Funds; Director, Membership Division of AARP; Trustee,
Employee's Pension and Welfare Trusts of AARP and Retired Persons Services,
Inc.; Formerly Director, Administration and Data Management Division of
AARP.
GEORGE L. MADDOX, JR.
Trustee of AARP Funds; Professor Emeritus and Director, Long Term Care
Resources Program, Duke University Medical Center; Senior Fellow, Center for
the Study of Aging and Human Development, Duke University; Professor
Emeritus of Sociology, Departments of Sociology and Psychiatry, Duke
University.
ROBERT J. MYERS
Trustee of AARP Funds; Actuarial Consultant; Formerly Executive Director,
National Commission on Social Security Reform; Director: NASL Series Trust,
Inc. and North American Funds, Inc.; Formerly Director, Board of Pensions,
Evangelical Lutheran Church in America; Formerly Chairman, Commission on
Railroad Retirement Reform; Member, U.S. Office of Technology Assessment,
Prospective Payment Assessment Commission.
JAMES H. SCHULZ
Trustee of AARP Funds; Professor of Economics and Kirstein Professor of
Aging Policy, Policy Center of Aging, Florence Heller School, Brandeis
University.
GORDON SHILLINGLAW
Trustee of AARP Funds; Professor Emeritus of Accounting, Columbia University
Graduate School of Business; Formerly Director and Treasurer, FERIS
Foundation of America.
<TABLE>
<C> <C>
MARGARET D. HADZIMA* EDWARD J. O'CONNELL*
Vice President Vice President and Assistant Treasurer
THOMAS W. JOSEPH* JAMES W. PASMAN*
Vice President Vice President
DAVID S. LEE* KATHRYN L. QUIRK*
Vice President and Assistant Treasurer Vice President and Secretary
THOMAS F. MCDONOUGH* HOWARD SCHNEIDER*
Vice President and Assistant Secretary Vice President
PAMELA A. MCGRATH* CORNELIA M. SMALL*
Vice President and Treasurer Vice President
</TABLE>
*Scudder, Stevens & Clark, Inc.
Effective January 1, 1995, each member of and nominee for the Board of
Trustees must own shares of one or more of the Funds within the AARP
Investment Program of which he/she serves as Trustee.
96
<PAGE>
SERVICE AND TAX INFORMATION
SHAREHOLDER Our knowledgeable AARP Mutual Fund Representatives
SERVICE LINE are available to answer questions about the Program
or your account Monday through Friday, between
1-800-253-2277 8:00 a.m.and 8:00 p.m., eastern time. Transactions
can be made Monday through Friday between 8:00 a.m.
and 4:00 p.m., eastern time.
Write: AARP Investment Program from Scudder
P.O. Box 2540
Boston, MA 02208-2540
For overnight AARP Investment Program from Scudder
and certified 42 Longwater Drive
mail: Norwell, MA 02061-1612
EASY-ACCESS LINE Shareholders with a touch-tone telephone may call
this automated line to obtain AARP Fund performance
1-800-631-4636 and account information or to exchange or sell
(redeem) AARP Mutual Fund shares. This service is
available 24 hours a day, 7 days a week.
TRANSACTIONS BY FAX If you have access to a fax machine, you can fax
transaction requests. Any exchange or redemption
1-800-821-6234 request received after 4:00 p.m. business days or on
weekends, will be processed the next business day.
All faxes are kept confidential.
TDD (TELECOMMUNICATIONS AARP members with hearing or speech impairments and
DEVICE FOR THE DEAF AND access to TDD equipment can communicate with the
SPEECH IMPAIRED) AARP Investment Program Monday through Friday
between 8:00 a.m. and 6:00 p.m., eastern time.
1-800-634-9454 Transactions can be made between 8:00 a.m. and 4:00
p.m., eastern time.
TAX INFORMATION Of the dividends paid from net investment income by
the AARP High Quality Tax Free Money Fund and the
AARP Insured Tax Free General Bond Fund for the
Funds' fiscal years ending September 30, 1996, 100%
constituted exempt-interest dividends for regular
federal income tax purposes.
Pursuant to Section 852 of the Internal Revenue
Code, the AARP Balanced Stock and Bond Fund, the
AARP Growth and Income Fund, the AARP Capital Growth
Fund, and the AARP Insured Tax Free General Bond
Fund designate $3,574,697, $132,329,293,
$52,397,990, and $3,762,709, respectively, as
capital gain dividends for their fiscal years ended
September 30, 1996.
Pursuant to Section 853 of the Internal Revenue
Code, AARP Global Growth Fund designates $0.012 per
share (representing a total of $60,508) of foreign
taxes and $0.046 per share (representing a total of
$229,904) of foreign source income as having been
paid in the fiscal year ended 9/30/96.
Pursuant to Section 854 of the Internal Revenue
Code, the percentages of ordinary income dividends
paid qualify for the dividends received deduction
for corporations are as follow: AARP Balanced Stock
and Bond Fund 40.72%, AARP Capital Growth Fund 100%
and AARP Growth and Income Fund 94.47%.
In January 1997 you will receive federal tax
information on all distributions paid to your
account in calendar year 1996.
<PAGE>
AARP TAX FREE INCOME TRUST
PART C. OTHER INFORMATION
<TABLE>
<S> <C>
Item 24. Financial Statements and Exhibits
- -------- ---------------------------------
a. Financial Statements
Included in Part A of this Registration Statement:
Financial Highlights for the ten fiscal years ended
September 30, 1996.
Included in Part B of this Registration Statement:
Lists of Investments as of September 30, 1996
Statements of Assets and Liabilities as of September 30, 1996
Statements of Operations for the fiscal year ended September
30, 1996
Statements of Changes in Net Assets for the fiscal year
ended September 30, 1996
Financial Highlights for the five fiscal years ended
September 30, 1996
Notes to Financial Statements
Statements, schedules and historical information other than those
listed above have been omitted since they are either not applicable
or are not required.
b. Exhibits:
1. (a)(1) Declaration of Trust dated June 8, 1984, as amended November 1, 1984.
(Previously filed as Exhibit 1(a) to Post-Effective Amendment No. 1
to the Registration Statement.)
(a)(2) Certificate of Amendment dated September 15, 1989 to Declaration of
Trust.
(Previously filed as Exhibit 1(a)(2) to Post-Effective Amendment No.
10 to the Registration Statement.)
(a)(3) Certificate of Amendment dated June 26, 1991 to Declaration of Trust.
(Previously filed as Exhibit 1(a)(3) to Post-Effective Amendment No.
12 to the Registration Statement.)
(a)(4) Certificate of Amendment dated January 25, 1994 to Declaration of
Trust.
(Previously filed as Exhibit 1(a)(4) to Post-Effective Amendment No.
16 to the Registration Statement.)
(a)(5) Amended and Restated Declaration of Trust dated September 13, 1996
is filed herein.
(b)(1) Establishment of Series dated November 27, 1984.
(Previously filed as Exhibit 1(b) to Post-Effective Amendment No. 4
to the Registration Statement.)
</TABLE>
Part C - Page 1
<PAGE>
<TABLE>
<S> <C>
(b)(2) Redesignation of Series dated June 26, 1991.
(Previously filed as Exhibit 1(b)(2) to Post-Effective Amendment No.
12 to the Registration Statement.)
2. (a)(1) By-Laws of the Registrant as amended June 17, 1992.
(Previously filed as Exhibit 2 to Post-Effective Amendment No. 13 to
the Registration Statement.)
(a)(2) By-Laws of the Registrant as amended March 17, 1993.
(Previously filed as Exhibit (2)(a)(2) to Post-Effective Amendment
No. 14 to the Registration Statement.)
(a)(3) Certificate as to Resolution of Board Members dated June 24, 1996
is filed herein.
3. Inapplicable.
4. Specimen certificate representing shares of beneficial interest
having a par value of $.01 per share.
(Previously filed as Exhibit 4 to Post-Effective Amendment No. 1 to
the Registration Statement.)
5. (a) Investment Management and Advisory Agreement between the Registrant
and AARP/Scudder Financial Management Company dated December 16,
1985.
(Previously filed as Exhibit 5(a) to Post-Effective Amendment No. 5
to the Registration Statement.) Terminated February 1, 1994.
(a)(1) Investment Management Agreement between the Registrant and Scudder,
Stevens & Clark, Inc. dated February 1, 1994.
(Previously filed as Exhibit 5(a)(1) to Post-Effective Amendment No.
16 to the Registration Statement.)
(b) Subadvisory Agreement among AARP/Scudder Financial Management
Company, Scudder, Stevens & Clark Ltd., the Registrant, AARP Income
Trust and AARP Growth Trust dated December 16, 1985.
(Previously filed as Exhibit 5(b) to Post-Effective Amendment No. 5
to the Registration Statement.) Terminated February 1, 1994.
6. Underwriting Agreement between the Registrant and Scudder Fund
Distributors, Inc. dated September 4, 1985.
(Previously filed as Exhibit 6 to Post-Effective Amendment No. 4 to
the Registration Statement.)
7. Inapplicable.
8. (a)(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.
4 to the Registration Statement.)
(a)(2) Fee schedule for Exhibit 8(a)(l).
(Previously filed as Exhibit 8(a)(2) to Post-Effective Amendment No.
4 to the Registration Statement.)
</TABLE>
Part C - Page 2
<PAGE>
<TABLE>
<S> <C>
(a)(3) Additional Provision to Custodian Agreement between the Registrant
and State Street Bank and Trust Company dated November 30, 1984.
(Previously filed as Exhibit 8(a)(3) to Post-Effective Amendment No.
4 to the Registration Statement.)
(a)(4) Amendment No. 1 to 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.
4 to the Registration Statement.)
(a)(5) Amendment dated September 15, 1988 to Custodian Contract between
Registrant and State Street Bank and Trust Company, dated November
30, 1984.
(Previously filed as Exhibit 8(a)(5) to Post-Effective Amendment No.
9 to the Registration Statement.)
(a)(6) Form of revised fee schedule for Exhibit 8(a)(1).
(Previously filed as Exhibit 8(a)(6) to Post-Effective Amendment No.
17 to the Registration Statement.)
(b) Subcustodian Agreement between State Street Bank and Trust Company
and Morgan Guaranty Trust Company of New York, dated November 25,
1985.
(Previously filed as Exhibit 8(b) to Post-Effective Amendment No. 9
to the Registration Statement.)
(c) Subcustodian Agreement between State Street Bank and Trust Company
and Irving Trust Company, dated November 30, 1987.
(Previously filed as Exhibit 8(c) to Post-Effective Amendment No. 9
to the Registration Statement.)
(d) Subcustodian Agreement between State Street Bank and Trust Company
and Security Pacific National Trust Company (New York), dated
February 18, 1988.
(Previously filed as Exhibit 8(d) to Post-Effective Amendment No. 9
to the Registration Statement.)
(e) Subcustodian Agreement between State Street Bank and Trust Company
and Chemical Bank, dated May 31, 1988.
(Previously filed as Exhibit 8(e) to Post-Effective Amendment No. 9
to the Registration Statement.)
9. (a) 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. 10
to the Registration Statement.)
(b) Member Services Agreement among AARP/Scudder Financial Management
Company, AARP Financial Services Corp., the Registrant, AARP Income
Trust and AARP Growth Trust dated November 30, 1984.
</TABLE>
Part C - Page 3
<PAGE>
<TABLE>
<S> <C>
(Previously filed as Exhibit 9(b) to Post-Effective Amendment No. 5
to the Registration Statement.) Terminated February 1, 1994.
(b)(1) Member Services Agreement between AARP Financial Services Corp. and
Scudder, Stevens & Clark, Inc. dated February 1, 1994.
(Previously filed as Exhibit 9(b)(1) to Post-Effective Amendment No.
16 to the Registration Statement.)
(c) Service Mark License Agreement among Scudder, Stevens & Clark,
American Association of Retired Persons, the Registrant, AARP Income
Trust and AARP Growth Trust dated November 30, 1984.
(Previously filed as Exhibit 9(c) to Post-Effective Amendment No. 5
to the Registration Statement.)
(c)(1) Service Mark License Agreement among Scudder, Stevens & Clark,
Inc., American Association of Retired Persons, the Registrant,
AARP Cash Investment Trust, AARP Growth Trust and AARP Income
Trust dated March 20, 1996 is filed herein.
(d) 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. 9
to the Registration Statement.)
(e) Fund Accounting Services Agreement between the Registrant, on behalf
of AARP High Quality Tax Free Money Fund and Scudder Fund Accounting
Corporation dated October 6, 1995.
(Previously filed as Exhibit 9(e) to Post-Effective Amendment No. 17
to the Registration Statement.)
(f) Fund Accounting Services Agreement between the Registrant, on behalf
of AARP Insured Tax Free General Bond Fund and Scudder Fund
Accounting Corporation dated November 10, 1995.
(Previously filed as Exhibit 9(f) to Post-Effective Amendment No. 17
to the Registration Statement.)
10. Inapplicable.
11. Consent of Independent Accountants is filed herein.
12. Inapplicable.
13. Inapplicable.
14. Inapplicable.
15. Inapplicable.
16. Schedule for Computation of Performance Data.
(Previously filed as Exhibit 16 to Post-Effective Amendment No. 10
to the Registration Statement.)
17. Financial Data Schedules are filed herein.
18. Inapplicable.
</TABLE>
Part C - Page 4
<PAGE>
Power of Attorney for Cuyler W. Findlay, Cyril F. Brickfield, Edgar R. Fiedler,
Eugene P. Forrester, George L. Maddox, Jr., James H. Schulz and Gordon
Shillinglaw is incorporated by reference to the Signature Page of Post-Effective
Amendment No. 8.
Power of Attorney for Linda C. Coughlin, Horace Deets and Wayne F. Haefer is
incorporated by reference to the Signature Page of Post-Effective Amendment No.
17 to the Registration Statement.
Power of Attorney for Carole Lewis Anderson, Adelaide Attard, Robert N. Butler
and Esther Canja is filed herein.
Item 25. Persons Controlled by or under Common Control with Registrant.
- -------- --------------------------------------------------------------
None
Item 26. Number of Holders of Securities (as of December 31, 1996).
- -------- ----------------------------------------------------------
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Shareholders
-------------- -----------------------------
<S> <C>
Shares of beneficial interest
with par value of $.01
AARP High Quality Tax Free Money Fund 9,087
AARP Insured Tax Free General Bond Fund 64,794
</TABLE>
Item 27. Indemnification.
- -------- ----------------
A policy of insurance covering Scudder, Stevens & Clark, Inc.,
its affiliates, including Scudder Investor Services, Inc., and
all of the registered investment companies advised by Scudder,
Stevens & Clark, 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 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, provided that any such expenses shall be paid
solely out of the funds and property of the series of the
Trust with respect to which such Shareholders Shares are
issued. The rights accruing to a Shareholder under this
Section 4.1 shall not exclude any other right to which such
Shareholder may be lawfully entitled, nor shall anything
herein contained restrict the right of the Trust to indemnify
or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein.
Part C - Page 5
<PAGE>
Section 4.2 Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, agent or service provider thereof for any
action or failure to act by him (or her) or any other such
Trustee, officer, employee, agent or service provider
(including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust)
except for his own bad faith, willful misfeasance, gross
negligence or reckless disregard of the duties involved in the
conduct of his office. The term "service provider" as used in
this Section 4.2, shall include any investment adviser,
principal underwriter or other person with whom the Trust has
an agreement for provision of services.
Section 4.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained
in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the
Trust to the fullest extent permitted by law against
all liability and against all expenses reasonably
incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions,
suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the
words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust or the
Shareholders by reason of a final adjudication by the
court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in
good faith in the reasonable belief that his action
was in the best interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as
provided in paragraph (b)(i) resulting in a payment
by a Trustee or officer, unless there has been a
determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office;
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type
inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees then in office act on
the matter) or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust,
shall be severable, shall not affect any other rights
to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a person who has
ceased to be such Trustee or officer and shall inure
to the benefit of the heirs, executors,
administrators and assigns of such a person. Nothing
contained herein shall affect any rights to
Part C - Page 6
<PAGE>
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 shall 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 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 28. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
The Adviser 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 28.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Director, Vice President, Assistant Treasurer, Chief Operating Officer & Chief
Financial Officer, Scudder, Stevens & Clark, Inc. (investment adviser)**
Lynn S. Birdsong Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Supervisory Director, The Latin America Income and Appreciation Fund N.V. (investment
company) +
Supervisory Director, The Venezuela High Income Fund N.V. (investment company) xx
Supervisory Director, Scudder Mortgage Fund (investment company)+
Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I
& II (investment company) +
Director, Scudder, Stevens & Clark (Luxembourg) S.A. (investment manager) #
Trustee, Scudder Funds Trust (investment company)*
President & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
President & Director, Scudder World Income Opportunities Fund, Inc. (investment
company)**
Director, Canadian High Income Fund (investment company)#
Director, Hot Growth Companies Fund (investment company)#
President, The Japan Fund, Inc. (investment company)**
Director, Sovereign High Yield Investment Company (investment company)+
Nicholas Bratt Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
President & Director, Scudder New Europe Fund, Inc. (investment company)**
President & Director, The Brazil Fund, Inc. (investment company)**
</TABLE>
Part C - Page 7
<PAGE>
<TABLE>
<S> <C>
President & Director, The First Iberian Fund, Inc. (investment company)**
President & Director, Scudder International Fund, Inc. (investment company)**
President & Director, Scudder Global Fund, Inc. (President on all series except Scudder
Global Fund) (investment company)**
President & Director, The Korea Fund, Inc. (investment company)**
President & Director, Scudder New Asia Fund, Inc. (investment company)**
President, The Argentina Fund, Inc. (investment company)**
Vice President, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)**
Vice President, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
Vice President, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser)
Toronto, Ontario, Canada
Vice President, Scudder, Stevens & Clark Overseas Corporation oo
E. Michael Brown Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Trustee, Scudder GNMA Fund (investment company)*
Trustee, Scudder U.S. Treasury Fund (investment company)*
Trustee, Scudder Tax Free Money Fund (investment company)*
Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)*
Director & President, Scudder Realty Holding Corporation (a real estate holding
company)*
Director & President, Scudder Trust Company (a trust company)+++
Director, Scudder Trust (Cayman) Ltd.
Mark S. Casady Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Director & Vice President, Scudder Investor Services, Inc. (broker/dealer)*
Vice President, Scudder Service Corporation (in-house transfer agent)*
Director, SFA, Inc. (advertising agency)*
Linda C. Coughlin Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Director & Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)*
President & Trustee, AARP Cash Investment Funds (investment company)**
President & Trustee, AARP Growth Trust (investment company)**
President & Trustee, AARP Income Trust (investment company)**
President & Trustee, AARP Tax Free Income Trust (investment company)**
President & Trustee, AARP Managed Investment Portfolios Trust (investment company)**
Director, SFA, Inc. (advertising agency)*
Margaret D. Hadzima Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)*
Jerard K. Hartman Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Scudder California Tax Free Trust (investment company)*
Vice President, Scudder Equity Trust (investment company)**
Vice President, Scudder Cash Investment Trust (investment company)*
Vice President, Scudder Fund, Inc. (investment company)**
Vice President, Scudder Global Fund, Inc. (investment company)**
Vice President, Scudder GNMA Fund (investment company)*
Vice President, Scudder Portfolio Trust (investment company)*
Vice President, Scudder Institutional Fund, Inc. (investment company)**
Vice President, Scudder International Fund, Inc. (investment company)**
Vice President, Scudder Investment Trust (investment company)*
Vice President, Scudder Municipal Trust (investment company)*
Vice President, Scudder Mutual Funds, Inc. (investment company)**
</TABLE>
Part C - Page 8
<PAGE>
<TABLE>
<S> <C>
Vice President, Scudder New Asia Fund, Inc. (investment company)**
Vice President, Scudder New Europe Fund, Inc. (investment company)**
Vice President, Scudder Securities Trust (investment company)*
Vice President, Scudder State Tax Free Trust (investment company)*
Vice President, Scudder Funds Trust (investment company)**
Vice President, Scudder Tax Free Money Fund (investment company)*
Vice President, Scudder Tax Free Trust (investment company)*
Vice President, Scudder U.S. Treasury Money Fund (investment company)*
Vice President, Scudder Pathway Series (investment company)*
Vice President, Scudder Variable Life Investment Fund (investment company)*
Vice President, The Brazil Fund, Inc. (investment company)**
Vice President, The Korea Fund, Inc. (investment company)**
Vice President, The Argentina Fund, Inc. (investment company)**
Vice President & Director, Scudder, Stevens & Clark of Canada, Ltd. (Canadian
investment adviser) Toronto, Ontario, Canada
Vice President, The First Iberian Fund, Inc. (investment company)**
Vice President, The Latin America Dollar Income Fund, Inc. (investment company)**
Vice President, Scudder World Income Opportunities Fund, Inc. (investment company)**
Richard A. Holt Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Scudder Variable Life Investment Fund (investment company)*
Dudley H. Ladd Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Director, Scudder Global Fund, Inc. (investment company)**
Director, Scudder International Fund, Inc. (investment company)**
Director, Scudder Mutual Fund, Inc. (investment company)**
Senior Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)*
President & Director, SFA, Inc. (advertising agency)*
Vice President & Trustee, Scudder Cash Investment Trust (investment company)*
Trustee, Scudder Investment Trust (investment company)*
Trustee, Scudder Portfolio Trust (investment company)*
Trustee, Scudder Municipal Trust (investment company)*
Trustee, Scudder Securities Trust (investment company)*
Trustee, Scudder State Tax Free Trust (investment company)*
Trustee, Scudder Equity Trust (investment company)**
Vice President, Scudder U.S. Treasury Money Fund (investment company)*
John T. Packard Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
President, Montgomery Street Income Securities, Inc. (investment company) o
Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
Daniel Pierce Chairman & Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Chairman & Director, Scudder New Europe Fund, Inc. (investment company)**
Trustee, Scudder California Tax Free Trust (investment company)*
President & Trustee, Scudder Equity Trust (investment company)**
Director, The First Iberian Fund, Inc. (investment company)**
President & Trustee, Scudder GNMA Fund (investment company)*
President & Trustee, Scudder Portfolio Trust (investment company)*
President & Trustee, Scudder Funds Trust (investment company)**
President & Director, Scudder Institutional Fund, Inc. (investment company)**
President & Director, Scudder Fund, Inc. (investment company)**
Chairman & Director, Scudder International Fund, Inc. (investment company)**
President & Trustee, Scudder Investment Trust (investment company)*
Vice President & Trustee, Scudder Municipal Trust (investment company)*
</TABLE>
Part C - Page 9
<PAGE>
<TABLE>
<S> <C>
Vice President & Trustee, Scudder Pathway Series (investment company)*
President & Director, Scudder Mutual Funds, Inc. (investment company)**
Director, Scudder New Asia Fund, Inc. (investment company)**
President & Trustee, Scudder Securities Trust (investment company)*
Trustee, Scudder State Tax Free Trust (investment company)*
Vice President & Trustee, Scudder Variable Life Investment Fund (investment company)*
Director, The Brazil Fund, Inc. (until 7/94) (investment company)**
Vice President & Assistant Treasurer, Montgomery Street Income Securities, Inc.
(investment company)o
Chairman, Vice President & Director, Scudder Global Fund, Inc. (investment company)**
Vice President, Director & Assistant Treasurer, Scudder Investor Services, Inc.
(broker/dealer)*
President & Director, Scudder Service Corporation (in-house transfer agent)*
Chairman & President, Scudder, Stevens & Clark of Canada, Ltd. (Canadian investment
adviser), Toronto, Ontario, Canada
President & Director, Scudder Precious Metals, Inc. xxx
Chairman & Director, Scudder Global Opportunities Funds (investment company) Luxembourg
Chairman, Scudder, Stevens & Clark, Ltd. (investment adviser) London, England
Director, Scudder Fund Accounting Corporation (in-house fund accounting agent)*
Director, Vice President & Assistant Secretary, Scudder Realty Holdings Corporation (a
real estate holding company)*
Director, Scudder Latin America Investment Trust PLC (investment company)@
Incorporator, Scudder Trust Company (a trust company)+++
Director, Fiduciary Trust Company (banking & trust company) Boston, MA
Director, Fiduciary Company Incorporated (banking & trust company) Boston, MA
Trustee, New England Aquarium, Boston, MA
Kathryn L. Quirk Director & Secretary, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Scudder Fund, Inc. (investment company)**
Vice President, Scudder Institutional Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder World Income Opportunities Fund, Inc.
(investment company)**
Vice President & Assistant Secretary, The Korea Fund, Inc. (investment company)**
Vice President & Assistant Secretary, The Argentina Fund, Inc. (investment company)**
Vice President & Assistant Secretary, The Brazil Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder International Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, Scudder Equity Trust (investment company)**
Vice President & Assistant Secretary, Scudder Securities Trust (investment company)*
Vice President & Assistant Secretary, Scudder Funds Trust (investment company)**
Vice President & Assistant Secretary, Scudder Global Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Montgomery Street Income Securities, Inc.
(investment company)o
Vice President & Assistant Secretary, Scudder Mutual Funds, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder Pathway Series (investment company)*
Vice President & Assistant Secretary, Scudder New Europe Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, Scudder Variable Life Investment Fund (investment
company)*
</TABLE>
Part C - Page 10
<PAGE>
<TABLE>
<S> <C>
Vice President & Assistant Secretary, The First Iberian Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, The Latin America Dollar Income Fund, Inc.
(investment company)**
Vice President & Secretary, AARP Growth Trust (investment company)**
Vice President & Secretary, AARP Income Trust (investment company)**
Vice President & Secretary, AARP Tax Free Income Trust (investment company)**
Vice President & Secretary, AARP Cash Investment Funds (investment company)**
Vice President & Secretary, AARP Managed Investment Portfolios Trust (investment
company)**
Vice President, Scudder GNMA Fund (investment company)*
Vice President & Secretary, The Japan Fund, Inc. (investment company)**
Director, Vice President & Secretary, Scudder Fund Accounting Corporation (in-house
fund accounting agent)*
Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation (a real
estate holding company)*
Vice President & Assistant Secretary, Scudder Precious Metals, Inc. xxx
Cornelia M. Small Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Scudder Global Fund, Inc. (investment company)**
Vice President, AARP Cash Investment Funds (investment company)**
Vice President, AARP Growth Trust (investment company)**
Vice President, AARP Income Trust (investment company)**
Vice President, AARP Tax Free Income Trust (investment company)**
Edmond D. Villani Director, President & Chief Executive Officer, Scudder, Stevens & Clark, Inc.
(investment adviser)**
Chairman & Director, Scudder New Asia Fund, Inc. (investment company)**
Chairman & Director, The Argentina Fund, Inc. (investment company)**
Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
Supervisory Director, Scudder Mortgage Fund (investment company) +
Chairman & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
Chairman & Director, Scudder World Income Opportunities Fund, Inc. (investment
company)**
Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I
& II (investment company)+
Director, The Brazil Fund, Inc. (investment company)**
Director, Indosuez High Yield Bond Fund (investment company) Luxembourg
President & Director, Scudder, Stevens & Clark Overseas Corporation oo
President & Director, Scudder, Stevens & Clark Corporation (Delaware) (investment
adviser)**
Director, IBJ Global Investment Management S.A., (Luxembourg investment management
company) Luxembourg, Grand-Duchy of Luxembourg
Stephen A. Wohler Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Montgomery Street Income Securities, Inc. (investment company)o
<FN>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
++ Two Prudential Plaza, 180 N. Stetson Avenue, Chicago, IL
+++ 5 Industrial Way, Salem, NH
</FN>
</TABLE>
Part C - Page 11
<PAGE>
<TABLE>
<S> <C>
o 101 California Street, San Francisco, CA
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
+ John B. Gorsiraweg 6, Willemstad Curacao, Netherlands Antilles
xx De Ruyterkade 62, P.O. Box 812, Willemstad Curacao, Netherlands Antilles
## 2 Boulevard Royal, Luxembourg
*** B1 2F3F 248 Section 3, Nan King East Road, Taipei, Taiwan
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
@ c/o Sinclair Hendersen Limited, 23 Cathedral Yard, Exeter, Devon
</TABLE>
Item 29. Principal Underwriters.
- -------- -----------------------
(a) Scudder California Tax Free Trust
Scudder Cash Investment Trust
Scudder Equity Trust
Scudder Fund, Inc.
Scudder Funds Trust
Scudder Global Fund, Inc.
Scudder GNMA Fund
Scudder Institutional Fund, Inc.
Scudder International Fund, Inc.
Scudder Investment Trust
Scudder Municipal Trust
Scudder Mutual Funds, Inc.
Scudder Pathway Series
Scudder Portfolio Trust
Scudder Securities Trust
Scudder State Tax Free Trust
Scudder Tax Free Money Fund
Scudder Tax Free Trust
Scudder U.S. Treasury Money Fund
Scudder Variable Life Investment Fund
AARP Cash Investment Funds
AARP Growth Trust
AARP Income Trust
AARP Tax Free Income Trust
AARP Managed Investment Portfolios Trust
The Japan Fund, Inc.
<TABLE>
<CAPTION>
(b)
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
E. Michael Brown Assistant Treasurer None
Two International Place
Boston, MA 02110
Mark S. Casady Director and Vice President None
Two International Place
Boston, MA 02110
</TABLE>
Part C - Page 12
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Linda Coughlin Director and Senior Vice President Chairman 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 None
345 Park Avenue
New York, NY 10154
Margaret D. Hadzima Assistant Treasurer Vice President
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Vice President
Two International Place Treasurer and Assistant Clerk
Boston, MA 02110
Dudley H. Ladd Director and Senior Vice President None
Two International Place
Boston, MA 02110
David S. Lee Director, President and Assistant Vice President and
Two International Place Treasurer Assistant Treasurer
Boston, MA 02110
Thomas F. McDonough Clerk Vice President and
Two International Place Assistant Secretary
Boston, MA 02110
Thomas H. O'Brien Assistant Treasurer None
345 Park Avenue
New York, NY 10154
Edward J. O'Connell Assistant Treasurer Vice President and
345 Park Avenue Assistant Treasurer
New York, NY 10154
Daniel Pierce Director, Vice President None
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Senior Vice President Vice President and
345 Park Avenue Secretary
New York, NY 10154
Edmund J. Thimme Director and Vice President None
345 Park Avenue
New York, NY 10154
</TABLE>
Part C - Page 13
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
David B. Watts Assistant Treasurer None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President None
Two International Place
Boston, MA 02110
</TABLE>
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>
(c)
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 30. 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, Stevens &
Clark, Inc., Two International Place, Boston, MA 02110.
Records relating to the duties of the Registrant's custodian
are maintained by State Street Bank and Trust Company,
Heritage Drive, North Quincy, Massachusetts.
Item 31. Management Services.
- -------- --------------------
Inapplicable.
Item 32. Undertakings.
- -------- -------------
Inapplicable.
Part C - Page 14
<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 of
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 30th day of January, 1997.
AARP TAX FREE INCOME TRUST
By /s/Thomas F. McDonough
----------------------------------------
Thomas F. McDonough, 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>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Linda C. Coughlin
- --------------------------------------
Linda C. Coughlin* Chairman and Trustee January 30, 1997
/s/Carole Lewis Anderson
- --------------------------------------
Carole Lewis Anderson* Trustee January 30, 1997
/s/Adelaide Attard
- --------------------------------------
Adelaide Attard* Trustee January 30, 1997
/s/Cyril F. Brickfield
- --------------------------------------
Cyril F. Brickfield* Trustee January 30, 1997
/s/Robert N. Butler
- --------------------------------------
Robert N. Butler* Trustee January 30, 1997
/s/Esther Canja
- --------------------------------------
Esther Canja* Trustee January 30, 1997
/s/Horace Deets
- --------------------------------------
Horace Deets* Vice Chairman and Trustee January 30, 1997
/s/Edgar R. Fiedler
- --------------------------------------
Edgar R. Fiedler* Trustee January 30, 1997
/s/Eugene P. Forrester
- --------------------------------------
Eugene P. Forrester* Trustee January 30, 1997
/s/Wayne F. Haefer
- --------------------------------------
Wayne F. Haefer* Trustee January 30, 1997
/s/George L. Maddox, Jr.
- --------------------------------------
George L. Maddox, Jr.* Trustee January 30, 1997
/s/Robert J. Myers
- --------------------------------------
Robert J. Myers* Trustee January 30, 1997
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/James H. Schulz
- --------------------------------------
James H. Schulz* Trustee January 30, 1997
/s/Gordon Shillinglaw
- --------------------------------------
Gordon Shillinglaw* Trustee January 30, 1997
/s/Pamela A. McGrath
- --------------------------------------
Pamela A. McGrath Treasurer (Principal Financial and January 30, 1997
Accounting Officer)
</TABLE>
*By /s/Thomas F. McDonough
---------------------------------------
Thomas F. McDonough
Attorney-in-fact pursuant to a power of attorney
contained in the signature pages of Post-Effective
Amendment No. 8 to the Registration Statement
filed December 4, 1987, Post-Effective Amendment
No. 17 to the Registration Statement filed January
19, 1996, and Post-Effective Amendment No. 19 to
the Registration Statement filed July 1, 1996.
2
<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 of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its 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 30th day of January, 1997.
AARP TAX FREE INCOME TRUST
By /s/Thomas F. McDonough
----------------------------------------
Thomas F. McDonough,
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. By so signing, the
undersigned in her capacity as a trustee or officer, or both, as the case may be
of the Registrant, does hereby appoint David S. Lee, Thomas F. McDonough and
Sheldon A. Jones and each of them, severally, or if more than one acts, a
majority of them, her true and lawful attorney and agent to execute in her name,
place and stead (in such capacity) any and all amendments to the Registration
Statement and any post-effective amendments thereto and all instruments
necessary or desirable in connection therewith, to attest the seal of the
Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or advisable to be done in the premises as fully and to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and approving the act of said attorneys and agents and each of them.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Carole Lewis Anderson
- --------------------------------------
Carole Lewis Anderson Trustee January 30, 1997
3
<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 of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its 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 30th day of January, 1997.
AARP TAX FREE INCOME TRUST
By /s/Thomas F. McDonough
----------------------------------------
Thomas F. McDonough,
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. By so signing, the
undersigned in her capacity as a trustee or officer, or both, as the case may be
of the Registrant, does hereby appoint David S. Lee, Thomas F. McDonough and
Sheldon A. Jones and each of them, severally, or if more than one acts, a
majority of them, her true and lawful attorney and agent to execute in her name,
place and stead (in such capacity) any and all amendments to the Registration
Statement and any post-effective amendments thereto and all instruments
necessary or desirable in connection therewith, to attest the seal of the
Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or advisable to be done in the premises as fully and to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and approving the act of said attorneys and agents and each of them.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Adelaide Attard
- --------------------------------------
Adelaide Attard Trustee January 30, 1997
4
<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 of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its 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 30th day of January, 1997.
AARP TAX FREE INCOME TRUST
By /s/Thomas F. McDonough
----------------------------------------
Thomas F. McDonough,
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. By so signing, the
undersigned in her capacity as a trustee or officer, or both, as the case may be
of the Registrant, does hereby appoint David S. Lee, Thomas F. McDonough and
Sheldon A. Jones and each of them, severally, or if more than one acts, a
majority of them, her true and lawful attorney and agent to execute in her name,
place and stead (in such capacity) any and all amendments to the Registration
Statement and any post-effective amendments thereto and all instruments
necessary or desirable in connection therewith, to attest the seal of the
Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or advisable to be done in the premises as fully and to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and approving the act of said attorneys and agents and each of them.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Robert N. Butler
- --------------------------------------
Robert N. Butler Trustee January 30, 1997
5
<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 of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its 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 30th day of January, 1997.
AARP TAX FREE INCOME TRUST
By /s/Thomas F. McDonough
----------------------------------------
Thomas F. McDonough,
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. By so signing, the
undersigned in her capacity as a trustee or officer, or both, as the case may be
of the Registrant, does hereby appoint David S. Lee, Thomas F. McDonough and
Sheldon A. Jones and each of them, severally, or if more than one acts, a
majority of them, her true and lawful attorney and agent to execute in her name,
place and stead (in such capacity) any and all amendments to the Registration
Statement and any post-effective amendments thereto and all instruments
necessary or desirable in connection therewith, to attest the seal of the
Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or advisable to be done in the premises as fully and to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and approving the act of said attorneys and agents and each of them.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Esther Canja
- --------------------------------------
Esther Canja Trustee January 30, 1997
6
<PAGE>
File No. 2-91579
File No. 811-4050
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 19
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 21
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AARP TAX FREE INCOME TRUST
<PAGE>
AARP TAX FREE INCOME TRUST
EXHIBIT INDEX
Exhibit 1(a)(5)
Exhibit 2(a)(3)
Exhibit 9(c)(1)
Exhibit 11
Exhibit 17
OFFICE OF THE CLERK
601 CITY HALL
BOSTON, MA 02201
SEP 27 1996
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
AARP TAX FREE INCOME TRUST
DATED: September 13, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C> <C>
ARTICLE I
NAME AND DEFINITIONS.....................................................................................1
Section 1.1. Name..........................................................................1
Section 1.2. Definitions...................................................................1
ARTICLE II
TRUSTEES ................................................................................................3
Section 2.1. General Powers................................................................3
Section 2.2. Investments...................................................................4
Section 2.3. Legal Title...................................................................5
Section 2.4. Issuance and Repurchase of Shares.............................................5
Section 2.5. Delegation; Committees........................................................6
Section 2.6. Collection and Payment........................................................6
Section 2.7. Expenses......................................................................6
Section 2.8. Manner of Acting; By-laws.....................................................6
Section 2.9. Miscellaneous Powers..........................................................6
Section 2.10. Principal Transactions........................................................7
Section 2.11. Number of Trustees............................................................7
Section 2.12. Election and Term.............................................................7
Section 2.13. Resignation and Removal.......................................................7
Section 2.14. Vacancies.....................................................................8
Section 2.15. Delegation of Power to Other Trustees.........................................8
ARTICLE III
CONTRACTS................................................................................................8
Section 3.1. Distribution Contract.........................................................8
Section 3.2. Advisory or Management Contract...............................................9
Section 3.3. Affiliations of Trustees or Officers, Etc.....................................9
Section 3.4. Compliance with 1940 Act......................................................9
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS...........................................10
Section 4.2. Non-Liability of Trustees, Etc...............................................10
Section 4.3. Mandatory Indemnification....................................................10
Section 4.4. No Bond Required of Trustees.................................................12
Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc...................12
Section 4.6. Reliance on Experts, Etc.....................................................12
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C> <C>
ARTICLE V
SHARES OF BENEFICIAL INTEREST...........................................................................13
Section 5.1. Beneficial Interest..........................................................13
Section 5.2. Rights of Shareholders.......................................................13
Section 5.3. Trust Only...................................................................13
Section 5.4. Issuance of Shares...........................................................13
Section 5.5. Register of Shares...........................................................14
Section 5.6. Transfer of Shares...........................................................14
Section 5.7. Notices, Reports.............................................................14
Section 5.8. Treasury Shares..............................................................15
Section 5.9. Voting Powers................................................................15
Section 5.10. Meetings of Shareholders.....................................................15
Section 5.11. Series Designation...........................................................15
Section 5.12. Assent to Declaration of Trust...............................................17
Section 5.13. Class Designation............................................................17
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES.....................................................................18
Section 6.1. Redemption of Shares.........................................................18
Section 6.2. Price........................................................................19
Section 6.3. Payment......................................................................19
Section 6.4. Effect of Suspension of Determination of Net Asset Value.....................19
Section 6.5. Repurchase by Agreement......................................................19
Section 6.6. Redemption of Shareholder's Interest.........................................19
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding....................................19
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula..........................................................20
Section 6.9. Suspension of Right of Redemption............................................20
ARTICLE VII
DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS..........................................21
Section 7.1. Net Asset Value..............................................................21
Section 7.2. Distributions to Shareholders................................................21
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares..............................................22
Section 7.4. Allocation Between Principal and Income......................................23
Section 7.5. Power to Modify Foregoing Procedures.........................................23
ARTICLE VIII
DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC.................................................23
Section 8.1. Duration.....................................................................23
Section 8.2. Termination of Trust.........................................................23
Section 8.3. Amendment Procedure..........................................................24
Section 8.4. Merger, Consolidation and Sale of Assets.....................................24
Section 8.5. Incorporation................................................................25
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C> <C>
ARTICLE IX
REPORTS TO SHAREHOLDERS.................................................................................25
ARTICLE X
MISCELLANEOUS...........................................................................................25
Section 10.1. Filing.......................................................................25
Section 10.2. Governing Law................................................................26
Section 10.3. Counterparts.................................................................26
Section 10.4. Reliance by Third Parties....................................................26
Section 10.5. Provisions in Conflict with Law or Regulations...............................26
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
AARP TAX FREE INCOME TRUST
DATED: September 13, 1996
AMENDED AND RESTATED DECLARATION OF TRUST made September 13, 1996 by a
majority of the Trustees of AARP Tax Free Income Trust (together with all other
persons from time to time duly elected, qualified and serving as Trustees in
accordance with the provisions of Article II hereof, the "Trustees").
WHEREAS, the undersigned, being duly elected and qualified Trustees of AARP
Tax Free Income Trust (the "Trust"), a business trust organized under the laws
of the Commonwealth of Massachusetts, pursuant to an Amended and Restated
Declaration of Trust dated September 13, 1996, as amended, do hereby certify
that at a meeting of the Shareholders of the Trust, by favorable vote on
September 13, 1996, of a majority of the shares issued and entitled to vote, the
Shareholders adopted the Amended and Restated Declaration of Trust as follows:
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby, until and unless
changed by the Trustees as provided in Section 8.3(a) hereof, is the "AARP Tax
Free Income Trust."
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "By-laws" means the By-laws referred to in Section 2.8 hereof, as from
time to time amended.
(b) "Class" means the two or more Classes as may be established and
designated from time to time by the Trustees pursuant to Section 5.13 hereof.
(c) The term "Commission" has the meaning given it in the 1940 Act. The
term "Interested Person" has the meaning given it in the 1940 Act, as modified
by any applicable order or orders of the Commission. Except as otherwise defined
by the Trustees in conjunction with the establishment of any series of Shares,
the term "vote of a majority of the Shares outstanding and entitled to vote"
<PAGE>
shall have the same meaning as the term "vote of a majority of the outstanding
voting securities" given it in the 1940 Act.
(d) "Custodian" means any Person other than the Trust who has custody of
any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(e) "Declaration" means this Amended and Restated Declaration of Trust, as
further amended from time to time. Reference in this Declaration of Trust to
"Declaration," "hereof," "herein," and "hereunder" shall be deemed to refer to
this Declaration rather than exclusively to the article or section in which such
words appear.
(f) "Distributor" means the party, other than the Trust, to the contract
described in Section 3.1 hereof.
(g) "His" shall include the feminine and neuter, as well as the masculine,
genders.
(h) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 3.2 hereof.
(i) "Municipal Bonds" means obligations issued by or on behalf of states,
territories of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which
is exempt from regular Federal income tax.
(j) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(k) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
(l) "Series" individually or collectively means the two or more Series as
may be established and designated from time to time by the Trustees pursuant to
Section 5.11 hereof. Unless the context otherwise requires, the term "Series"
shall include Classes into which shares of the Trust, or of a Series, may be
divided from time to time.
(m) "Shareholder" means a record owner of Outstanding Shares.
(n) "Shares" means the equal proportionate units of interest into which
the beneficial interest in the Trust shall be divided from time to time,
including the Shares of any and all Series and Classes which may be established
by the Trustees, and includes fractions of Shares as well as whole Shares.
"Outstanding Shares" means those Shares shown from time to time on the books of
the Trust or its Transfer Agent as then issued and outstanding, but shall not
include Shares which have been redeemed or repurchased by the Trust and which
are at the time held in the treasury of the Trust.
2
<PAGE>
(o) "Transfer Agent" means any one or more Persons other than the Trust
who maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account, and the like.
(p) The "Trust" means AARP Tax Free Income Trust.
(q) The "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(r) The "Trustees" means the person or persons who has or have signed this
Declaration, so long as he or they shall continue in office in accordance with
the terms hereof, and all other persons who may from time to time or be duly
qualified and serving as Trustees in accordance with the provisions of Article
II hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in this capacity or their capacities as trustees hereunder.
Section 1.3. Principal Place of Business. The principal place of business
of the Trust shall be Two International Place, Boston, Massachusetts.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to be the
same extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
3
<PAGE>
Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of
such operations.
(b) To invest in, hold for investment, or reinvest in, securities,
including common and preferred stocks; warrants; bonds, debentures, bills,
time notes and all other evidences of indebtedness; negotiable or
non-negotiable instruments; government securities, including securities of
any state, municipality or other political subdivision thereof, or any
governmental or quasi-governmental agency or instrumentality; and money
market instruments including bank certificates of deposit, finance paper,
commercial paper, bankers acceptances and all kinds of repurchase
agreements, of any corporation, company, trust, association, firm or other
business organization however established, and of any country, state,
municipality or other political subdivision, or any governmental or
quasi-governmental agency or instrumentality.
(c) To acquire (by purchase, subscription or otherwise), to hold, to
trade in and deal in, to acquire any rights or options to purchase or sell,
to sell or otherwise dispose of, to lend, and to pledge any such securities
and to enter into repurchase agreements and forward foreign currency
exchange contracts, to purchase and sell futures contracts on securities,
securities indices and foreign currencies, to purchase or sell options on
such contracts, foreign currency contracts and foreign currencies and to
engage in all types of hedging and risk management transactions, as
determined appropriate by the Trustees.
(d) To exercise all rights, powers and privileges of ownership or
interest in all securities, repurchase agreements, future contracts and
options and other assets included in the Trust Property, including the
right to vote thereon and otherwise act with respect thereto and to do all
acts for the preservation, protection, improvement and enhancement in value
of all such assets.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real
or personal, including cash, and any interest therein.
(f) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee,
or undertake the performance of any obligation or engagement of any other
Person and to lend Trust Property.
(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in
the Trust Property or in the affairs of which the Trustees have any direct
or indirect interest; to do all acts and things designed to protect, to
preserve, improve or enhance the value of such obligation or interest, and
to guarantee or become surety on any or all of the contracts, stocks,
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bonds, notes, debentures and other obligations of any such corporation,
company, trust, association or firm.
(h) To enter into a plan of distribution and any related agreements
whereby the Trust may finance directly or indirectly any activity which is
primarily intended to result in the sale of Shares.
(i) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the attainment
of any object or the furtherance of any power hereinbefore set forth,
either alone or in association with others, and to do every other act or
thing incidental or appurtenant to or growing out of or connected with the
aforesaid business or purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property, including
the property of any Series of the Trust, shall be vested in the Trustees as
joint tenants except that the Trustees shall have power to cause legal title to
any Trust Property to be held by or in the name of one or more of the Trustees,
or in the name of the Trust, or in the name of any other Person as nominee, on
such terms as the Trustees may determine, provided that the interest of the
Trust therein is deemed appropriately protected. The right, title and interest
of the Trustees in the Trust Property and the property of each Series of the
Trust shall vest automatically in each Person who may hereafter become a
Trustee. Upon the termination of the term of office, resignation, removal or
death of a Trustee he shall automatically cease to have any right, title or
interest in any of the Trust Property or the property of any Series of the
Trust, and the right, title and interest of such Trustee in the Trust Property
shall vest automatically in the remaining Trustees. Such vesting and cessation
of title shall be effective whether or not conveyancing documents have been
executed and delivered.
Section 2.4. Issuance and Repurchase of Shares. The Trustees shall have the
power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell,
reissue, dispose of, transfer, and otherwise deal in Shares and, subject to the
provisions set forth in Articles VI and VII and Section 5.11 hereof, to apply to
any such repurchase, redemption, retirement, cancellation or acquisition of
Shares any funds or property of the particular series of the Trust with respect
to which such Shares are issued, whether capital or surplus or otherwise, to the
full extent now or hereafter permitted by the laws of the Commonwealth of
Massachusetts governing business corporations.
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Section 2.5. Delegation; Committees. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees or
agents of the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient, to the same extent as such
delegation is permitted by the 1940 Act.
Section 2.6. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 2.7. Expenses. The Trustees shall have the power to incur and pay
any expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The Trustees
shall fix the compensation of all officers, employees and Trustees.
Section 2.8. Manner of Acting; By-laws. Except as otherwise provided herein
or in the By-laws, any action to be taken by the Trustees may be taken by a
majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of the entire number
of Trustees then in office. The Trustees may adopt By-laws not inconsistent with
this Declaration to provide for the conduct of the business of the Trust and may
amend or repeal such By-laws to the extent such power is not reserved to the
Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
Section 2.9. Miscellaneous Powers. Subject to Section 5.11, hereof, the
Trustees shall have the power to: (a) employ or contract with such Persons as
the Trustees may deem desirable for the transaction of the business of the
Trust; (b) enter into joint ventures, partnerships and any other combinations or
associations; (c) remove Trustees or fill vacancies in or add to their number,
elect and remove such officers and appoint and terminate such agents or
employees as they consider appropriate, and appoint from their own number, and
terminate, any one or more committees which may exercise some or all of the
power and authority of the Trustees as the Trustees may determine; (d) purchase,
and pay for out of Trust Property, insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, distributors,
selected dealers or independent contractors of the Trust against all claims
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arising by reason of holding any such position or by reason of any action taken
or omitted by any such Person in such capacity, whether or not constituting
negligence, or whether or not the Trust would have the power to indemnify such
Person against such liability; (e) establish pension, profit-sharing, share
purchase, and other retirement, incentive and benefit plans for any Trustees,
officers, employees and agents of the Trust; (f) to the extent permitted by law,
indemnify any person with whom the Trust has dealings, including the Investment
Adviser, Distributor, Transfer Agent and selected dealers, to such extent as the
Trustees shall determine; (g) guarantee indebtedness or contractual obligations
of others; (h) determine and change the fiscal year of the Trust and the method
by which its accounts shall be kept; and (i) adopt a seal for the Trust, but the
absence of such seal shall not impair the validity of any instrument executed on
behalf of the Trust.
Section 2.10. Principal Transactions. Except in transactions not permitted
by the 1940 Act or rules and regulations adopted by the Commission, the Trustees
may, on behalf of the Trust, buy any securities from or sell any securities to,
or lend any assets of the Trust to, any Trustee or officer of the Trust or any
firm of which any such Trustee or officer is a member acting as principal, or
have any such dealings with the Investment Adviser, Distributor or Transfer
Agent or with any Interested Person of such Person; and the Trust may employ any
such Person, or firm or company in which such Person is an Interested Person, as
broker, legal counsel, registrar, Transfer Agent, dividend disbursing agent or
custodian upon customary terms.
Section 2.11. Number of Trustees. The number of Trustees shall initially be
one (1), and thereafter shall be such number as shall be fixed from time to time
by a written instrument signed by a majority of the Trustees.
Section 2.12. Election and Term. Except for the Trustees named herein or
appointed to fill vacancies pursuant to Section 2.14 hereof, the Trustees shall
be elected by the Shareholders owning of record a plurality of the Shares voting
at a meeting of Shareholders called pursuant to the provisions of Section 16(a)
of the 1940 Act. Such a meeting shall be held on a date fixed by the Trustees.
Except in the event of resignation or removals pursuant to Section 2.13 hereof,
each Trustee shall hold office until the next such meeting of Shareholders and
until his successor is duly elected and qualified.
Section 2.13. Resignation and Removal. Any Trustee may resign his trust
(without the need for any prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided the aggregate
number of Trustees after such removal shall not be less than one) with cause, by
the action of two-thirds of the remaining Trustees. Any Trustee may be removed
at any meeting of Shareholders by vote of two thirds of the Outstanding Shares.
The Trustees shall promptly call a meeting of the shareholders for the purpose
of voting upon the question of removal of any such Trustee or Trustees when
requested in writing to do so by the holders of not less than ten percent (10%)
of the Outstanding Shares, and in that connection, the Trustees will assist
shareholder communications to the extent provided for in Section 16(c) under the
1940 Act. Upon the resignation or removal of a Trustee, or his otherwise ceasing
to be a Trustee, he shall execute and deliver such documents as the remaining
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Trustees shall require for the purpose of conveying to the Trust or the
remaining Trustees any Trust Property or property of any series of the Trust
held in the name of the resigning or removed Trustee. Upon the incapacity or
death of any Trustee, his legal representative shall execute and deliver on his
behalf such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.14. Vacancies. The term of office of a Trustee shall terminate
and a vacancy shall occur in the event of the death, resignation, removal,
bankruptcy, adjudicated incompetence or other incapacity to perform the duties
of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing agency created pursuant to the terms of
the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill
such vacancy by the appointment of such other person as they in their discretion
shall see fit, made by a written instrument signed by a majority of the Trustees
then in office. Any such appointment shall not become effective, however, until
the person named in the written instrument of appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the terms of the
Declaration. An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by reason of retirement, resignation or
increase in the number of Trustees, provided that such appointment shall not
become effective prior to such retirement, resignation or increase in the number
of Trustees. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in this Section 2.14, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by the Declaration.
A written instrument certifying the existence of such vacancy signed by a
majority of the Trustees in office shall be conclusive evidence of the existence
of such vacancy.
Section 2.15. Delegation of Power to Other Trustees. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
less than two (2) Trustees personally exercise the powers granted to the
Trustees under this Declaration except as herein otherwise expressly provided.
ARTICLE III
CONTRACTS
Section 3.1. Distribution Contract. The Trustees may in their discretion
from time to time enter into an exclusive or non-exclusive distribution contract
or contracts providing for the sale of Shares at a price based on the net asset
value of a Share, whereby the Trustees may either agree to sell the Shares to
the other party to the contract or appoint such other party their sales agent
for the Shares, and in either case on such terms and conditions, if any, as may
be prescribed in the By-laws; and such further terms and conditions as the
Trustees may in their discretion determine not inconsistent with the provisions
of this Article III or of the By-laws; and such contract may also provide for
the repurchase of the Shares by such other party as agent of the Trustees.
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Section 3.2. Advisory or Management Contract. The Trustees may in their
discretion from time to time enter into an investment advisory or management
contract or separate advisory contracts with respect to one or more Series
whereby the other party to such contract shall undertake to furnish to the Trust
such management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions as the Trustees may in their discretion determine, including the
grant of authority to such other party to determine what securities shall be
purchased or sold by the Trust and what portion of its assets shall be
uninvested, which authority shall include the power to make changes in the
investments of the Trust or any Series.
The Trustees may also employ, or authorize the Investment Adviser to
employ, one or more sub-advisers from time to time to perform such of the acts
and services of the Investment Adviser and upon such terms and conditions as may
be agreed upon between the Investment Adviser and such sub-advisers and approved
by the Trustees. Any reference in this Declaration to the Investment Adviser
shall be deemed to include such sub-advisers unless the context otherwise
requires.
Section 3.3. Affiliations of Trustees or Officers, Etc. The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager,
adviser or distributor of or for any partnership, corporation, trust,
association or other organization or of or for any parent or affiliate of
any organization, with which a contract of the character described in
Sections 3.1 or 3.2 above or for services as Custodian, Transfer Agent or
disbursing agent or for related services may have been or may hereafter be
made, or that any such organization, or any parent or affiliate thereof, is
a Shareholder of or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in Sections
3.1 or 3.2 above or for services as Custodian, Transfer Agent or disbursing
agent or for related services may have been or may hereafter be made also
has any one or more of such contracts with one or more other partnerships,
corporations, trusts, associations or other organizations, or has other
business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
Section 3.4. Compliance with 1940 Act. Any contract entered into pursuant
to Sections 3.1 or 3.2 shall be consistent with and subject to the requirements
of Section 15 of the 1940 Act (including any amendment thereof or other
applicable act of Congress hereafter enacted), as modified by any applicable
order or orders of the Commission, with respect to its continuance in effect,
its termination and the method of authorization and approval of such contract or
renewal thereof.
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ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person; and all such
Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs 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 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;
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(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 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 interests of the Trust; or
(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 (as defined below) acting on the
matter (provided that a majority of the Disinterested Trustees
then in office act on the matter), or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a person who has ceased to be
such Trustee or officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such a person. Nothing contained
herein shall affect any rights to indemnification to which personnel of the
Trust other than Trustees and officers may be entitled by contract or
otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in paragraph
(a) of this Section 4.3 may be advanced by the Trust prior to a 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:
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(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 (i) is
not an Interested Person of the Trust, as defined under ss.2(a)(19) of the 1940
Act (including anyone who has been exempted from being an Interested Person by
any rule, regulation or order of the Commission), and (ii) is not involved in
the claim, action, suit or proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee shall be obligated to
give any bond or other security for the performance of any of his duties
hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc. No
purchaser, lender, transfer agent or other Person dealing with the Trustees or
any officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the Trustees
or by said officer, employee or agent or be liable for the application of money
or property paid, loaned, or delivered to or on the order of the Trustees or of
said officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking, and every other
act or thing whatsoever executed in connection with the Trust shall be
conclusively presumed to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking made or issued by the Trustees may recite that the same is executed
or made by them not individually, but as Trustees under the Declaration, and
that the obligations of the Trust under any such instrument are not binding upon
any of the Trustees or Shareholders individually, but bind only the trust
estate, and may contain any further recital which they or he may deem
appropriate, but the omission of such recital shall not operate to bind the
Trustees individually. The Trustees shall at all times maintain insurance for
the protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee and officer or employee
of the Trust shall, in the performance of his duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
its officers or employees or by the Investment Adviser, the Distributor,
Transfer Agent, selected dealers, accountants, appraisers or other experts or
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consultants selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of beneficial interest, all
of one class, except as provided in Section 5.11 and Section 5.13 hereof, par
value $.01 per share. The number of Shares of beneficial interest authorized
hereunder is unlimited. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares or a split of
Shares, shall be fully paid and non-assessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust Property
and the property of each Series of the Trust of every description and the right
to conduct any business hereinbefore described are vested exclusively in the
Trustees, and the Shareholders shall have no interest therein other than the
beneficial interest conferred by their Shares, and they shall have no right to
call for any partition or division of any property, profits, rights or interests
of the Trust nor can they be called upon to share or assume any losses of the
Trust or suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the rights
specifically set forth in this Declaration. The Shares shall not entitle the
holder to preference, preemptive, appraisal, conversion or exchange rights,
except as the Trustees may determine with respect to any Series of Shares.
Section 5.3. Trust Only. It is the intention of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their discretion may, from
time to time without vote of the Shareholders, issue Shares, in addition to the
then issued and outstanding Shares and shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times and on such terms as the Trustees may deem
best, and may in such manner acquire other assets (including the acquisition of
assets subject to, and in connection with the assumption of liabilities) and
businesses. In connection with any issuance of Shares, the Trustees may issue
fractional Shares and Shares held in the treasury, and Shares may be issued in
separate Series as provided in Section 5.11 hereof. The Trustees may from time
to time divide or combine the Shares into a greater or lesser number without
thereby changing the proportionate beneficial interests in the Trust, or any
Series. Contributions to the Trust may be accepted for, and Shares shall be
redeemed as, whole Shares and/or 1/1,000ths of a Share or integral multiples
thereof.
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Section 5.5. Register of Shares. A register shall be kept at the principal
office of the Trust or an office of the Transfer Agent which shall contain the
names and addresses of the Shareholders and the number of Shares held by them
respectively and a record of all transfers thereof. Such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein or in the
By-laws provided, until he has given his address to the Transfer Agent or such
other officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the Shares;
however, the Trustees, in their discretion, may authorize the issuance of share
certificates and promulgate appropriate rules and regulations as to their use.
Section 5.6. Transfer of Shares. Except as otherwise provided by the
Trustees, shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly authorized in writing, upon
delivery to the Trustees or the Transfer Agent of a duly executed instrument of
transfer, together with such evidence of the genuineness of each such execution
and authorization and of other matters as may reasonably be required. Upon such
delivery the transfer shall be recorded on the register of the Trust. Until such
record is made, the Shareholder of record shall be deemed to be the holder of
such Shares for all purposes hereunder and neither the Trustees nor any transfer
agent or registrar nor any officer, employee or agent of the Trust shall be
affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.
Section 5.7. Notices, Reports. Any and all notices to which any Shareholder
may be entitled and any and all communications shall be deemed duly served or
given if mailed, postage prepaid, addressed to any Shareholder of record at his
last known address as recorded on the register of the Trust. A notice of a
meeting, an annual report and any other communication to Shareholders need not
be sent to a Shareholder (i) if an annual report and a proxy statement for two
consecutive shareholder meetings have been mailed to such Shareholder's address
and have been returned as undeliverable, (ii) if all, and at least two, checks
(if sent by first class mail) in payment of dividends on Shares during a
twelve-month period have been mailed to such Shareholder's address and have been
returned as undeliverable or (iii) in any other case in which a proxy statement
concerning a meeting of security holders is not required to be given pursuant to
the Commission's proxy rules as from time to time in effect under the Securities
Exchange Act of 1934. However, delivery of such proxy statements, annual reports
and other communications shall resume if and when such Shareholder delivers or
causes to be delivered to the Trust written notice setting forth such
Shareholder's then current address.
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Section 5.8. Treasury Shares. Shares held in the treasury shall, until
reissued pursuant to Section 5.4, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Section 2.12; (ii) for the
removal of Trustees as provided in Section 2.13; (iii) with respect to any
investment advisory or management contract entered into pursuant to Section 3.2;
(iv) with respect to termination of the Trust as provided in Section 8.2; (v)
with respect to any amendment of this Declaration to the extent and as provided
in Section 8.3; (vi) with respect to any merger, consolidation or sale of assets
as provided in Section 8.4; (vii) with respect to incorporation of the Trust or
any Series to the extent and as provided in Section 8.5; (viii) to the same
extent as the stockholders of Massachusetts business corporation as to whether
or not a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or any
Series or Class hereof or the Shareholders (provided, however, that a
Shareholder of a particular Series or Class shall not be entitled to a
derivative or class action on behalf of any other Series or Class (or
Shareholder of any other Series or Class) of the Trust); (ix) with respect to
any plan adopted pursuant to Rule 12b-1 (or any successor rule) under the 1940
Act; and (x) with respect to such additional matters relating to the Trust as
may be required by this Declaration, the By-laws or any registration of the
Trust as an investment company under the 1940 Act with the Commission (or any
successor agency) or as the Trustees may consider necessary or desirable. Each
whole Share shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional Share shall be entitled to a proportionate
fractional vote, except that the Trustees may, in conjunction with the
establishment of any Series or Class of Shares, establish or reserve the right
to establish conditions under which the several Series or Classes shall have
separate voting rights or, if a Series or Class would not, in the sole judgment
of the Trustees, be materially affected by a proposal, no voting rights. There
shall be no cumulative voting in the election of Trustees. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required by law, this Declaration or the By-laws to be taken by
Shareholders. The By-laws may include further provisions for Shareholders' votes
and meetings and related matters.
Section 5.10. Meetings of Shareholders. Meetings of Shareholders may be
called at any time by the President, and shall be called by the President and
Secretary at the request in writing or by resolution, of a majority of Trustees,
or at the written request of the holder or holders of ten percent (10%) or more
of the total number of Shares then issued and outstanding of the Trust entitled
to vote at such meeting. Any such request shall state the purpose of the
proposed meeting.
Section 5.11. Series Designation. The Trustees, in their discretion, may
authorize the division of Shares into two or more Series, and the different
Series shall be established and designated, and the variations in the relative
rights and preferences as between the different Series shall be fixed and
determined, by the Trustees; provided, that all Shares shall be identical except
that there may be variations so fixed and determined between different Series as
to investment objective, purchase price, allocation of expenses, right of
redemption, special and relative rights as to dividends and on liquidation,
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conversion rights, and conditions under which the several Series shall have
separate voting rights. All references to Shares in this Declaration shall be
deemed to be Shares of any or all Series as the context may require.
If the Trustees shall divide the Shares of the Trust into two or more
Series, the following provisions shall be applicable:
(a) All provisions herein relating to the Trust shall apply equally
to each Series of the Trust except as the context requires otherwise.
(b) The number of authorized Shares and the number of Shares of each
Series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and
reacquired of any Series into one or more Series that may be established
and designated from time to time. The Trustees may hold as treasury Shares
(of the same or some other Series), reissue for such consideration and on
such terms as they may determine, or cancel any Shares of any Series
reacquired by the Trust at their discretion from time to time.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the
rights of creditors of such Series and except as may otherwise be required
by applicable laws, and shall be so recorded upon the books of account of
the Trust. In the even that there are any assets, income, earnings,
profits, and proceeds thereof, funds, or payments which are not readily
identifiable as belonging to any particular Series, the Trustees shall
allocate them among any one or more of the Series established and
designated from time to time in such manner and on such basis as they, in
their sole discretion, deem fair and equitable. Each such allocation by the
Trustees shall be conclusive and binding upon the shareholders of all
Series for all purposes.
(d) The assets belonging to each particular Series shall be charged
with the liabilities of the Trust in respect of that Series and all
expenses, costs, charges and reserves attributable to that Series, and any
general liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any particular Series
shall be allocated and charged by the Trustees to and among any one or more
of the Series established and designated from time to time in such manner
and on such basis as the Trustees in their sole discretion deem fair and
equitable. Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes. The Trustees shall have full
discretion, to the extent not inconsistent with the 1940 Act, to determine
which items are capital; and each such determination and allocation shall
be conclusive and binding upon the Shareholders. The assets for a
particular Series of the Trust shall, under no circumstances, be charged
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with liabilities attributable to any other Series of the Trust. All persons
extending credit to, or contracting with or having any claim against a
particular Series of the Trust shall look only to the assets of that
particular Series for payment of such credit, contract or claim. No
Shareholder or former Shareholder of any Series shall have any claim on or
right to any assets allocated or belonging to any other Series.
(e) Each Share of a Series of the Trust shall represent a beneficial
interest in the net assets of such Series. Each holder of Shares of a
Series shall be entitled to receive his pro rata share of distributions of
income and capital gains made with respect to such Series. Upon redemption
of his Shares or indemnification for liabilities incurred by reason of his
being or having been a Shareholder of a Series, such shareholder shall be
paid solely out of the funds and property of such Series of the Trust. Upon
liquidation or termination of a Series of the Trust, Shareholders of such
Series shall be entitled to receive a pro rata share of the net assets of
such Series. A Shareholder of a particular Series of the Trust shall not be
entitled to participate in a derivative or class action on behalf of any
other Series or the Shareholders of any other Series of the Trust.
The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the then Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such Series, or as otherwise provided in such instrument. The
Trustees may by an instrument executed by a majority of their number abolish any
Series and the establishment and designation thereof. Except as otherwise
provided in this Article V, the Trustees shall have the power to determine the
designations, preferences, privileges, limitations and rights, of each Series or
Class of Shares. Each instrument referred to in this paragraph shall have the
status of an amendment to this Declaration.
Section 5.12. Assent to Declaration of Trust. Every Shareholder, by virtue
of having become a shareholder, shall be held to have expressly assented and
agreed to the terms hereof and to have become a party hereto.
Section 5.13. Class Designation. The Trustees, in their discretion, may
authorize the division of the Shares of the Trust, or, if any Series be
established, the Shares of any Series, into two or more Classes, and the
different Classes shall be established and designated, and the variations in the
relative rights and preferences as between the different Classes shall be fixed
and determined, by the Trustees; provided, that all Shares of the Trust or of
any Series shall be identical to all other Shares of the Trust or the same
Series, as the case may be, except that there may be variations between
different classes as to allocation of expenses, right of redemption, special and
relative rights as to dividends and on liquidation, conversion rights, and
conditions under which the several Classes shall have separate voting rights.
All references to Shares in this Declaration shall be deemed to be Shares of any
or all Classes as the context may require.
If the Trustees shall divide the Shares of the Trust of any Series into two
or more Classes, the following provisions shall be applicable:
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All provisions herein relating to the Trust, or any Series of the
Trust, shall apply equally to each Class of Shares of the Trust or of any
Series of the Trust, except as the context requires otherwise.
The number of Shares of each Class that may be issued shall be
unlimited. The Trustees may classify or reclassify any unissued Shares of
the Trust or any Series or any Shares previously issued and reacquired of
any Class of the Trust or of any Series into one or more Classes that may
be established and designated from time to time. The Trustees may hold as
treasury Shares (of the same or some other Class), reissue for such
consideration on such terms as they may determine, or cancel any Shares of
any Class reacquired by the Trust at their discretion from time to time.
Liabilities, expenses, costs, charges and reserves related to the
distribution of, and other identified expenses that should properly be
allocated to, the Shares of a particular Class may be charged to and borne
solely by such Class and the bearing of expenses solely by a Class of
Shares may be appropriately reflected (in a manner determined by the
Trustees) and cause differences in the net asset value attributable to, and
the dividend, redemption and liquidation rights of, the Shares of different
Classes. Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the
Shareholders of all Classes for all purposes.
The establishment and designation of any Class of Shares shall be
effective upon the execution of a majority of the then Trustees of an
instrument setting forth such establishment and designation and the
relative rights and preferences of such Class, or as otherwise provided in
such instrument. The Trustees may, by an instrument executed by a majority
of their number, abolish any Class and the establishment and designation
thereof. Each instrument referred to in this paragraph shall have the
status of an amendment to this Declaration.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust.
The Trust shall redeem the Shares upon the appropriately verified written
application of the record holder thereof (or upon such other form of request as
the Trustees may determine) at such office or agency as may be designated from
time to time for that purpose in the Trust's then effective registration
statement under the Securities Act of 1933. The Trustees may from time to time
specify additional conditions, not inconsistent with the 1940 Act, regarding the
redemption of Shares in the Trust's then effective registration statement under
the Securities Act of 1933.
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Section 6.2. Price. Shares shall be redeemed at their net asset value
determined as set forth in Section 7.1 hereof as of such time as the Trustees
shall have theretofore prescribed by resolution. In the absence of such
resolution, the redemption price of Shares deposited shall be the net asset
value of such Shares next determined as set forth in Section 7.1 hereof after
receipt of such application.
Section 6.3. Payment. Payment for such Shares shall be made in cash or in
property out of the assets of the relevant Series for the Trust to the
Shareholder of record at such time and in the manner, not inconsistent with the
1940 Act or other applicable laws, as may be specified from time to time in the
Trust's then effective registration statement under the Securities Act of 1933,
subject to the provisions of Section 6.4 hereof.
Section 6.4. Effect of Suspension of Determination of Net Asset Value. If,
pursuant to Section 6.9 hereof, the Trustees shall declare a suspension of the
determination of net asset value, the rights of Shareholders (including those
who shall have applied for redemption pursuant to Section 6.1 hereof but who
shall not yet have received payment) to have Shares redeemed and paid for by the
Trust shall be suspended until the termination of such suspension is declared.
Any record holder who shall have his redemption right so suspended may, during
the period of such suspension, by appropriate written notice of revocation at
the office or agency where application was made, revoke any application for
redemption not honored and withdraw any certificates on deposit. The redemption
price of Shares for which redemption applications have not been revoked shall be
the net asset value of such Shares next determined as set forth in Section 7.1
after the termination of such suspension, and payment shall be made within seven
(7) days after the date upon which the application was made plus the period
after such application during which the determination of net asset value was
suspended.
Section 6.5. Repurchase by Agreement. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.
Section 6.6. Redemption of Shareholder's Interest. The Trust shall have the
right at any time without prior notice to the shareholder to redeem Shares of
any shareholder for their then current net asset value per Share if at such time
the shareholder owns Shares having an aggregate net asset value of less than an
amount set from time to time by the Trustees subject to such terms and
conditions as the Trustees may approve, and subject to the Trust's giving
general notice to all shareholders of its intention to avail itself of such
right, either by publication in the Trust's registration statement, if any, or
by such other means as the Trustees may determine.
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. If the Trustees shall, at any time
and in good faith, be of the opinion that direct or indirect ownership of Shares
or other securities of the Trust has or may become concentrated in any Person to
an extent which would disqualify any Series of the Trust as a regulated
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investment company under the Internal Revenue Code, then the Trustees shall have
the power by lot or other means deemed equitable by them (i) to call for
redemption by any such Person a number, or principal amount, of Shares or other
securities of the Trust sufficient to maintain or bring the direct or indirect
ownership of Shares or other securities of the Trust into conformity with the
requirements of such qualification and (ii) to refuse to transfer or issue
Shares or other securities of the Trust to any Person whose acquisition of the
Shares or other securities of the Trust in question would result in
disqualification. The redemption shall be effected at the redemption price and
in the manner provided in Section 6.1.
The holders of Shares or other securities of the Trust shall upon demand
disclose to the Trustees in writing such information with respect to direct and
indirect ownership of Shares or other securities of the Trust as the Trustees
deem necessary to comply with the provisions of the Internal Revenue Code, or to
comply with the requirements of any other taxing authority.
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula. The Trust may also reduce the number of Outstanding Shares
pursuant to the provisions of Section 7.3.
Section 6.9. Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings, (ii)
during which trading on the New York Stock Exchange is restricted, (iii) during
which an emergency exists as a result of which disposal by the Trust of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust fairly to determine the value of its net assets, or
(iv) during any other period when the Commission may for the protection of
Shareholders of the Trust by order permit suspension of the right of redemption
or postponement of the date of payment or redemption; provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions prescribed in (ii), (iii), or (iv) exist. Such suspension shall take
effect at such time as the Trust shall specify but not later than the close of
business on the business day next following the declaration of suspension, and
thereafter there shall be no right of redemption or payment on redemption until
the Trust shall declare the suspension at an end, except that the suspension
shall terminate in any event on the first day on which said stock exchange shall
have reopened or the period specified in (ii) or (iii) shall have expired as to
which in the absence of an official ruling by the Commission, the determination
of the Trust shall be conclusive). In the case of a suspension of the right of
redemption, a Shareholder may either withdraw his request for redemption or
receive payment based on the net asset value existing after the termination of
the suspension.
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ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The value of the assets of the Trust or any
Series of the Trust shall be determined by appraisal of the securities of the
Trust or allocated to such Series, such appraisal to be on the basis of such
method as shall be deemed to reflect the fair value thereof, determined in good
faith by or under the direction of the Trustees. From the total value of said
assets, there shall be deducted all indebtedness, interest, taxes, payable or
accrued, including estimated taxes on unrealized book profits, expenses and
management charges accrued to the appraisal date, net income determined and
declared as a distribution and all other items in the nature of liabilities
attributable to the Trust or such Series or Class thereof which shall be deemed
appropriate. The net asset value of a Share shall be determined by dividing the
net asset value of the Class, or if no Class has been established, of the
Series, or, if no Series has been established, of the Trust, by the number of
Shares of that Class, or Series, or of the Trust, as applicable, outstanding.
The net asset value of Shares of the Trust or any Class or Series of the Trust
shall be determined pursuant to the procedure and methods prescribed or approved
by the Trustees in their discretion and as set forth in the most recent
Registration Statement of the Trust as filed with the Securities and Exchange
Commission pursuant to the requirement of the Securities Act of 1933, as
amended, the Investment Company Act of 1940, as amended, and the Rules
thereunder. The net asset value of the Shares shall be determined at least once
on each business day, as of the close of trading on the New York Stock Exchange
or as of such other time or times as the Trustees shall determine.
The power and duty to make the daily calculations may be delegated by the
Trustees to the Investment Adviser, the Custodian, the Transfer Agent or such
other Person as the Trustees may determine by resolution or by approving a
contract which delegates such duty to another Person. The Trustees may suspend
the daily determination of net asset value to the extent permitted by the 1940
Act.
Section 7.2. Distributions to Shareholders. The Trustees shall from time to
time distribute ratably among the Shareholders of the Trust or a Series such
proportion of the net profits, surplus (including paid-in surplus), capital, or
assets of the Trust or such Series held by the Trustees as they may deem proper.
Such distributions may be made in cash or property (including without limitation
any type of obligations of the Trust or such Series or any assets thereof), and
the Trustees may distribute ratably among the Shareholders additional Shares of
the Trust or such Series issuable hereunder in such manner, at such times, and
on such terms as the Trustees may deem proper. Such distributions may be among
the Shareholders of record at the time of declaring a distribution or among the
Shareholders of record at such other date or time or dates or times as the
Trustees shall determine. The Trustees may in their discretion determine that,
solely for the proposes of such distributions, Outstanding Shares shall exclude
Shares for which orders have been placed subsequent to a specified time on the
date the distribution is declared or on the next preceding day if the
distribution is declared as of a day on which Boston banks are not open for
business, all as described in the registration statement under the Securities
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Act of 1933. The Trustees may always retain from the net profits such amounts
they may deem necessary to pay the debts or expenses of the Trust or the Series
or to meet obligations of the Trust or the series, or as they may retain for
future requirements or extensions of the business. The Trustees may adopt and
offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or related plans as the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust or the Series to avoid or reduce liability for taxes.
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares. Subject to Section 5.11 hereof, the net income
of the Trust or any Series shall be determined in such manner as the Trustees
shall provide by resolution. Expenses of the Trust or a Series, including the
advisory or management fee, shall be accrued each day. Such net income may be
determined by or under the direction of the Trustees as of the close of trading
on the New York Stock Exchange on each day on which such Exchange is open or as
of such other time or times as the Trustees shall determine, and, except as
provided herein, all the net income of the Trust or any Series, as so
determined, may be declared as a dividend on the Outstanding Shares of the Trust
or such Series. If, for any reason, the net income of the Trust or any Series,
determined at any time is a negative amount, the Trustees shall have the power
with respect to the Trust or such Series (i) to offset each Shareholder's pro
rata share of such negative amount from the accrued dividend account of such
Shareholder, or (ii) to reduce the number of Outstanding Shares of the Trust or
such Series by reducing the number of Shares in the account of such Shareholder
by that number of full and fractional Shares which represents the amount of such
excess negative net income, or (iii) to cause to be recorded on the books of the
Trust or such Series an asset account in the amount of such negative net income,
which account may be reduced by the amount, provided that the same shall
thereupon become the property of the Trust or such Series with respect to the
Trust or such Series and shall not be paid to any Shareholder, of dividends
declared thereafter upon the outstanding Shares of the Trust or such Series on
the day such negative net income is experienced, until such asset account is
reduced to zero; or (iv) to combine the methods described in clauses (i) and
(ii) and (iii) of this sentence, in order to cause the net asset value per Share
of the Trust or such Series to remain at a constant amount per Outstanding Share
immediately after each such determination and declaration. The Trustees shall
also have the power to fail to declare a dividend out of net income for the
purpose of causing the net asset value per Share to be increased to a constant
amount. The Trustees shall not be required to adopt, but may at any time adopt,
discontinue or amend the practice of maintaining the net asset value per Share
of the Trust or a Series at a constant amount.
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Section 7.4. Allocation Between Principal and Income. The Trustees shall
have full discretion to determine whether any cash or property received shall be
treated as income or as principal and whether any item of expense shall be
charged to the income or the principal account, and their determination made in
good faith shall be conclusive upon the Shareholders. In the case of stock
dividends received, the Trustees shall have full discretion to determine, in the
light of the particular circumstances, how much, if any, of the value thereof
shall be treated as income, the balance, if any, to be treated as principal.
Section 7.5. Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article VII, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
Share net asset value or net income, or the declaration and payment of dividends
and distributions as they may deem necessary or desirable.
ARTICLE VIII
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust or the Series of the Trust shall continue
without limitation of time but subject to the provisions of this Article VIII.
Section 8.2. Termination of Trust or the Series of the Trust. (a) The Trust
or any Series of the Trust may be terminated by an instrument in writing signed
by a majority of the Trustees or by the affirmative vote of the holders of a
majority of the Shares outstanding and entitled to vote, at any meeting of
Shareholders. Upon the termination of the Trust or any Series,
(i) the Trust or any Series shall carry on no business except for the
purpose of winding up its affairs;
(ii) the Trustees shall proceed to wind up the affairs of the Trust or
Series and all of the powers of the Trustees under this Declaration shall
continue until the affairs of the Trust or Series shall have been wound up,
including the power to fulfill or discharge the contracts of the Trust or
Series, collect its assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining Trust Property or
property of the Series to one or more persons at public or private sale for
consideration which may consist in whole or in part of cash, securities or
other property of any kind, discharge or pay its liabilities, and do all
other acts appropriate to liquidate its business;
(iii) after paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property or property of the Series, in cash
or in kind or partly each, among the Shareholders of the Trust or Series
according to their respective rights.
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(b) After termination of the Trust or any Series and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust or the Series of the Trust an instrument in
writing setting forth the fact of such termination, and the Trustees shall
thereupon be discharged from all further liabilities an duties hereunder, and
the rights and interests of all Shareholders of the Trust or Series shall
thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may be amended by a
vote of the holders of a majority of the Shares outstanding and entitled to vote
or by any instrument in writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of a majority of the Shares outstanding
and entitled to vote. Amendments shall be effective upon the taking of action as
provided in this section or at such later time as shall be specified in the
applicable vote or instrument. The Trustees may also amend this Declaration
without the vote or consent of Shareholders if they deem it necessary to conform
this Declaration to the requirements of applicable federal or state laws or
regulations or the requirements of the regulated investment company provisions
of the Internal Revenue Code (including those provisions of such Code relating
to the retention of the exemption from federal income tax with respect to
dividends paid by the Trust out of interest income received on Municipal Bonds),
but the Trustees shall not be liable for failing to do so. The Trustees may also
amend this Declaration without the vote or consent of Shareholders if they deem
it necessary or desirable to change the name of the Trust, to supply any
omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or to make any other changes in the Declaration
which do not materially adversely affect the rights of Shareholders hereunder.
(b) No amendment may be made under this Section 8.3 which would change any
rights with respect to any Shares of the Trust or Series by reducing the amount
payable thereon upon liquidation of the Trust or Series or by diminishing or
eliminating any voting rights pertaining thereto, except with the vote or
consent of the holders of two-thirds of the Shares of the Trust or Series
outstanding and entitled to vote. Nothing contained in this Declaration shall
permit the amendment of this Declaration to impair the exemption from personal
liability of the Shareholders, Trustees, officers, employees and agents of the
Trust or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Shareholders or by the
Trustees as aforesaid or a copy of the Declaration, as amended, and executed by
a majority of the Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as the
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall have become
effective, this Declaration may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
Section 8.4. Merger, Consolidation and Sale of Assets. The Trust or any
Series thereof may merge or consolidate with any other corporation, association,
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trust or other organization or may sell, lease or exchange all or substantially
all of the Trust Property or the property of any Series, including its good
will, upon such terms and conditions and for such consideration when and as
authorized at any meeting of Shareholders of the Trust or Series called for the
purpose by the affirmative vote of the holders of a majority of the Shares of
the Trust or Series.
Section 8.5. Incorporation. With the approval of the holders of a majority
of the Shares of the Trust or any Series outstanding and entitled to vote, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction or any other trust, partnership,
association or other organization to take over all of the Trust Property or the
property of any Series or to carry on any business in which the Trust or the
Series shall directly or indirectly have any interest, and to sell, convey and
transfer the Trust Property or the property of any Series to any such
corporation, trust, association or organization in exchange for the Shares or
securities thereof or otherwise, and to lend money to, subscribe for the Shares
or securities of, and enter into any contracts with any such corporation, trust,
partnership, association or organization, or any corporation, partnership,
trust, association or organization in which the Trust or the Series holds or is
about to acquire shares or any other interest. The Trustees may also cause a
merger or consolidation between the Trust or any Series or any successor thereto
and any such corporation, trust, partnership, association or other organization
if and to the extent permitted by law, as provided under the law then in effect.
Nothing contained herein shall be construed as requiring approval of
Shareholders for the Trustees to organize or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations and
selling, conveying or transferring a portion of the Trust Property to such
organization or entities.
ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report, which may be included in the Trust's prospectus, of
the transactions of the Trust, including financial statements which shall at
least annually be certified by independent public accountants.
ARTICLE X
MISCELLANEOUS
Section 10.1. Filing. This Declaration and any amendment hereto shall be
filed in the Office of the Secretary of the Commonwealth of Massachusetts and in
such other places as may be required under the laws of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Unless the amendment is embodied in an instrument signed by a majority of the
Trustees, each amendment filed shall be accompanied by a certificate signed and
acknowledged by a Trustee stating that such action was duly taken in a manner
provided herein. A restated Declaration, integrating into a single instrument
25
<PAGE>
all of the provisions of the Declaration which are then in effect and operative,
may be executed from time to time by a majority of the Trustees and shall, upon
filing with the Secretary of the Commonwealth of Massachusetts, be conclusive
evidence of all amendments contained therein and may hereafter be referred to in
lieu of the original Declaration and the various amendments thereto. The
restated Declaration may include any amendment which the Trustees are empowered
to adopt, whether or not such amendment has been adopted prior to the execution
of the restated Declaration.
Section 10.2. Governing Law. This Declaration is executed by the Trustees
and delivered in the Commonwealth of Massachusetts and with reference to the
internal laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the internal laws of said State without regard to the choice of law
rules thereof.
Section 10.3. Counterparts. This Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original, and
such counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust appears to be Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c) the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements of
this Declaration, (e) the form of any By-laws adopted by or the identity of any
officers elected by the Trustees, or (f) the existence of any fact or facts
which in any manner relate to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any Person dealing with the
Trustees and their successors.
Section 10.5. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provisions in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
26
<PAGE>
IN WITNESS WHEREOF, the undersigned, pursuant to Article VIII, Section
8.3(c) hereof, have executed this instrument this 13th day of September, 1996.
/s/Cuyler W. Findlay
----------------------
Cuyler W. Findlay
/s/Linda C. Coughlin
----------------------
Linda C. Coughlin
/s/Carole Lewis Anderson
----------------------
Carole Lewis Anderson
/s/Adelaide Attard
----------------------
Adelaide Attard
----------------------
Cyril F. Brickfield
/s/Robert N. Butler, M.D.
----------------------
Robert N. Butler, M.D.
/s/Esther Canja
----------------------
Esther Canja
/s/Horace Deets
----------------------
Horace Deets
/s/Edgar R. Fiedler
----------------------
Edgar R. Fiedler
/s/Eugene P. Forrester
----------------------
Eugene P. Forrester
/s/Wayne F. Haefer
----------------------
Wayne F. Haefer
/s/George L. Maddox, Jr.
----------------------
George L. Maddox, Jr.
/s/Robert J. Myers
----------------------
Robert J. Myers
/s/James H. Schulz
----------------------
James H. Schulz
27
<PAGE>
/s/Gordon Shillinglaw
----------------------
Gordon Shillinglaw
THE COMMONWEALTH OF MASSACHUSETTS
County of Suffolk September 13, 1996
Then personally appeared the above-named individuals, who each
acknowledged the foregoing instrument to be his/her free act and deed.
Before me,
/s/ [ILLEGIBLE SIGNATURE]
------------------------------
Notary Public
My commission expires: 4-8-99
28
AARP CASH INVESTMENT FUNDS
AARP High Quality Money Fund
AARP GROWTH TRUST
AARP Balanced Stock and Bond Fund
AARP Capital Growth Fund
AARP Global Growth Fund
AARP Growth and Income Fund
AARP INCOME TRUST
AARP GNMA and U.S. Treasury Fund
AARP High Quality Bond Fund
AARP TAX FREE INCOME TRUST
AARP High Quality Tax Free Money Fund
AARP Insured Tax Free General Bond Fund
Certificate as to Resolution
of
Board Members
The undersigned certifies that he is the Assistant Secretary of each of AARP
Cash Investment Funds ("CASH"), AARP Growth Trust ("GROWTH"), AARP Income Trust
("INCOME") and AARP Tax Free Income Trust ("TAX FREE") (each a "Trust"), and
that, as such, he is authorized to execute this Certificate on behalf of each
Trust, and further certifies that the following is a complete and correct copy
of a resolution duly adopted by the duly elected Members of the Board at a
meeting duly called, convened and held on June 18, 1996, at which a quorum was
present and acting throughout, and that such resolution has not been amended and
is in full force and effect.
RESOLVED, that, pursuant to the provision of Article XI of the Trust's
By-Laws, the first sentence of Article III, Sections 2 and 3 of the
Trust's By-Laws is hereby amended to read as follows (additions
underlined, deletions struck out):
Section 2. Notice of Meetings. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting,
shall be given by the Trustees by mail to each Shareholder at his/her
address as recorded on the register of the Trust mailed at least ten
(10) days and not more than ninety (90) sixty (60) days before the
meeting.
Section 3. Record Date for Meetings and Other Purposes. For the
purpose of determining the Shareholders who are entitled to notice of
and to vote at any meeting, or to participate in any distribution, or
for the purpose of any other action, the Trustees may from time to
time close the transfer books for such period, not exceeding thirty
(30) days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than ninety (90)
<PAGE>
sixty (60) days prior to the date of any meeting of Shareholders or
distribution or other action as a record date for the determinations
of the persons to be treated as Shareholders of record for such
purposes, except for dividend payments which shall be governed by the
Declaration.
IN WITNESS WHEREOF, I hereunto set my hand this 24th day of June, 1996.
/s/
---------------------------------
Assistant Secretary
2
Service Mark License Agreement
SERVICE MARK LICENSE AGREEMENT, dated as of March 20, 1996 among each of
Scudder, Stevens & Clark, Inc. ("Scudder"), American Association of Retired
Persons ("AARP"), on the one hand, and each of AARP Cash Investment Funds, AARP
Growth Trust, AARP Income Trust, and AARP Tax Free Income Trust (individually, a
"Trust", and collectively, the "Trusts"), on the other hand.
W I T N E S S E T H :
WHEREAS, Scudder and AARP Financial Services Corp., a wholly-owned
subsidiary corporation of AARP, are general partners of AARP/Scudder Financial
Services Company (the "Partnership"), pursuant to a partnership agreement, dated
as of October 9, 1984 (the "Partnership Agreement");
WHEREAS, Scudder, AARP and the Partnership have entered into an investment
company service agreement, dated as of October 9, 1984 (the "Investment Company
Service Agreement");
WHEREAS, Scudder and each Trust have entered into an Investment Management
Agreement dated as of February 1, 1994 (collectively, the "Management
Agreements");
WHEREAS, Scudder has assigned all of its right, title and interest in the
"Scudder" and "Scudder, Stevens & Clark" names and marks (hereinafter being
referred to both individually and collectively as the "Scudder Marks"), to
Scudder Trust Company ("STC"), a subsidiary of Scudder, which are now being used
in connection with a wide variety of investment management and advisory services
performed by Scudder and with investment company activities conducted by
investment companies advised and managed by Scudder;
<PAGE>
WHEREAS, STC has granted an exclusive license to Scudder to use and
sublicense the Scudder Marks;
WHEREAS, AARP is the owner of various service marks including but not
limited to "The American Association of Retired Persons" and "AARP" (hereinafter
being referred to both individually and collectively as the "AARP Marks"), which
are now being used in connection with a wide variety of services sponsored by
AARP and offered by AARP to its membership;
WHEREAS, each of the Trusts wishes to use the Scudder Marks and AARP Marks
in connection with its business as an investment company in connection with
various financial services and financial products (the "Business") throughout
the United States of America (the "Territory"), and is willing to comply with
Scudder's and AARP's quality standards and other conditions hereinafter set
forth; and
WHEREAS, Scudder and AARP are respectively willing to grant to each of the
Trusts the non-exclusive right to use the Scudder Marks and AARP Marks upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and conditions contained herein, it is agreed as follows:
ARTICLE I
Subject to the conditions herein set forth, each of Scudder and AARP hereby
grants to each of the Trusts a royalty-free, non-exclusive and non-transferable
license to use, respectively, the Scudder Marks and AARP Marks as service marks
in connection with the Business in the Territory. In the case of the Scudder
Marks, the license granted herein is a sublicense as permitted by STC. The
licenses granted hereby do not include the right to sub-license.
2
<PAGE>
ARTICLE II
Each of the Trusts acknowledges the exclusive right of Scudder as exclusive
licensee, and the exclusive ownership by STC and AARP, of the Scudder Marks and
AARP Marks, respectively, and the validity of the Scudder Marks and AARP Marks
and of any registrations obtained respectively by Scudder or AARP therefor. Each
of the Trusts agrees that it will never contest, either directly or indirectly,
the exclusive rights of Scudder as exclusive licensee, and exclusive ownership
by STC and AARP, of the Scudder Marks or AARP Marks. To the extent, if any, that
any rights to the Scudder Marks or AARP Marks might otherwise be deemed to
accrue to any of the Trusts by operation of law by virtue of such Trust's use of
the Scudder Marks or AARP Marks while this license shall be in effect (or for
any other reason), it is hereby agreed that all such rights will revert
respectively to STC and AARP on termination of this Agreement. Each of the
Trusts agrees that it will not use or encourage its representatives, agents or
shareholders to use any word or symbol confusingly similar to the Scudder Marks
or AARP Marks or make use of the Scudder Marks or AARP Marks other than in
accordance with the provisions of this Agreement. Each of the Trusts
acknowledges that it has no rights in the Scudder Marks or AARP Marks or any
goodwill associated therewith, other than those set forth herein. All uses to be
made by the Trusts of the Scudder Marks and AARP Marks in the Territory shall
inure to the benefit of STC and AARP, respectively.
ARTICLE III
All rights granted to each of the Trusts under this Agreement are subject
to the condition that each of Scudder and AARP be reasonably satisfied at all
times that such Trust is conforming to high standards of ethics, prudence and
integrity in the operation of its business as an investment company and to such
other reasonable standards and specifications as may be set by Scudder and AARP,
3
<PAGE>
with respect to the Scudder Marks and AARP Marks, respectively, and communicated
to each of the Trusts from time to time.
ARTICLE IV
Each of the Trusts shall use the Scudder Marks and AARP Marks only in
accordance with recognized good service mark and trademark practice and shall
not use them in such a manner as to affect adversely the validity of the
registrations or applications for registration of the Scudder Marks or AARP
Marks, as the case may be, or the exclusive rights of Scudder as exclusive
licensee, or exclusive ownership by STC and AARP thereof or so as to depreciate
the goodwill attached thereto. Each of the Trusts agrees that it shall at its
expense include notices of the rights of STC and AARP, respectively, to the
Scudder Marks or AARP Marks or any other information or notices that may be
required by law or by Scudder or AARP on any document or other item bearing any
of the Scudder Marks or AARP Marks over which such Trust has control. Each of
the Trusts agrees at its expense to take all measures which Scudder or AARP may
require to avoid any confusion of the Scudder Marks or AARP Marks with any other
trademarks or service marks owned or used by such Trust.
Each of the Trusts shall submit to Scudder and AARP, respectively, upon
their written request, free of charge, and in the manner specified by them,
representative samples of any agreements, stationery, forms, advertisements,
brochures, documents or any other items of any nature whatsoever which bear any
of the Scudder Marks or AARP Marks and which are used by such Trust.
ARTICLE V
Each of the Trusts shall promptly notify Scudder or AARP, as the case may
be, of any charge of service or trademark infringement, unfair trade competition
or service or trademark dilution made against such Trust or its representatives
4
<PAGE>
as the result of the use respectively of the Scudder Marks or AARP Marks
licensed herein, and Scudder or AARP, as the case may be, will assume the
defense and expense of proceedings pursuant to any such charge. Each of the
Trusts agrees to cooperate with Scudder and AARP in any such proceedings,
including without limitation, allowing Scudder or AARP, as the case may be, to
carry on litigation in such Trust's name on behalf of Scudder or AARP, as the
case may be.
ARTICLE VI
Each of Scudder and AARP may assign its respective rights and obligations
under this Agreement with respect to any or all of the Scudder Marks or AARP
Marks to any party to which it assigns, respectively, any of its rights in the
Scudder Marks or AARP Marks. No Trust shall assign any of its respective rights
or obligations under this Agreement, and any attempt to assign shall be void.
ARTICLE VII
This Agreement shall terminate upon the termination of any of the
Management Agreements, the Partnership Agreement or the Investment Company
Service Agreement, or if STC terminates Scudder's license to the Scudder Marks.
Each of the Trusts, within 60 days after receipt of notice of any such
termination, unless otherwise agreed to by Scudder as to the Scudder Marks or by
AARP as to the AARP Marks, shall cease making any further use of any of the
Scudder Marks or AARP Marks or any mark confusingly similar thereto and shall,
at its expense, delete the Scudder Marks and AARP Marks from all media,
including forms, advertisements, stationery, brochures and documents, in which
they appear, within such 60 day period.
5
<PAGE>
ARTICLE VIII
Neither of Scudder or AARP makes any warranties in connection with the
Scudder Marks or AARP Marks. Each of Scudder and AARP in its sole discretion may
cease its use of, and terminate its rights to, one or more of, respectively, the
Scudder Marks or AARP Marks without penalty, and each of Scudder and AARP agree
to promptly notify each of the Trusts of its respective intention to do so. Each
of Scudder and AARP in its sole discretion may adopt new service marks.
ARTICLE IX
This Agreement shall be governed by the laws of the State of New York. The
parties hereto agree that all matters of dispute that are to be settled by
litigation, negotiation or arbitration at any time by reason of the terms of
this Agreement shall be negotiated, tried, litigated, conducted and/or
arbitrated, as the case may be, in New York, New York.
ARTICLE X
This instrument shall constitute the entire agreement between the parties
with respect to the use of the Scudder Marks and AARP Marks. Modifications of
this Agreement may be effected only by a written instrument signed by all
parties.
IN WITNESS WHEREOF, Scudder, AARP and each of the Trusts have caused this
Agreement to be executed by their duly authorized officers or representatives.
SCUDDER, STEVENS & CLARK, INC.
By /s/David S. Lee
----------------------------------
Title: Managing Director
6
<PAGE>
AMERICAN ASSOCIATION OF RETIRED
PERSONS
By /s/Horace B. Deets
----------------------------------
Title: Horace B. Deets
Executive Director
AARP CASH INVESTMENT FUNDS
By /s/Linda C. Coughlin
----------------------------------
Title: President
AARP GROWTH TRUST
By /s/Linda C. Coughlin
----------------------------------
Title: President
AARP INCOME TRUST
By /s/Linda C. Coughlin
----------------------------------
Title: President
AARP TAX FREE INCOME TRUST
By /s/Linda C. Coughlin
----------------------------------
Title: President
7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 19 to the registration statement on Form N-1A (the "Registration
Statement") of AARP Tax Free Income Trust of our report dated November 14, 1996,
relating to the financial statements and financial highlights appearing in the
September 30, 1996 Annual Report to Shareholders of AARP Growth Trust, which is
comprised of AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund,
AARP Global Growth Fund and AARP Capital Growth Fund; AARP Cash Investment
Funds, which is comprised of AARP High Quality Money Fund; AARP Income Trust,
which is comprised of AARP GNMA and U.S. Treasury Fund and AARP High Quality
Bond Fund; and AARP Tax Free Income Trust, which is comprised of AARP High
Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund, which
are incorporated by reference into the Registration Statement. We also consent
to the references to us under the headings "Experts" in the Statement of
Additional Information and "Financial Highlights" in the Prospectus.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
January 29, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
AARP Insured Tax Free General Bond Fund Annual Report for the fiscal year ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER>1
<NAME> AARP Insured Tax Free General Bond Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> $1,661,512,280
<INVESTMENTS-AT-VALUE> $1,740,393,909
<RECEIVABLES> $26,116,736
<ASSETS-OTHER> $38,624
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> $1,766,549,269
<PAYABLE-FOR-SECURITIES> $6,074,420
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> $5,062,627
<TOTAL-LIABILITIES> $11,137,047
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> $1,689,034,498
<SHARES-COMMON-STOCK> 98,088,821
<SHARES-COMMON-PRIOR> 101,872,699
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> ($10,611,830)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> $76,989,554
<NET-ASSETS> $1,755,412,222
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> $98,356,689
<OTHER-INCOME> 0
<EXPENSES-NET> $11,772,281
<NET-INVESTMENT-INCOME> $86,584,408
<REALIZED-GAINS-CURRENT> $18,477,812
<APPREC-INCREASE-CURRENT> ($2,417,538)
<NET-CHANGE-FROM-OPS> $102,664,682
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> $86,584,408
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,963,608
<NUMBER-OF-SHARES-REDEEMED> 13,666,268
<SHARES-REINVESTED> 2,918,782
<NET-CHANGE-IN-ASSETS> ($51,635,100)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> ($28,924,305)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> $8,665,253
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> $11,772,281
<AVERAGE-NET-ASSETS> $1,791,541,119
<PER-SHARE-NAV-BEGIN> $17.74
<PER-SHARE-NII> $0.87
<PER-SHARE-GAIN-APPREC> $0.16
<PER-SHARE-DIVIDEND> $0.87
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> $17.90
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from the AARP High
Quality Tax Free Money Fund Annual
Report for the fiscal year ended
September 30, 1996 and is qualified in
its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER>2
<NAME> AARP High Quality Tax Free Money Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> $110,537,355
<INVESTMENTS-AT-VALUE> $110,537,355
<RECEIVABLES> $934,299
<ASSETS-OTHER> $95,903
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> $111,567,557
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> $302,829
<TOTAL-LIABILITIES> $302,829
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> $112,090,701
<SHARES-COMMON-STOCK> 111,270,214
<SHARES-COMMON-PRIOR> 119,753,010
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> ($825,973)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> $111,264,728
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> $4,174,016
<OTHER-INCOME> 0
<EXPENSES-NET> $982,761
<NET-INVESTMENT-INCOME> $3,191,255
<REALIZED-GAINS-CURRENT> $1,553
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> $3,192,808
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> $3,191,255
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30,976,787
<NUMBER-OF-SHARES-REDEEMED> 42,004,745
<SHARES-REINVESTED> 2,545,162
<NET-CHANGE-IN-ASSETS> ($8,481,243)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> ($1,226,724)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> $453,559
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> $982,761
<AVERAGE-NET-ASSETS> $115,266,632
<PER-SHARE-NAV-BEGIN> $1.00
<PER-SHARE-NII> $0.028
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> $0.028
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> $1.00
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
