Institutional International Equity Portfolio
345 Park Avenue, New York, New York 10154
(800) 854-8525
Investment Adviser
Scudder, Stevens & Clark, Inc.
345 Park Avenue
New York, New York 10154
Distributor
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Fund Accounting Agent
Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Transfer Agent and
Dividend Disbursing Agent
Scudder Service Corporation
P.O. Box 9242
Boston, Massachusetts 02205
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus, and information or
representations not contained herein must not be relied upon as having been
authorized by the Company or the Distributor. This Prospectus does not
constitute an offer of any security other than the registered securities to
which it relates or an offer to any person in any jurisdiction where such offer
would be unlawful.
Institutional International
Equity Portfolio
BARRETT INTERNATIONAL
SHARES
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Prospectus
April 3, 1996
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INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
345 Park Avenue, New York, New York 10154
1-800-854-8525
Scudder, Stevens & Clark, Inc. - Investment Adviser
Scudder Investor Services, Inc. - Distributor
Institutional International Equity Portfolio (the "Portfolio") is a series
of Scudder Institutional Fund, Inc. (the "Company"), a no-load, open-end,
diversified, management investment company. Currently the Portfolio is comprised
of a single class of shares ("Barrett International Shares").
The Portfolio seeks long-term growth of capital primarily through a
diversified portfolio of marketable foreign equity securities.
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This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please retain it for
future reference. If you require more detailed information, a Statement of
Additional Information dated April 3, 1996, as amended from time to time, may be
obtained without charge by writing or calling the Company at the address and
telephone number printed above. The Statement of Additional Information, which
is incorporated by reference into this Prospectus, has been filed with the
Securities and Exchange Commission.
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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 PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Table of Contents
Page
----
Expense Information 2
Investment Objective and Policies 3
Additional Information About Policies and Investments 4
Distribution and Performance Information 6
Company Organization 7
Transaction Information 9
Shareholder Benefits 12
April 3, 1996
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Expense Information
This information is designed to help an investor understand the various costs
and expenses of investing in the Portfolio.
1) Shareholder Transaction Expenses: Expenses charged directly to an
individual account in the Portfolio for various transactions.
NONE
2) Annual Portfolio Operating Expenses: Estimated expenses to be paid by the
Portfolio before it distributes its net investment income, expressed as an
annualized percentage of its average daily net assets for the initial
fiscal period.
Investment Management Fee (after waiver) 0%*
Other Expenses 0.95%
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Total Portfolio Operating Expenses 0.95%*
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Example
Based on the estimated level of total Portfolio operating expenses listed above,
the total expenses relating to a $1,000 investment, assuming a 5% annual return
and redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Portfolio before it distributes
its net investment income to shareholders.
1 Year 3 Years
------ -------
$10 $30
See "Company Organization--Investment Adviser" for further information about
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Portfolio
Operating Expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual
Portfolio expenses and return vary from year to year and may be higher or lower
than those shown.
* Until April 30, 1997, the Adviser has agreed to waive a portion of its
investment management fee to the extent necessary so that the total
annualized expenses of the Portfolio do not exceed 0.95% of average daily
net assets. If the Adviser had not agreed to waive a portion of its fee, it
is estimated that annualized Portfolio expenses would be: investment
management fee 0.90%, other expenses 1.22% and total operating expenses
2.12% for the initial fiscal period. To the extent that expenses fall below
0.95% during the fiscal year, the Adviser reserves the right to recoup,
during the fiscal year incurred, amounts waived during the period, but only
to the extent that the Portfolio's expenses do not exceed 0.95%.
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Investment Objective and Policies
The investment objective of the Portfolio is to seek long-term growth of
capital primarily through a diversified portfolio of marketable foreign equity
securities. These securities are selected primarily to permit the Portfolio to
participate in non-United States companies and economies with prospects for
growth. The Portfolio invests in companies, wherever organized, which do
business primarily outside the United States. The Portfolio intends to diversify
investments among several countries and to have represented in the portfolio, in
substantial proportions, business activities in not less than five different
countries. The Portfolio does not intend to concentrate investments in any
particular industry. The investment objective of the Portfolio is nonfundamental
and can be changed without the approval of the holders of a majority of the
Portfolio's outstanding shares. Shareholders will receive written notice of any
changes in the Portfolio's objective. If there is a change in investment
objective, shareholders should consider whether the Portfolio remains an
appropriate investment in light of their then current financial position and
needs. There is no assurance that the Portfolio will achieve its investment
objective. Except as otherwise indicated, the Portfolio's policies are not
fundamental and may be changed without a vote of shareholders.
Investments
The Portfolio generally invests at least 90% of its total assets in equity
securities of established companies, listed on foreign exchanges, which the
Portfolio's investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"),
believes have favorable characteristics.
When the Adviser believes that it is appropriate to do so in order to
achieve the Portfolio's investment objective of long-term capital growth, the
Portfolio may invest up to 10% of its total assets in 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). Portfolio debt investments will be selected on the basis
of, among other things, yield, credit quality, and the fundamental outlooks for
currency and interest rate trends in different parts of the globe, taking into
account the ability to hedge a degree of currency or local bond price risk. The
Portfolio may purchase "investment-grade" bonds, which are those rated Aaa, Aa,
A or Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by
Standard & Poor's ("S&P") or, if unrated, judged by the Adviser to be of
equivalent quality. The Portfolio may also invest up to 5% of its total assets
in debt securities which are rated below investment-grade (see "Risk Factors").
When the Adviser determines that exceptional conditions exist abroad, the
Portfolio may, for temporary defensive purposes, invest all or a portion of its
assets in Canadian or U.S. Government obligations or currencies, or securities
of companies incorporated in and having their principal activities in Canada or
the U.S.
The Portfolio's investments are generally denominated in foreign
currencies. The strength or weakness of the U.S. dollar against these currencies
is responsible for part of the Portfolio's investment performance. For example,
if the dollar falls in value relative to the Japanese yen, the dollar value of a
Japanese stock held in the Portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the Japanese stock will fall.
The Portfolio reserves the right, without prior shareholder approval, in
the future to pursue its investment objective by investing all of its investable
assets in a separate registered investment company having the same investment
objective and substantially similar policies and restrictions as the Portfolio.
The new structure (commonly known as "master-feeder") could enable the Portfolio
to benefit, directly or indirectly, from certain economies of scale, based on
the premise that certain of the expenses of operating an investment portfolio
are relatively fixed and that a larger investment portfolio may eventually
achieve a lower ratio of operating expenses to average net assets.
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Additional Information About Policies and Investments
Investment Restrictions
The following investment restrictions and those described in the Statement
of Additional Information are fundamental policies of the Portfolio that may be
changed only when permitted by law and approved by the holders of a majority of
the Portfolio's outstanding voting securities, as described under "Company
Organization" in the Statement of Additional Information.
The Portfolio may not borrow money, except as a temporary measure for
extraordinary or emergency purposes and may not make loans, except through the
lending of portfolio securities, the purchase of debt securities or through
repurchase agreements. The Portfolio may not invest more than 25% of its assets
in securities of companies in the same industry.
In addition, as a matter of nonfundamental policy, the Portfolio may not
invest more than 10% of its total assets, in the aggregate, in securities which
are not readily marketable or otherwise illiquid, restricted securities and
repurchase agreements maturing in more than seven days.
For a more complete description, see "Investment Restrictions" in the
Statement of Additional Information.
Strategic Transactions and Derivatives
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities in the Portfolio or to enhance potential gain. These strategies may
be executed through the use of derivative contracts. Such strategies are
generally accepted as a part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing these investment strategies, the Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect the Portfolio's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of
fixed-income securities in the Portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Portfolio's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Portfolio
to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes. Please refer to "Risk
Factors--Strategic Transactions and Derivatives" for more information.
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Risk Factors
Foreign Securities. Investments in foreign securities involve special
considerations due to limited information, higher brokerage costs, different
accounting standards, thinner trading markets as compared to domestic markets
and the likely impact of foreign taxes on the income from securities. They may
also entail other risks, such as the possibility of one or more of the
following: imposition of dividend or interest withholding or confiscatory taxes;
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; less government supervision
and regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Purchases of foreign
securities are usually made in foreign currencies and, as a result, the
Portfolio 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. Further, it may be more difficult for the Company's agents to keep
currently informed about corporate actions which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. The Portfolio's ability and decisions to purchase and sell portfolio
securities may be affected by laws or regulations relating to the convertibility
and repatriation of assets.
Debt Securities. The Portfolio may invest no more than 5% of its total assets in
debt securities which are rated below investment-grade; that is, rated below Baa
by Moody's or below BBB by S&P, commonly referred to as junk bonds. The lower
the ratings of such debt securities, the greater their risks render them like
equity securities. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics. The Portfolio may invest
in securities which are rated D by S&P or, if unrated, are of equivalent
quality. Securities rated D may be in default with respect to payment of
principal or interest. The market value of the Portfolio's debt securities may
vary inversely with changes in prevailing interest rates.
Strategic Transactions and Derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or for prices higher than (in the case of put options) or lower than (in
the case of call options) current market values, limit the amount of
appreciation the Portfolio can realize on its investments or cause the Portfolio
to hold a security it might otherwise sell. The use of currency transactions can
result in the Portfolio incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements or the
inability to deliver or receive a specified currency. The use of options and
futures transactions entails certain other risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of the Portfolio creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Portfolio's position. In addition, futures and options markets
may not be liquid in all circumstances and certain over-the-counter options may
have no markets. As a result, in certain markets, the Portfolio might not be
able to close out a transaction without incurring substantial losses, if at all.
Although the use of futures contracts and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time they tend to limit any potential gain which
might result from an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized. The Strategic Transactions that the Portfolio may use and
some of their risks are described more fully in the Portfolio's Statement of
Additional Information.
5
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Portfolio Turnover
It is anticipated that the portfolio turnover rate of the Portfolio will
not exceed 100% for the initial fiscal year. However, economic and market
conditions may necessitate more active trading, resulting in a higher portfolio
turnover rate. A higher rate involves greater brokerage expenses to the
Portfolio and may result in the realization of net capital gains, which would be
taxable to shareholders when distributed.
Distribution and Performance Information
Dividends and Capital Gains Distributions
The Portfolio intends to distribute dividends from its net investment
income and net realized capital gains after utilization of capital loss
carryforwards, if any, in December to prevent application of federal excise tax.
An additional distribution may be made, if necessary. Any dividends or capital
gains distributions declared in October, November or December with a record date
in such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. Dividends and distributions will be invested in
additional shares of the Portfolio at net asset value and credited to the
shareholder's account on the payment date or, at the shareholder's election,
paid in cash. Dividend checks and Statements of Account will be mailed
approximately two business days after the payment date.
Generally, dividends from net investment income are taxable to shareholders
as ordinary income. Long-term capital gains distributions, if any, which are so
designated by the Portfolio are taxable as long-term capital gains regardless of
the length of time shareholders have owned their shares. Short-term capital
gains and any other taxable income distributions are taxable as ordinary income.
Dividends and other distributions are taxable to shareholders in the same manner
whether received in cash or reinvested in additional Portfolio shares.
Shareholders may be able to claim a credit or deduction on their income tax
returns for their pro rata portion of qualified taxes paid by the Portfolio to
foreign countries.
Taxes
The Portfolio intends to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"). To qualify, the
Portfolio must meet certain income, distribution and diversification
requirements. In any year in which the Portfolio qualifies as a regulated
investment company and timely distributes all of its taxable income, the
Portfolio generally will not pay any U.S. federal income or excise tax.
The Portfolio sends detailed tax information about the amount and type of
its distribution by January 31 of the following year.
Upon the redemption, sale or other disposition of shares of the Portfolio,
a shareholder may realize a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares.
The Portfolio will be required to withhold, subject to certain exemptions,
at a rate of 31% of all taxable distributions payable to shareholders who fail
to provide the Portfolio with their correct taxpayer identification number or to
make required certifications, or who have been notified by the IRS that they are
subject to backup withholding. (See also "Transaction Information--Redeeming
Shares.")
Further information relating to U.S. federal tax consequences is contained
in the Statement of Additional Information. Portfolio distributions also may be
subject to state, local and foreign taxes. Shareholders are urged to consult
their own tax advisors regarding specific questions as to federal, state, local
or foreign taxes.
Performance Information
From time to time, quotations of the Portfolio's performance may be
included in advertisements, sales literature or shareholder reports. All
performance figures are historical, show the performance of a hypothetical
investment and are not intended to indicate future performance. "Total return"
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is the change in value of an investment in the Portfolio for a specified period.
The "average annual total return" of the Portfolio is the average annual
compound rate of return of an investment in the Portfolio assuming the
investment has been held for one year and the life of the Portfolio as of a
stated ending date. "Cumulative total return" represents the cumulative change
in value of an investment in the Portfolio for various periods. Total return
calculations assume that all dividends and capital gains distributions during
the period were reinvested in shares of the Portfolio. "Capital change" measures
return from capital, including reinvestment of any capital gains distributions
but does not include the reinvestment of dividends. Performance will vary based
upon, among other things, changes in market conditions and the level of the
Portfolio's expenses.
Company Organization
The Company was formed on January 2, 1986 as a corporation under the laws
of the State of Maryland. The Company is a no-load, open-end, diversified,
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"). The Company's activities are supervised by its Board of
Directors. The Board of Directors, under applicable laws of the State of
Maryland, in addition to supervising the actions of the Company's Adviser and
Distributor, as set forth below, decides upon matters of general policy.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Company is not required to and has no current intention of
holding annual shareholder meetings, although meetings may be called for
purposes such as electing or removing Directors, changing fundamental investment
policies or approving an investment advisory agreement. Shareholders will be
assisted in communicating with other shareholders in connection with removing a
Director as if Section 16(c) of the 1940 Act were applicable.
If the Portfolio does not achieve an asset level of $100 million within a
period of three years from commencement of operations, it may be terminated at
the Board's discretion.
Investment Adviser
The Company retains the investment management firm of Scudder, Stevens &
Clark, Inc., a Delaware corporation, to manage the Portfolio's daily investment
and business affairs subject to the policies established by the Board of
Directors. The Adviser is one of the most experienced investment counsel firms
in the U.S. The Adviser was established in 1919 as a partnership and was
restructured as a Delaware corporation in 1985. The principal source of the
Adviser's income is professional fees received from providing continuing
investment advice. The Adviser provides investment counsel for many individuals
and institutions, including insurance companies, endowments, industrial
corporations and financial and banking organizations. As of December 31, 1995,
the Adviser and its affiliates had in excess of $100 billion under their
supervision.
Pursuant to the Investment Advisory Agreement (the "Agreement") with the
Company on behalf of the Portfolio, the Adviser regularly provides the Portfolio
with investment research, advice and supervision and furnishes continuously an
investment program for the Portfolio consistent with its investment objective
and policies. The Agreement further provides that the Adviser will pay the
compensation and certain expenses of all officers and certain employees of the
Company who are affiliated with the Adviser or its affiliates and will make
available to the Portfolio such of the Adviser's directors, officers and
employees as are reasonably necessary for the Portfolio's operations or as may
be duly elected officers or directors of the Company. Under the Agreement, the
Adviser also pays the Portfolio's office rent and provides investment advisory
research and statistical facilities and all clerical services relating to
research, statistical and investment work. The Adviser, including the Adviser's
employees who serve the Portfolio, may render investment advice, management and
other services to others.
The Portfolio will bear all expenses not specifically assumed by the
Adviser, including, among others, the fee payable to the Adviser, the fees of
the Directors who are not "affiliated persons" of the Adviser, the expenses of
all Directors and the fees and out-of-pocket expenses of the Company's Custodian
and the Transfer Agent. For a more detailed description of the expenses to be
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borne by the Portfolio, see "Investment Adviser" and "Distributor" in the
Statement of Additional Information.
The Portfolio is charged a management fee equal, on an annual basis, to
0.90% of the Portfolio's average daily net assets. Management fees are computed
daily and paid monthly. The Adviser has agreed to maintain the total annualized
expenses of the Portfolio at no more than 0.95% of the average daily net assets
of the Portfolio until April 30, 1997.
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced
investment management firms, actively manages your investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities. The Adviser has been a
leader in international investment management and trading for over 40 years.
The Institutional International Equity Portfolio is managed by a team of
Scudder investment professionals, each of whom plays an important role in the
Portfolio's management process. Team members work together to develop investment
strategies and select securities for the Portfolio. They are supported by
Scudder's large staff of economists, research analysts, traders, and other
investment specialists who work in Scudder's offices across the U.S. and abroad.
Scudder believes its team approach benefits Portfolio investors by bringing
together many disciplines and leveraging Scudder's extensive resources.
Lead Portfolio Manager Carol L. Franklin has responsibility for setting the
Portfolio's investment strategy and overseeing security selection for the
Portfolio. Ms. Franklin, who has 18 years of experience in finance and
investing, joined Scudder in 1981. Nicholas Bratt, Portfolio Manager, directs
Scudder's overall global equity investment strategies. Mr. Bratt joined Scudder
in 1976. Irene T. Cheng, Portfolio Manager, joined Scudder in 1993. Ms. Cheng
has been a portfolio manager since 1993 and has 11 years of experience in
finance and investing. Francisco S. Rodrigo III, Portfolio Manager, joined
Scudder in 1994. Mr. Rodrigo has been involved with investment in global and
international stocks and bonds as a portfolio manager and analyst since 1989.
Joan Gregory, Portfolio Manager, focuses on stock selection, a role she has
played since she joined Scudder in 1992. Ms. Gregory has been involved with
investment in global and international stocks as an assistant portfolio manager
since 1989.
Transfer Agent
Scudder Service Corporation, P.O. Box 9242, Boston, Massachusetts 02205, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Portfolio.
Distributor
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the
Company's principal underwriter (the "Distributor"). Scudder Investor Services,
Inc. confirms, as agent, all purchases of shares of the Portfolio. Under the
Underwriting Agreement with the Company, the Distributor acts as the principal
underwriter and bears the cost of printing and mailing prospectuses to potential
investors and of any advertising expenses incurred by it in connection with the
distribution of shares.
Custodian
Brown Brothers Harriman & Co. is the custodian for the Portfolio.
Accounting Agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the general accounting records of the Portfolio.
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Transaction Information
Purchasing Shares
There is a $1,000 minimum initial investment in the Portfolio and a minimum
account size of $1,000. The minimum subsequent investment for the Portfolio is
$1,000. The minimum investment requirement may be waived or lowered for
investments effected through banks and other institutions and for investments
effected on a group basis by certain other entities and their employees, such as
pursuant to a payroll deduction plan and for investments made in an Individual
Retirement Account offered by the Company. Investment minimums may also be
waived for Directors and officers of the Company. The Company and the
Distributor reserve the right to reject any purchase order. All funds will be
invested in full and fractional shares.
Shares of the Portfolio may be purchased by writing or calling the Transfer
Agent. Orders for shares of the Portfolio will be executed at the net asset
value per share next determined after an order has become effective. See "Share
Price."
Orders for shares of the Portfolio will become effective at the net asset
value per share next determined after receipt by the Transfer Agent of a check
drawn on any member of the Federal Reserve System or by the custodian of a bank
wire or Federal Reserve wire.
Checks drawn on a non-member bank or a foreign bank may take substantially
longer to be converted into federal funds and, accordingly, may delay the
execution of an order. Checks must be payable in U.S. dollars and will be
accepted subject to collection at full face value.
By investing in the Portfolio, a shareholder appoints the Transfer Agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gains distributions that are paid in
additional shares. See "Distribution and Performance Information--Dividends and
Capital Gains Distributions."
Initial Purchase by Wire
1. Shareholders may open an account by calling toll free from any
continental state: 1-800-854-8525. Give the name(s) in which the Portfolio's
account is to be registered, address, Social Security or taxpayer identification
number, dividend payment election, amount to be wired, name of the wiring bank
and name and telephone number of the person to be contacted in connection with
the order. An account number will then be assigned.
2. Instruct the wiring bank to transmit the specified amount to:
State Street Bank and Trust Company
Boston, Massachusetts
ABA Number 011000028
Custody and Shareholder Services Division
Attention: Institutional International Equity Portfolio
Account (name(s) in which registered)
Account Number (as assigned by telephone) and amount
invested in the Portfolio
3. Complete a Purchase Application. Indicate the services to be used. A
completed Purchase Application must be received by the Transfer Agent before the
Expedited Redemption Service can be used. Mail the Purchase Application to:
Scudder Service Corporation
P.O. Box 9242
Boston, Massachusetts 02205
Additional Purchases by Wire
Instruct the wiring bank to transmit the specified amount to State Street
Bank and Trust Company with the information stated above.
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Additional Purchases by Telephone Order
Existing shareholders may purchase shares at a certain day's price by
calling the Transfer Agent before the close of regular trading on the New York
Stock Exchange (the "Exchange"), normally 4:00 p.m. eastern time, on that day.
Orders must be for $10,000 or more and cannot be for an amount greater than four
times the value of your account at the time the order is placed. A confirmation
with complete purchase information is sent shortly after your order is received.
You must include with your payment the order number given at the time the order
is placed. If payment by check or wire is not received within three business
days, the order is subject to cancellation and the shareholder will be
responsible for any loss to the Portfolio resulting from this cancellation. The
Portfolio may, at its discretion, accept purchase orders of less than $10,000
regardless of the account size or may allow an account to be established through
this service.
Initial Purchase by Mail
1. Complete a Purchase Application. Indicate the services to be used.
2. Mail the Purchase Application and check payable to the Institutional
International Equity Portfolio to the Transfer Agent at the address set forth
above.
Additional Purchases by Mail
1. Make a check payable to the Institutional International Equity
Portfolio. Write the shareholder's Portfolio account number on the check.
2. Mail the check and the detachable stub from the Statement of Account (or
a letter providing the account number) to the Transfer Agent at the address set
forth above.
Redeeming Shares
Upon receipt by the Transfer Agent of a redemption request in proper form,
shares of the Portfolio will be redeemed at its next determined net asset value.
See "Share Price." For the shareholder's convenience, the Company has
established several different redemption procedures.
No redemption of shares purchased by check will be permitted until seven
business days after those shares have been credited to the shareholder's
account.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to make payment of redemption proceeds in whole or in part
in readily marketable securities, subject to regulation by some state securities
commissions. The Company may suspend the right of redemption during any period
when (i) trading on the Exchange is restricted or the Exchange is closed, other
than customary weekend and holiday closings, (ii) the SEC has by order permitted
such suspension or (iii) an emergency, as defined by rules of the SEC, exists
making disposal of portfolio securities or determination of the value of the net
assets of the Portfolio not reasonably practicable.
The proceeds of redemption may be more or less than the amount invested
and, therefore, a redemption may result in a gain or loss for federal income tax
purposes.
A shareholder's account in the Portfolio remains open for up to one year
following complete redemption, and all costs during the period will be borne by
the Portfolio.
The Company reserves the right to redeem upon not less than 30 days'
written notice the shares in an account of the Portfolio that has a value of
$1,000 or less. Reductions in value that result solely from market activity will
not trigger an involuntary redemption. However, any shareholder affected by the
exercise of this right will be allowed to make additional investments prior to
the date fixed for redemption to avoid liquidation of the account.
The Company also reserves the right, following 30 days' notice to
shareholders, to redeem all shares in accounts without certified Social Security
or taxpayer identification numbers. A shareholder may avoid involuntary
redemption by providing the Company with a taxpayer identification number during
the 30-day notice period.
10
<PAGE>
Redemption by Mail
1. Write a letter of instruction. Indicate the dollar amount or number of
shares to be redeemed. Refer to the shareholder's Portfolio account number and
give Social Security or taxpayer identification number (where applicable).
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all must sign.
3. If shares to be redeemed have a value of $50,000 or more, the
signature(s) must be guaranteed by a commercial bank that is a member of the
Federal Deposit Insurance Corporation, a trust company, a member firm of a
domestic stock exchange or a foreign branch of any of the foregoing. In
addition, signatures may be guaranteed by other Eligible Guarantor Institutions,
i.e., other banks, other brokers and dealers, municipal securities brokers and
dealers, government securities brokers and dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. The Transfer Agent, however, may reject redemption
instructions if the guarantor is neither a member of nor a participant in a
signature guarantee program (currently known as "STAMPsm"). Signature guarantees
by notaries public are not acceptable. Further documentation, such as copies of
corporate resolutions and instruments of authority, may be requested from
corporations, administrators, executors, personal representatives, trustees or
custodians to evidence the authority of the person or entity making the
redemption request.
4. Mail the letter to the Transfer Agent at the address set forth under
"Purchasing Shares."
Checks for redemption proceeds will normally be mailed the day following
receipt of the request in proper form, although the Company reserves the right
to take up to seven days. Unless other instructions are given in proper form, a
check for the proceeds of a redemption will be sent to the shareholder's address
of record. The Custodian may benefit from the use of redemption proceeds until
the check issued to a redeeming shareholder for such proceeds has cleared.
When proceeds of a redemption are to be paid to someone other than the
shareholder, either by wire or check, the signature(s) on the letter of
instruction must be guaranteed regardless of the amount of the redemption.
Redemption by Expedited Redemption Service
If Expedited Redemption Service has been elected on the Purchase
Application on file with the Transfer Agent, redemption of shares may be
requested by telephoning the Transfer Agent on any day the Company and State
Street Bank and Trust Company are open for business.
1. Telephone the request to the Transfer Agent by calling toll free from
any continental state: 1-800-854-8525, or
2. Mail the request to the Transfer Agent at the address set forth under
"Purchasing Shares."
Proceeds of Expedited Redemptions of $1,000 or more will be wired to the
shareholder's bank indicated in the Purchase Application. If an Expedited
Redemption request for the Portfolio is received by the Transfer Agent by the
close of regular trading on the Exchange (currently 4:00 p.m. eastern time) on a
day the Company and State Street Bank and Trust Company are open for business,
the redemption proceeds will be transmitted to the shareholder's bank the
following business day. A check for proceeds of less than $1,000 will be mailed
to the shareholder's address of record.
The Portfolio uses procedures designed to give reasonable assurance that
telephone instructions are genuine, including recording telephone calls, testing
a caller's identity and sending written confirmation of telephone transactions.
If the Portfolio does not follow such procedures, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. The Portfolio will not
be liable for acting upon instructions communicated by telephone that it
reasonably believes to be genuine.
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Share Price
Net asset value per share for the Portfolio is determined by Scudder Fund
Accounting Corporation on each day the Exchange is open for trading. The net
asset value of shares of the Portfolio is determined at the close of regular
trading on the Exchange, which is currently 4:00 p.m. (eastern time). The net
asset value per share of the Portfolio is computed by dividing the value of the
total assets of the Portfolio, less all liabilities, by the total number of
outstanding shares of the Portfolio.
Shareholder Benefits
Account Services
Shareholders will be sent a Statement of Account from the Distributor, as
agent of the Company, whenever a share transaction is effected in the accounts.
Shareholders can write or call the Company at the address and telephone number
on the cover of this Prospectus with any questions relating to their investment
in shares of the Portfolio.
Shareholder Services
The Company offers the following shareholder services. See the Statement of
Additional Information for further details about these services or call or write
the Company.
Special Monthly Summary of Accounts. A special service is available to
banks, brokers, investment advisers, trust companies and others who have a
number of accounts in the Portfolio. A monthly summary of accounts can be
provided, showing for each account the account number, the month-end share
balance and the dividends and distributions paid during the month.
Shareholder Reports. The fiscal year of the Portfolio ends on December 31
of each year. The Portfolio sends to its shareholders, at least semi-annually,
reports showing the investments in the Portfolio and other information
(including unaudited financial statements) pertaining to the Portfolio. An
annual report, containing financial statements audited by the Portfolio's
independent accountants, is sent to shareholders each year.
Shareholder inquiries should be addressed to Scudder Institutional Fund,
Inc., 345 Park Avenue, New York, New York 10154.
12
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INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
345 Park Avenue
New York, New York 10154
1-800-854-8525
Institutional International Equity Portfolio (the
"Portfolio") is a series of Scudder
Institutional Fund, Inc.
(the "Company"), a no-load, open-end, diversified management investment company.
The Portfolio seeks long-term growth of capital
primarily through a diversified portfolio of
marketable foreign equity securities.
- --------------------------------------------------------------------------------
Statement of Additional Information
April 3, 1996
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of Institutional International Equity
Portfolio dated April 3, 1996, as may be amended from time to time, a copy of
which may be obtained without charge by writing to Scudder Investor Services,
Inc., Two International Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Page
i
TABLE OF CONTENTS
Page
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES.....................................................................1
General Investment Objective and Policies....................................................................1
Risk Factors.................................................................................................2
Investment Restrictions.....................................................................................11
PURCHASING SHARES....................................................................................................13
REDEEMING SHARES.....................................................................................................13
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................13
PERFORMANCE INFORMATION..............................................................................................14
Average Annual Total Return.................................................................................14
Cumulative Total Return.....................................................................................14
Total Return................................................................................................15
Capital Change..............................................................................................15
Comparison of Portfolio Performance.........................................................................15
SHAREHOLDER BENEFITS.................................................................................................16
COMPANY ORGANIZATION.................................................................................................16
INVESTMENT ADVISER...................................................................................................17
Personal Investments by Employees of the Adviser............................................................18
DIRECTORS AND OFFICERS...............................................................................................18
REMUNERATION.........................................................................................................20
DISTRIBUTOR..........................................................................................................21
TAXES................................................................................................................21
PORTFOLIO TRANSACTIONS...............................................................................................24
Brokerage Commissions.......................................................................................24
Portfolio Turnover..........................................................................................25
NET ASSET VALUE......................................................................................................25
ADDITIONAL INFORMATION...............................................................................................26
Experts.....................................................................................................26
Other Information...........................................................................................26
FINANCIAL STATEMENTS.................................................................................................27
APPENDIX
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</TABLE>
<PAGE>
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES
(See "Investment Objective and Policies" and
"Additional Information About Policies
and Investments" in the Portfolio's Prospectus)
General Investment Objective and Policies
The investment objective of the Portfolio is to seek long-term growth
of capital primarily through a diversified portfolio of marketable foreign
equity securities. These securities are selected primarily to permit the
Portfolio to participate in non-United States companies and economies with
prospects for growth. The Portfolio invests in companies, wherever organized,
which in the judgment of the Portfolio's investment adviser, have their
principal activities and interests outside the United States. The Portfolio
intends to diversify investments among several countries and to have represented
in the portfolio, in substantial proportions, business activities in not less
than five different countries. To the extent consistent with the Portfolio's
objective of long-term growth of capital, as described above, it is the policy
of the Portfolio to provide shareholders with participation in the economies of
a number of countries other than the U.S. The Portfolio may invest in securities
of companies incorporated in the U.S. and having their principal activities and
interests outside of the U.S. The investment objective of the Portfolio is
nonfundamental and can be changed without the approval of the holders of a
majority of the Portfolio's outstanding shares, as defined in the Investment
Company Act of 1940 (the "1940 Act") and a rule thereunder. There is no
assurance that the Portfolio will achieve its investment objective. Except as
otherwise indicated, the Portfolio's policies are not fundamental and may be
changed without a vote of shareholders.
The Portfolio generally invests at least 90% of its total assets in
equity securities of established companies, listed on recognized exchanges,
which the Portfolio's investment adviser, Scudder, Stevens & Clark, Inc. (the
"Adviser"), believes have favorable characteristics. The Adviser expects this
condition to continue, although the Portfolio may invest in other securities.
When the Adviser believes that it is appropriate to do so in order to
achieve the Portfolio's investment objective of long-term capital growth, the
Portfolio may invest up to 10% of its total assets in 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). In determining the location of the principal activities and
interests of a company, the Adviser takes into account such factors as the
location of the company's assets, personnel, sales and earnings. In selecting
securities for the Portfolio, the Adviser seeks to identify companies whose
securities prices do not adequately reflect their established positions in their
fields. In analyzing companies for investment, the Adviser ordinarily looks for
one or more of the following characteristics: above-average earnings growth per
share, high return on invested capital, healthy balance sheets and overall
financial strength, strong competitive advantages, strength of management and
general operating characteristics which will enable the companies to compete
successfully in the marketplace. Investment decisions are made without regard to
arbitrary criteria as to minimum asset size, debt-equity ratios or dividend
history of portfolio companies.
The Portfolio may invest in any type of security including, but not
limited to shares, preferred or common; bonds and other evidences of
indebtedness; and other securities of issuers wherever organized, and not
excluding evidences of indebtedness of governments and their political
subdivisions. The Portfolio, in view of its investment objective, intends under
normal conditions to maintain a portfolio consisting primarily of a diversified
list of equity securities.
When the Adviser determines that exceptional conditions exist abroad,
the Portfolio may, for temporary defensive purposes, invest all or a portion of
its assets in Canadian or U.S. Government obligations or currencies, or
securities of companies incorporated in and having their principal activities in
Canada or the U.S.
Foreign securities such as those purchased by the Portfolio may be
subject to foreign government taxes which could reduce the yield on such
securities, although a shareholder of the Portfolio may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Fund. (See "TAXES.")
From time to time, the Portfolio may be a purchaser of restricted debt
or equity securities (i.e., securities which may require registration under the
Securities Act of 1933, or an exemption therefrom, in order to be sold in the
<PAGE>
ordinary course of business) in a private placement. The Portfolio has
undertaken not to purchase or acquire any such securities if, solely as a result
of such purchase or acquisition, more than 10% of the value of the Portfolio's
total assets would be invested in restricted securities or otherwise illiquid
(securities subject to legal restrictions on resales to institutions, or
contractual restrictions on resale) and more than 10% of its total assets would
be invested in securities that are not readily marketable.
The Portfolio reserves the right in the future, without prior
shareholder approval, to pursue its investment objective by investing all of its
investable assets in a separate registered investment company having the same
investment objective and substantially similar policies and restrictions as the
Portfolio. The new structure (commonly known as "master-feeder") could enable
the Portfolio to benefit, directly or indirectly, from certain economies of
scale, based on the premise that certain of the expenses of operating an
investment portfolio are relatively fixed and that a larger investment portfolio
may eventually achieve a lower ratio of operating expenses to average net
assets.
Risk Factors
Foreign Securities. The Portfolio is intended to provide individual and
institutional investors with an opportunity to invest a portion of their assets
in securities of a diversified group of companies, wherever organized, which do
business primarily outside the U.S., and foreign governments. The Adviser
believes that diversification of assets on an international basis decreases the
degree to which events in any one country, including the U.S., will affect an
investor's entire investment holdings. In certain periods since World War II,
many leading foreign economies and foreign stock market indices have grown more
rapidly than the U.S. economy and leading U.S. stock market indices, although
there can be no assurance that this will be true in the future. Because of the
Portfolio's investment policy, the Portfolio is not intended to provide a
complete investment program for an investor.
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 U.S. securities and which may
favorably or unfavorably affect the Portfolio's 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
U.S. and, at times, volatility of price can be greater than in the U.S. Fixed
commissions on some foreign securities exchanges and bid to asked spreads in
foreign bond markets are generally higher than commissions or bid to asked
spreads on U.S. markets, although the Portfolio will endeavor to achieve the
most favorable net results on its 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 Portfolio's
agents to keep currently informed about corporate actions which may affect the
prices of portfolio securities. Communications between the U.S. and foreign
countries may be less reliable than within the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Payment for securities without delivery may be required in
certain foreign markets. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of the
Portfolio seeks to mitigate the risks associated with the foregoing
considerations through continuous professional management.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Portfolio may hold
foreign currencies and forward contracts, futures contracts and options on
foreign currencies and foreign currency futures contracts, the value of the
assets of the Portfolio as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations, and the Portfolio may incur costs in connection with conversions
between various currencies. Although the Portfolio values its assets daily in
terms of U.S. dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so from time to time,
and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
2
<PAGE>
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer. The
Portfolio will conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into options or forward or futures
contracts to purchase or sell foreign currencies. The market value of the
Portfolio's debt securities, and correspondingly the Portfolio's share price,
will vary inversely with changes in prevailing interest rates.
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve the Portfolio's objective of long-term capital growth, the
Portfolio may invest up to 10% of its total assets in debt securities including
bonds of foreign governments, supranational organizations and private issuers,
including bonds denominated in the ECU. Portfolio debt investments will be
selected on the basis of, among other things, yield, credit quality, and the
fundamental outlooks for currency and interest rate trends in different parts of
the globe, taking into account the ability to hedge a degree of currency or
local bond price risk. The Portfolio 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 to be of equivalent quality as determined by the Adviser.
Moody's considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics. The market value of the Portfolio's debt
securities may vary inversely with changes in prevailing interest rates.
High Yield/High Risk Bonds. The Portfolio may also purchase, to a limited
extent, debt securities which are rated below investment-grade, that is, rated
below Baa by Moody's or below BBB by S&P and unrated securities, which usually
entail greater risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid, than securities in the
higher rating categories. The lower the ratings of such debt securities, the
greater their risks. The Portfolio will invest no more than 5% of its total
assets in securities rated BB or lower by Moody's or Ba by S&P, and may invest
in securities which are rated D by S&P. Securities rated D may be in default
with respect to payment of principal or interest. See the Appendix to this
Statement of Additional Information for a more complete description of the
ratings assigned by ratings organizations and their respective characteristics.
An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would have a greater adverse impact on the value of such
obligations than on higher quality debt securities. During an economic downturn
or period of rising interest rates, highly leveraged issues may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations. Prices and yields of high yield
securities will fluctuate over time and, during periods of economic uncertainty,
volatility of high yield securities may adversely affect the Portfolio's net
asset value. In addition, investments in high yield zero coupon or pay-in-kind
bonds, rather than income-bearing high yield securities, may be more speculative
and may be subject to greater fluctuations in value due to changes in interest
rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market. A thin trading market may
limit the ability of the Portfolio to accurately value high yield securities in
its portfolio and to dispose of those securities. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
These securities may also involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties.
Credit quality in the high-yield securities market can change suddenly
and unexpectedly, and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the
Portfolio's investment objective by investment in such securities may be more
dependent on the Adviser's credit analysis than is the case for higher quality
bonds. Should the rating of a portfolio security be downgraded, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of such security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
3
<PAGE>
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
Strategic Transactions and Derivatives. The Portfolio may, but is not required
to, utilize various other investment strategies as described below to hedge
various market risks (such as interest rates, currency exchange rates, and broad
or specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities in the Portfolio's portfolio, or
to enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Portfolio
may purchase and sell exchange-listed and over-the-counter put and call options
on securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Portfolio's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Portfolio to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Portfolio
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Portfolio, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Portfolio can realize on its
investments or cause the Portfolio to hold a security it might otherwise sell.
The use of currency transactions can result in the Portfolio incurring losses as
a result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of
the Portfolio creates the possibility that losses on the hedging instrument may
be greater than gains in the value of the Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
4
<PAGE>
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Portfolio assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Portfolio is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Portfolio's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. The Portfolio 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 the Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess the
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creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Portfolio will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers" or broker/dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO") or, in the case
of OTC currency transactions, are determined to be of equivalent credit quality
by the Adviser. The staff of the SEC currently takes the position that OTC
options purchased by the Portfolio, and portfolio securities "covering" the
amount of the Portfolio's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Portfolio's limitation on investing no more than 10% of its
total assets in illiquid securities.
If the Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale of put options can
also provide income.
The Portfolio may purchase and sell call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets, and on securities indices,
currencies and futures contracts. All calls sold by the Portfolio must be
"covered" (i.e., the Portfolio must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though the Portfolio will receive
the option premium to help protect it against loss, a call sold by the Portfolio
exposes the Portfolio during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolio to hold a security or
instrument which it might otherwise have sold.
The Portfolio may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Portfolio will not sell put options if, as a result, more
than 50% of the Portfolio's assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
General Characteristics of Futures. The Portfolio may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Portfolio, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Portfolio's use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the
Portfolio to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Portfolio. If the Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
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entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
The Portfolio will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Portfolio's total assets (taken at current
value); however, in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Portfolio also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Portfolio may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) 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. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Portfolio may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.
The Portfolio's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its securities or the receipt
of income therefrom. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.
The Portfolio will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Portfolio may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Portfolio has or in
which the Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Portfolio may also engage
in proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency whose changes in value are generally considered to be correlated to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, in exchange for U.S. dollars.
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The amount of the commitment or option would not exceed the value of the
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), the Portfolio holds securities denominated in
schillings and the Adviser believes that the value of schillings will decline
against the U.S. dollar, the Adviser may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Portfolio if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that the Portfolio is engaging in proxy hedging. If the Portfolio enters into a
currency hedging transaction, the Portfolio will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Portfolio if it is unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are subject
to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions. The Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Portfolio may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Portfolio believe such obligations do not
constitute senior securities under the 1940 Act, and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Portfolio will
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not enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from a NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Portfolio segregate liquid,
high grade assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Portfolio to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid, high grade
securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by the
Portfolio will require the Portfolio to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid, high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Portfolio on an index will require the Portfolio to own portfolio
securities which correlate with the index or to segregate liquid, high grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by the Portfolio requires the Portfolio to
segregate liquid, high grade assets equal to the exercise price.
Except when the Portfolio enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Portfolio to
buy or sell currency will generally require the Portfolio to hold an amount of
that currency or liquid securities denominated in that currency equal to the
Portfolio's obligations or to segregate liquid high grade assets equal to the
amount of the Portfolio's obligation.
OTC options entered into by the Portfolio, 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 Portfolio 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
Portfolio, or the in-the-money amount plus any sell-back formula amount in the
case of a cash-settled put or call. In addition, when the Portfolio sells a call
option on an index at a time when the in-the-money amount exceeds the exercise
price, the Portfolio will segregate, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Portfolio other than those above generally settle
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with physical delivery, or with an election of either physical delivery or cash
settlement and the Portfolio 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.
In the case of a futures contract or an option thereon, the Portfolio
must deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Portfolio's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Portfolio may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Portfolio could purchase a put option
if the strike price of that option is the same or higher than the strike price
of a put option sold by the Portfolio. Moreover, instead of segregating assets
if the Portfolio held a futures or forward contract, it could purchase a put
option on the same futures or forward contract with a strike price as high or
higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
The Portfolio's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company. (See "TAXES.")
Repurchase Agreements. The Portfolio may enter into repurchase agreements with
any member bank of the Federal Reserve System and any broker-dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker-dealer has been determined by the Adviser to be at least
as high as that of other obligations the Portfolio may purchase or to be at
least equal to that of issuers of commercial paper rated within the two highest
grades assigned by Moody's or S&P.
A repurchase agreement provides a means for the Portfolio to earn
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Portfolio) acquires a security ("Obligation") and
the seller agrees, at the time of sale, to repurchase the Obligation at a
specified time and price. Securities subject to a repurchase agreement are held
in a segregated account and the value of such securities kept at least equal to
the repurchase price on a daily basis. The repurchase price may be higher than
the purchase price, the difference being income to the Portfolio, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the Portfolio together with the repurchase price upon repurchase. In
either case, the income to the Portfolio is unrelated to the interest rate on
the Obligation itself. Obligations will be held by the Custodian or in the
Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Portfolio to the seller of the Obligation subject to the
repurchase agreement and is therefore subject to the Portfolio's investment
restriction applicable to loans. It is not clear whether a court would consider
the Obligation purchased by the Portfolio subject to a repurchase agreement as
being owned by the Portfolio or as being collateral for a loan by the Portfolio
to the seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the Obligation before repurchase of
the Obligation under a repurchase agreement, the Portfolio 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. If the court characterizes
the transaction as a loan and the Portfolio has not perfected a security
interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Portfolio would be at risk of losing some
or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Portfolio, the Adviser seeks to
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minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the Obligation, in which case the
Portfolio may incur a loss if the proceeds to the Portfolio of the sale to a
third party are less than the repurchase price. However, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Portfolio will direct the seller of
the Obligation to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Portfolio will be unsuccessful in
seeking to enforce the seller's contractual obligation to deliver additional
securities.
Investment Restrictions
In connection with its investment objective and policies as set forth
in the Prospectus, the Company has adopted the following investment
restrictions, on behalf of the Portfolio, none of which may be changed without
the approval of the holders of a majority of the Portfolio's outstanding shares,
as defined in the 1940 Act.
As a matter of fundamental policy, the Portfolio may not:
(1) with respect to 75% of its total assets, taken at market
value, purchase more than 10% of the voting securities of any
one issuer, or invest more than 5% of the value of its total
assets in the securities of any one issuer, except obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and except securities of other investment
companies (except that if the Portfolio chooses to participate
in the master-feeder structure, as described in the section
titled "General Investment Objective and Policies," it may
purchase up to 100% of the voting securities of any one issuer
and may invest up to 100% of its investment securities in a
single issuer without restriction);
(2) borrow money, except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements; provided that the Portfolio maintains
asset coverage of 300% for all borrowings;
(3) 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 the
Portfolio;
(4) make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent the entry into repurchase
agreements and the purchase of debt securities in accordance
with its investment objectives and investment policies may be
deemed to be loans;
(5) purchase or sell real estate (except that the Portfolio 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 the Portfolio reserves
freedom of action to hold and to sell real estate acquired as
a result of the Portfolio's ownership of securities); and
(6) purchase or sell physical commodities or contracts relating to
physical commodities.
The Portfolio will not as a matter of nonfundamental policy:
(a) purchase or retain securities of any open-end investment company,
or securities of closed-end investment companies except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchases, or except when
such purchase, though not made in the open market, is part of a
plan of merger, consolidation, reorganization or acquisition of
assets; in any event the Portfolio may not purchase more than 3%
of the outstanding voting securities of another investment
company, may not invest more than 5% of its assets in another
investment company, and may not invest more than 10% of its
assets in other investment companies (except that if the
Portfolio chooses to participate in the master-feeder structure,
as described in the section titled "General Investment Objective
and Policies," it may invest up to 100% of its investment
securities in an investment company without restriction);
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(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(c) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer, director
or trustee of the Portfolio or a member, officer, director or
trustee of the investment adviser of the Portfolio if one or more
of such individuals owns beneficially more than one-half of one
percent (1/2%) of the outstanding shares or securities or both
(taken at market value) of such issuer and such individuals
owning more than one-half of one percent (1/2%) of such shares or
securities together own beneficially more than 5% of such shares
or securities or both;
(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right to
obtain securities equivalent in kind and amount to the securities
sold and, if the right is conditional, the sale is made upon the
same conditions, except in connection with arbitrage transactions
and except that the Portfolio may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities;
(e) invest more than 10% of its total assets in securities which are
not readily marketable or otherwise illiquid, the disposition of
which is restricted under Federal securities laws, or in
repurchase agreements not terminable within 7 days, and the
Portfolio will not invest more than 10% of its total assets in
restricted securities;
(f) other than as may be necessary to participate in a master-feeder
arrangement, purchase securities of any issuer with a record of
less than three years continuous operations, including
predecessors, and in equity securities which are not readily
marketable except U.S. Government securities, and obligations
issued or guaranteed by any foreign government or its agencies or
instrumentalities, if such purchase would cause the investments
of the Portfolio in all such issuers to exceed 5% of the total
assets of the Portfolio taken at market value;
(g) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Portfolio
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
Portfolio's net assets;
(h) 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 Portfolio and the premiums paid for options on
futures contracts does not exceed 5% of the fair market value of
the Portfolio'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;
(i) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which own
or invest in such interests);
(j) borrow money in excess of 5% of its total assets (taken at market
value) except for temporary or emergency purposes or borrow other
than from banks;
(k) purchase warrants if as a result warrants taken at the lower of
cost or market value would represent more than 5% of the value of
the Portfolio's total net assets or more than 2% of its net
assets in warrants that are not listed on the New York or
American Stock Exchanges or on an exchange with comparable
listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value);
(l) invest more than 10% of its total assets in debt securities
(including convertible securities) or more than 5% of its total
assets in securities rated BB/Ba or below by Moody's or S&P or
the equivalent;
(m) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Portfolio's total assets at the
time the loan is made; all loans of portfolio securities will be
12
<PAGE>
fully collateralized and marked to market daily. The Portfolio
has no current intention of making loans of portfolio securities
that would amount to greater than 5% of the Portfolio's total
assets; or
(n) purchase or sell real estate limited partnership interests.
In addition to the foregoing restrictions, it is not the policy of the
Portfolio to concentrate its investments in any particular industry and the
Portfolio's management does not intend to make acquisitions in particular
industries which would increase the percentage of the market value of the
Portfolio's assets above 25% for any one industry. The Portfolio may not deviate
from such policy without a vote of a majority of the outstanding shares as
provided by the 1940 Act.
Whenever any investment restriction states a maximum percentage of the
Portfolio's assets, it is intended that if the percentage limitation is met at
the time the action is taken; subsequent percentage changes resulting from
fluctuating asset values will not be considered a violation of such
restrictions.
PURCHASING SHARES
(See "Transaction Information--Purchasing Shares" in the Portfolio's Prospectus)
There is a $1,000 minimum initial investment in the Portfolio, with a
minimum account size of $1,000. The minimum subsequent investment for the
Portfolio is $1,000. Investment minimums may be waived for Directors and
officers of the Company and certain other affiliates and entities. The Portfolio
and Scudder Investor Services, Inc. (the "Distributor") reserve the right to
reject any purchase order. All funds will be invested in full and fractional
shares.
Shares of the Portfolio may be purchased by writing or calling Scudder
Service Corporation, a subsidiary of the Adviser (the "Transfer Agent"). Due to
the desire of the Company to afford ease of redemption, certificates will not be
issued to indicate ownership in the Portfolio. Orders for shares of the
Portfolio will be executed at the net asset value per share next determined
after an order has become effective.
Checks drawn on a non-member bank or a foreign bank may take
substantially longer to be converted into federal funds and, accordingly, may
delay the execution of an order. Checks must be payable in U.S. dollars and will
be accepted subject to collection at full face value.
By investing in the Portfolio, a shareholder appoints the Transfer
Agent to establish an open account to which all shares purchased will be
credited with any dividends and capital gains distributions that are paid in
additional shares. See "Distribution and Performance Information--Dividends and
Capital Gains Distributions" in the Portfolio's Prospectus.
REDEEMING SHARES
(See "Transaction Information--Redeeming Shares" in the Portfolio's Prospectus)
Payment of redemption proceeds may be made in securities, subject to
regulation by some state securities commissions. The Company may suspend the
right of redemption with respect to the Portfolio during any period when (i)
trading on the New York Stock Exchange (the "Exchange") is restricted or the
Exchange is closed, other than customary weekend and holiday closings, (ii) the
SEC has by order permitted such suspension or (iii) an emergency, as defined by
rules of the SEC, exists making disposal of portfolio securities or
determination of the value of the net assets of the Portfolio not reasonably
practicable.
A shareholder's account remains open for up to one year following
complete redemption and all costs during the period will be borne by the
Portfolio. This permits an investor to resume investments.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and Performance
Information--Dividends and Capital Gains
Distributions" in the Portfolio's Prospectus.)
The Portfolio intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The
13
<PAGE>
Portfolio may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Portfolio may retain all or part of such gain for reinvestment
after paying the related federal income taxes for which the shareholders may
then be asked to claim a credit against their federal income tax liability. (See
"TAXES.")
If the Portfolio does not distribute the amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, the Portfolio may be subject to that excise tax. (See "TAXES.") In certain
circumstances, the Portfolio may determine that it is in the interest of
shareholders to distribute less than the required amount.
Earnings and profits distributed to shareholders on redemptions of
Portfolio shares may be utilized by the Portfolio, to the extent permissible, as
part of the Portfolio's dividends paid deduction on its federal tax return.
The Portfolio intends to distribute its investment company taxable
income and any net realized capital gains in December to avoid federal excise
tax, although an additional distribution may be made, if necessary.
Both types of distributions will be made in shares of the Portfolio and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent. Distributions of
investment company taxable income and net realized capital gains are taxable
(See "TAXES"), whether made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Portfolio issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
(See "Distribution and Performance Information--Performance Information"
in the Portfolio's Prospectus.)
From time to time, quotations of the Portfolio's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for periods of one year and the life of the Portfolio, where applicable,
all ended on the last day of a recent calendar quarter. Average annual total
return quotations reflect changes in the price of the Portfolio's shares, if
any, and assume that all dividends and capital gains distributions during the
respective periods were reinvested in Portfolio shares. Average annual total
return is calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000.
T = Average Annual Total Return.
n = number of years.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of the Portfolio's shares
14
<PAGE>
and assume that all dividends and capital gains distributions during the period
were reinvested in Portfolio shares. Cumulative total return is calculated by
finding the cumulative rates of return of a hypothetical investment over such
periods, according to the following formula (cumulative total return is then
expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return.
P = a hypothetical initial investment of $1,000.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
Capital Change
Capital change measures the return from invested capital including
reinvested capital gains distributed. Capital change does not include the
reinvestment of income dividends.
Quotations of the Portfolio's performance are based on historical
earnings, show the performance of a hypothetical investment, and are not
intended to indicate future performance of the Portfolio. An investor's shares
when redeemed may be worth more or less than their original cost. Performance of
the Portfolio will vary based on changes in market conditions and the level of
the Portfolio's expenses.
Comparison of Portfolio Performance
Because some or all of the Portfolio's investments are denominated in
foreign currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part of the Portfolio's investment performance.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Portfolio. Such
historical information is not indicative of future fluctuations in the value of
the U.S. dollar against these currencies. In addition, marketing materials may
cite country and economic statistics and historical stock market performance for
any of the countries in which the Portfolio invests, including, but not limited
to, the following: population growth, gross domestic product, inflation rate,
average stock market price-earnings ratios and the total value of stock markets.
Sources for such statistics may include official publications of various foreign
governments and exchanges.
From time to time, in marketing and other portfolio literature, the
performance of the Portfolio may be compared to the performance of broad groups
of mutual funds with similar investment goals, as tracked by independent
organizations. Among these organizations, Lipper Analytical Services, Inc.
("Lipper") may be cited. When Lipper's tracking results are used, the Portfolio
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. For instance, the Portfolio will be compared
with funds within Lipper's international equity fund category. Rankings may be
listed among one or more of the asset-size classes as determined by Lipper.
Since the assets in all funds are always changing, the Portfolio may be
ranked within one Lipper asset-size class at one time and in another Lipper
asset-size class at some other time. Footnotes in advertisements and other
marketing literature will include the time period and Lipper asset-size class,
as applicable, for the ranking in question.
15
<PAGE>
SHAREHOLDER BENEFITS
(See "Shareholders Benefits" in the Portfolio's Prospectus)
Special Monthly Summary of Accounts. A special service is available to
banks, brokers, investment advisers, trust companies and others who have a
number of accounts in any Portfolio. In addition to the copy of the regular
Statement of Account furnished to the registered holder after each transaction,
a monthly summary of accounts can be provided. The monthly summary will show for
each account the account number, the month-end share balance and the dividends
and distributions paid during the month. All costs of this service will be borne
by the Company. For information on the special monthly summary of accounts,
contact the Company.
COMPANY ORGANIZATION
(See "Company Organization" in the Portfolio's Prospectus)
The Company was formed on January 2, 1986 as a corporation under the
laws of the State of Maryland. The authorized capital stock of the Company
consists of 25,000,000,000 shares having a par value of $.001 per share, of
which 5,000,000,000 shares each have been designated for the Government
Portfolio, Federal Portfolio and Cash Portfolio, 2,000,000,000 shares have been
designated for the Tax-Free Portfolio and 100,000,000 have been designated for
the Institutional International Equity Portfolio. The Company is authorized to
issue full and fractional shares in separate series. The Directors have created
28 series, constituting the Government Portfolio, the Federal Portfolio, Cash
Portfolio, Tax-Free Portfolio, Institutional International Equity Portfolio,
Institutional Prime Portfolio, Institutional Municipal Income Portfolio,
Institutional Intermediate Cash Portfolio, Institutional Bond Index Portfolio,
Institutional Cash Plus Portfolio, Institutional Global Equity Portfolio,
Institutional Emerging Markets Equity Portfolio, Institutional Global Small
Company Equity Portfolio, Institutional Latin America Equity Portfolio,
Institutional Japanese Equity Portfolio, Institutional Pacific Basin Equity
Portfolio, Institutional Growth and Income Portfolio, Institutional Quality
Growth Portfolio, Institutional Value Equity Portfolio, Institutional Small
Company Equity Portfolio, Institutional Defensive Limited Volatility Bond
Portfolio, Institutional Intermediate Limited Volatility Bond Portfolio,
Institutional Active Value Bond Portfolio, Institutional Long Duration Bond
Portfolio, Institutional Mortgage Investment Portfolio, Institutional Global
Bond Portfolio, Institutional International Bond Portfolio, and Institutional
Emerging Markets Fixed Income Portfolio. The Directors have reserved authority
to create, in the future, other series representing shares of additional
portfolios.
On any matter submitted to a vote of shareholders, all shares then
entitled to vote will be voted by Portfolio unless otherwise required by the
1940 Act, in which case all shares will be voted in the aggregate. For example,
a change in a Portfolio's fundamental investment policies would be voted upon
only by shareholders of the Portfolio involved. Additionally, approval of the
Investment Advisory Agreements is a matter to be determined separately by each
Portfolio. Approval by the shareholders of one Portfolio is effective as to that
Portfolio whether or not sufficient votes are received from the shareholders of
the other Portfolios to approve the proposal as to those Portfolios. As used in
the Prospectus and in this Statement of Additional Information, the term
"majority," when referring to approvals to be obtained from shareholders of a
Portfolio, means the vote of the lesser of (i) 67% or more of the voting
securities of the Portfolio represented at a meeting if the holders of more than
50% of the outstanding voting securities of the Portfolio are present in person
or represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Portfolio. The term "majority," when referring to the
approvals to be obtained from shareholders of the Company as a whole, means the
vote of the lesser of (i) 67% of the Company's shares represented at a meeting
if the holders of more than 50% of the outstanding shares are present in person
or represented by proxy, or (ii) more than 50% of the Company's outstanding
shares. Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held.
Each share of a Portfolio represents an equal proportional interest in
that Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Portfolio
as are declared in the discretion of the Directors. In the event of the
liquidation or dissolution of the Company, shares of a Portfolio are entitled to
receive the assets attributable to that Portfolio that are available for
distribution, and a distribution of any general assets not attributable to a
particular Portfolio that are available for distribution in such manner and on
such basis as the Directors in their sole discretion may determine.
16
<PAGE>
Shareholders are not entitled to any pre-emptive rights. All shares,
when issued, will be fully paid and non-assessable by the Company.
INVESTMENT ADVISER
(See "Company Organization--Investment Adviser" in the Portfolio's Prospectus)
The Company retains Scudder, Stevens & Clark, Inc. (the "Adviser") as
investment adviser on behalf of the Portfolio pursuant to an Investment Advisory
Agreement (the "Agreement"). The Adviser is one of the most experienced
investment counsel firms in the U.S. It was established in 1919 as a partnership
and was restructured as a Delaware corporation in 1985. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice, and the firm derives no income from banking, brokerage, or
underwriting of securities. A subsidiary of the Adviser, Scudder Investor
Services, Inc. (the "Distributor"), acts as principal underwriter for shares of
registered open-end investment companies. The Adviser provides investment
counsel for many individuals and institutions, including insurance companies,
endowments, industrial corporations and financial and banking organizations. As
of December 31, 1995, the Adviser and its affiliates had in excess of $100
billion under their supervision.
The Adviser maintains a research department with more than 50
professionals, which conducts continuous studies of the factors that affect
various industries, companies and individual securities in the U.S. as well as
abroad. In this work the Adviser utilizes reports, statistics and other
investment information from a wide variety of sources, including brokers and
dealers who may execute portfolio transactions for the Portfolio and for other
clients of the Adviser. Investment decisions, however, are based primarily on
investigations and critical analyses by the Adviser's own research specialists
and portfolio managers.
The Adviser may give advice and take action with respect to any of its
other clients, which may differ from advice given or from the time or nature of
action taken with respect to the Portfolio. If these clients and the Portfolio
are simultaneously buying or selling a security with a limited market, the price
may be adversely affected. In addition, the Adviser may, on behalf of other
clients, furnish financial advice or be involved in tender offers or merger
proposals relating to companies in which the Portfolio invests. The best
interests of the Portfolio may or may not be consistent with the achievement of
the objectives of the other persons for whom the Adviser is providing advice or
for whom they are acting. Where a possible conflict is apparent, the Adviser
will follow whatever course of action is in its judgment in the best interests
of the Portfolio. The Adviser may consult independent third persons in reaching
its decision.
Under the Agreement, it is the responsibility of the Adviser, subject
to the supervision of the Board of Directors, to manage the Portfolio's
investments in conformity with the stated policies of the Portfolio by providing
supervision of its investments, including the acquisition, holding or disposal
of securities for the Portfolio, and by effecting purchase and sale orders for
securities of the Portfolio. Under the Agreement, the Adviser also furnishes the
Portfolio with certain bookkeeping, accounting and certain administrative
services which are not furnished by the Custodian or Scudder Fund Accounting
Corporation, a subsidiary of the Adviser, office space and equipment, and the
services of the officers and employees of the Company. The Adviser has
authorized any of its managing directors, officers and employees who have been
elected as Directors or officers of the Company to serve in the capacities to
which they have been elected.
The Portfolio will bear all expenses not specifically assumed by the
Adviser under the terms of the Agreement. Such expenses will include without
limitation: (a) organization expenses of the Portfolio; (b) clerical salaries;
(c) fees and expenses incurred by the Portfolio in connection with membership in
investment company organizations; (d) brokerage and other expenses of executing
portfolio transactions; (e) payment for portfolio pricing services to a pricing
agent, if any; (f) legal, auditing or accounting expenses; (g) trade association
dues; (h) taxes or governmental fees; (i) the fees and expenses of the transfer
agent of the Portfolio; (j) the cost of preparing share certificates or any
other expenses, including clerical expenses of issue, redemption or repurchase
of shares of the Portfolio; (k) the expenses and fees for registering and
qualifying securities for sale; (l) the fees and expenses of directors of the
Company who are not employees or affiliates of the Adviser or any of its
affiliates; (m) travel expenses of all officers, directors and employees; (n)
insurance premiums; (o) the cost of preparing and distributing reports and
notices to shareholders; (p) public and investor relations expenses; or (q) the
fees or disbursements of custodians of the Portfolio's assets, including
expenses incurred in the performance of any obligations enumerated by the
Articles of Incorporation or By-Laws insofar as they govern agreements with any
such custodian. No sales or promotional expenses are incurred by the Company,
17
<PAGE>
but expenses incurred in complying with laws relating to the issue or sale of
the Portfolio's shares are not deemed sales or promotional expenses.
For these services the Portfolio pays the Adviser a fee equal to 0.90%
of the Portfolio's average daily net assets. Management fees are computed daily
and paid monthly. The Adviser has agreed to maintain the total annualized
expenses of the Portfolio at no more than 0.95% of the average daily net assets
of the Portfolio until April 30, 1997.
The Agreement provides that if, in any fiscal year, the "total
expenses" of the Portfolio ("total expenses" generally excludes taxes, interest,
brokerage commission and other portfolio transaction expenses, other
expenditures that are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses, but including the management
fee) exceed the expense limitations applicable to the Portfolio imposed by the
securities regulations of any state, the Adviser will pay or reimburse the
Portfolio for the excess. The Agreement, however, limits such payment or
reimbursement to the amount of the annual management fee otherwise payable by
the Portfolio. It is believed that currently the most restrictive state annual
expense limitation is 2.5% of the first $30,000,000 of average daily net assets,
2% of the next $70,000,000 and 1.5% of average daily net assets over
$100,000,000.
The Agreement will continue in effect with respect to the Portfolio if
specifically approved annually by a majority of the Directors of the Company,
including a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Agreement may be terminated without
penalty by either of the parties on 60 days' written notice and must terminate
in the event of its assignment. The Agreement may be amended or modified only if
approved by vote of the holders of the majority of the Portfolio's outstanding
shares as defined in the 1940 Act.
The Agreement provides that the Adviser is not liable for any act or
omission in the course of or in connection with rendering services under the
Agreement in the absence of willful misfeasance, bad faith or gross negligence
of its obligations or duties.
The Adviser places orders for the purchase and sale of securities for
the Portfolio. The Company will not deal with the Adviser in any transaction in
which the Adviser acts as principal.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser'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 Portfolio. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of
the Company for the past five years are listed below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Position with
Position with Underwriter, Scudder
Name (Age) and Address Company Principal Occupation** Investor Services, Inc.
- ---------------------- -------------- ---------------------- -----------------------
Daniel Pierce (62)+*# President and Chairman of the Board and Vice President, Director
Director Managing Director of and Assistant Treasurer
Scudder, Stevens & Clark,
Inc.
18
<PAGE>
Position with
Position with Underwriter, Scudder
Name (Age) and Address Company Principal Occupation** Investor Services, Inc.
- ---------------------- -------------- ---------------------- -----------------------
David S. Lee (62)+*# Chairman of the Managing Director of President, Director and
Board and Director Scudder, Stevens & Clark, Assistant Treasurer
Inc.
Edgar R. Fiedler (66)# Director Vice President and Economic --
50114 Manly Counselor, The Conference
Chapel Hill, NC 27514 Board, Inc.
Peter B. Freeman (63) Director Corporate Director and --
100 Alumni Avenue Trustee
Providence, RI 02906
Robert W. Lear (78) Director Executive-in-Residence, --
429 Silvermine Road Visiting Professor, Columbia
New Canaan, CT 06840 University Graduate School
of Business
K. Sue Cote (34)+ Vice President Principal of Scudder, --
Stevens & Clark, Inc.
Jerard K. Hartman (63)++ Vice President Managing Director of --
Scudder, Stevens & Clark,
Inc.
Thomas W. Joseph (56)+ Vice President and Principal of Scudder, Vice President,
Assistant Secretary Stevens & Clark, Inc. Director, Treasurer and
Assistant Clerk
Kathryn L. Quirk (43)++ Vice President Managing Director of Vice President
Scudder, Stevens & Clark,
Inc.
Thomas F. McDonough (49)+ Vice President and Principal of Scudder, Clerk
Assistant Secretary Stevens & Clark, Inc.
Pamela A. McGrath (42)+ Vice President Managing Director of --
and Treasurer Scudder, Stevens & Clark,
Inc.
Irene McC. Pelliconi# (65)++ Secretary Vice President of Scudder, --
Stevens & Clark, Inc.
<FN>
* Messrs. Lee and Pierce are considered by the Company to be persons who are "interested persons" of the
Adviser or of the Company (within the meaning of the 1940 Act).
** All the Directors and officers have been associated with their respective companies for more than five years,
but not necessarily in the same capacity.
# Messrs. Pierce, Fiedler and Lee are members of the Executive Committee.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
</FN>
</TABLE>
19
<PAGE>
Directors of the Company not affiliated with the Adviser receive from
the Company an annual fee and a fee for each Board of Directors and Board
Committee meeting attended and are reimbursed for all out-of-pocket expenses
relating to attendance at such meetings. Directors who are affiliated with the
Adviser do not receive compensation from the Company, but the Company may
reimburse such Directors for all out-of-pocket expenses relating to attendance
at meetings.
The Directors and officers of the Company, as a group, owned less than
1% of the outstanding shares of the Portfolio as of the commencement of
operations.
REMUNERATION
Several of the officers and Directors of the Company may be officers or
employees of the Adviser, Scudder Fund Accounting Corporation, Scudder Investor
Services, Inc., Scudder Service Corporation or Scudder Trust Company, from whom
they receive compensation, as a result of which they may be deemed to
participate in the fees paid by the Company. The Portfolio pays no direct
remuneration to any officer of the Company. However, each of the Company's
Directors who is not affiliated with the Adviser will be compensated for all
expenses relating to Company business (specifically including travel expenses
relating to Company business). Each of these unaffiliated Directors receives
from the Company compensation of $150 per Portfolio for each Director's meeting
attended and each Board Committee meeting attended and an annual Director's fee,
payable quarterly, of $500 for each Portfolio with average daily net assets less
than $100 million, and $1500 for each Portfolio with average daily net assets in
excess of $100 million.
The following Compensation Table, provides in tabular form, the following data.
Column (1) All Directors who receive compensation from the Company.
Column (2) Aggregate compensation received by a Director from all Portfolios of
the Company.* Columns (3) and (4) Pension or retirement benefits accrued or
proposed to be paid by the Company. Column (5) Total compensation received by a
Director from the Company plus compensation received from all funds managed by
the Adviser for which a Director serves. The total number of funds from which a
Director receives such compensation is also provided in column (5). Generally,
compensation received by a Director for serving on the board of a closed-end
fund is greater than the compensation received by a Director for serving on the
board of an open-end fund.
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1995**
<S> <C> <C> <C> <C> <C>
========================= ============================= ================== ================= ====================
(1) (2) (3) (4) (5)
Pension or Total Compensation
Retirement From Company and
Benefits Accrued Estimated Company Complex
As Part of Annual Benefits Paid to Director
Name of Person, Position Aggregate Compensation from Company Expenses Upon Retirement
Company*
========================= ============================= ================== ================= ====================
Edgar R. Fiedler,*** $22,400 N/A N/A $33,570
Director (6 Funds)
Peter B. Freeman, $11,766 N/A N/A $126,750
Director (31 Funds)
Robert W. Lear, $11,766 N/A N/A $40,850
Director (10 Funds)
<FN>
* Scudder Institutional Fund, Inc. consists of Institutional Government Portfolio, Institutional Federal
Portfolio, Institutional Cash Portfolio, Institutional Tax-Free Portfolio and Institutional International
Equity Portfolio.
** Institutional International Equity Portfolio commenced operations on April 3, 1996.
20
<PAGE>
*** Mr. Fiedler received $22,400 through a deferred compensation program. As of December 31, 1995, Mr. Fiedler
had a total of $206,003 accrued in a deferred compensation program for serving on the Board of Directors of
the Company. Mr. Fiedler also as of December 31, 1995 had a total of $208,215 accrued in a deferred
compensation program for serving on the Board of Directors for Scudder Fund, Inc. (which has five active
funds).
</FN>
</TABLE>
DISTRIBUTOR
(See "Company Organization--Distributor" in the Portfolio's Prospectus)
Pursuant to a contract with the Portfolio, Scudder Investor Services,
Inc. (the "Distributor"), a subsidiary of the Adviser, serves as the Company's
principal underwriter in connection with a continuous offering of shares of the
Portfolio. The Distributor receives no remuneration for its services as
principal underwriter and is not obligated to sell any specific amount of
Company shares. As principal underwriter, it accepts purchase orders for shares
of the Portfolio. In addition, the Underwriting Agreement obligates the
Distributor to pay certain expenses in connection with the offering of the
shares of the Portfolio. After the Prospectuses and periodic reports have been
prepared, set in type and mailed to shareholders, the Distributor will pay for
the printing and distribution of copies thereof used in connection with the
offering to prospective investors. The Distributor will also pay for
supplemental sales literature and advertising costs.
TAXES
(See "Distribution and Performance Information--Taxes"
in the Portfolio's Prospectus.)
The Prospectus describes generally the tax treatment of distributions
by the Portfolio. This section of the Statement includes additional information
concerning federal taxes.
The Portfolio has elected to be treated as a regulated investment
company under Subchapter M of the Code, or a predecessor statute. As a regulated
investment company, the Portfolio is required to distribute to its shareholders
at least 90 percent of its investment company taxable income (including net
short-term capital gain) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
The Portfolio is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Portfolio's ordinary income for the calendar
year, at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 during such year, and all ordinary income and capital gains
for prior years that were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of the Portfolio.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, the
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim a proportionate
share of federal income taxes paid by the Portfolio on such gains as a credit
against the shareholder's federal income tax liability, and will be entitled to
increase the adjusted tax basis of the shareholder's Portfolio shares by the
difference between the shareholder's pro rata share of such gains and the
shareholder's tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are not expected to comprise a
substantial part of the Portfolio's gross income. If any such dividends
constitute a portion of the Portfolio's gross income, a portion of the income
distributions of the Portfolio may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
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extent the shares of the Portfolio with respect to which the dividends are
received are treated as debt-financed under federal income tax law and is
eliminated if either those shares or the shares of the Portfolio are deemed to
have been held by the Portfolio or the shareholders, as the case may be, for
less than 46 days.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Portfolio have been held by
such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares may result in tax consequences (gain
or loss) to the shareholder and are also subject to these reporting
requirements.
An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individual's earned income for any taxable year
only if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($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; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Portfolio result in a reduction in the net asset
value of the Portfolio's shares. Should a distribution reduce the net asset
value below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder as ordinary income or capital gain as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
The Portfolio intends to qualify for and may make the election
permitted under Section 853 of the Code so that shareholders may (subject to
limitations) be able to claim a credit or deduction on their federal income tax
returns for, and will be required to include in gross income (in addition to
distributions actually received), their pro rata portion of qualified taxes paid
by the Portfolio to foreign countries (which taxes relate primarily to
investment income). The Portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the total assets of the
Portfolio at the close of the taxable year consists of securities in foreign
corporations. The foreign tax credit available to shareholders is subject to
certain limitations imposed by the Code.
If the Portfolio does not make the election permitted under section 853
any foreign taxes paid or accrued will represent an expense to the Portfolio
which will reduce its investment company taxable income. Absent this election,
shareholders will not be able to claim either a credit or a deduction for their
pro rata portion of such taxes paid by the Portfolio, nor will shareholders be
required to treat as part of the amounts distributed to them their pro rata
portion of such taxes paid.
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Equity options (including covered call options written on portfolio
stock) and over-the-counter options on debt securities written or purchased by
the Portfolio will be subject to tax under Section 1234 of the Code. In general,
no loss will be recognized by the Portfolio 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 Portfolio's holding period for the
option, and in the case of the exercise of a put option, on the Portfolio's
holding period for the underlying property. The purchase of a put option may
constitute a short sale for federal income tax purposes, causing an adjustment
in the holding period of any stock in the Portfolio's portfolio similar to the
stocks on which the index is based. If the Portfolio writes an 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 short-term capital gain or loss. If a call
option is exercised, the character of the gain or loss depends on the holding
period of the underlying stock.
Positions of the Portfolio which consist of at least one stock and at
least one stock option or other position with respect to a related security
which substantially diminishes the Portfolio'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 stocks or securities and conversion of short-term capital
losses into long-term capital losses. An exception to these straddle rules
exists for certain "qualified covered call options" on stock written by the
Portfolio.
Many futures and forward contracts entered into by the Portfolio and
listed nonequity options written or purchased by the Portfolio (including
options on debt securities, options on futures contracts, options on securities
indices and options on currencies), will be governed by Section 1256 of the
Code. Absent a tax election to the contrary, gain or loss attributable to the
lapse, exercise or closing out of any such position generally will be treated as
60% long-term and 40% short-term, and on the last trading day of the Portfolio's
fiscal year, all outstanding Section 1256 positions will be marked to market
(i.e., treated as if such positions were closed out at their closing price on
such day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term. Under Section 988 of the Code, discussed below, foreign currency
gain or loss from foreign currency-related forward contracts, certain futures
and options and similar financial instruments entered into or acquired by the
Portfolio will be treated as ordinary income or loss.
Subchapter M of the Code requires the Portfolio to realize less than
30% of its annual gross income from the sale or other disposition of stock,
securities and certain options, futures and forward contracts held for less than
three months. The Portfolio's options, futures and forward transactions may
increase the amount of gains realized by the Portfolio that are subject to this
30% limitation. Accordingly, the amount of such transactions that the Portfolio
may undertake may be limited.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Portfolio accrues receivables or
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
options, futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If the Portfolio invests in stock of certain foreign investment
companies, the Portfolio 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 Portfolio's holding period for
the stock. The distribution or gain so allocated to any taxable year of the
Portfolio, other than the taxable year of the excess distribution or
disposition, would be taxed to the Portfolio 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 Portfolio's investment company taxable income and, accordingly,
would not be taxable to the Portfolio to the extent distributed by the Portfolio
as a dividend to its shareholders.
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Proposed regulations have been issued which may allow the Portfolio 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 Portfolio would report
as ordinary income the amount by which the fair market value of the foreign
company's stock exceeds the Portfolio's adjusted basis in these shares. No mark
to market losses would 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 Portfolio 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.
Investments by the Portfolio in original issue discount obligations
will result in income to the Portfolio equal to a portion of the excess of the
face value of the obligations over issue price (the "original issue discount")
each year that the obligations are held, even though the Portfolio receives no
cash interest payments. This income is included in determining the amount of
income which the Portfolio must distribute to maintain its status as a regulated
investment company and to avoid federal income and excise taxes. If the
Portfolio invests in certain high yield original issue discount obligations
issued by corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Portfolio by its corporate shareholders, to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
the Portfolio in a written notice to shareholders.
The Portfolio will be required to report to the IRS all distributions
of investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Portfolio shares, except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, distributions of investment company taxable income and capital
gains and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if a Portfolio is notified by the IRS or a
broker that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Shareholders of the Portfolio may be subject to state and local taxes
on distributions received from the Portfolio and on redemptions of the
Portfolio's shares.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Portfolio, including the possibility
that such a shareholder may be subject to a U.S. withholding tax at a rate of
30% (or at a lower rate under an applicable income tax treaty) on amounts
constituting ordinary income received by him or her, where such amounts are
treated as income from U.S. sources under the Code.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
To the maximum extent feasible, the Adviser places orders for portfolio
transactions for the Portfolio through the Distributor which in turn places
orders on behalf of the Portfolio with issuers, underwriters or other brokers
and dealers. The Distributor receives no commissions, fees or other remuneration
from the Portfolio for this service. Allocation of brokerage is supervised by
the Adviser.
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The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Portfolio is to obtain the most favorable net
results taking into account such factors as price, commission where applicable
(negotiable in the case of U.S. national securities exchange transactions but
generally fixed in the case of foreign exchange transactions) size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Portfolio to reported commissions paid by others. The
Adviser reviews on a routine basis commission rates, execution and settlement
services performed, making internal and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply market quotations to the Custodian for appraisal
purposes, or who supply research, market and statistical information to the
Portfolio. The term "research, market and statistical information" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is not authorized when placing
portfolio transactions for the Portfolio to pay a brokerage commission (to the
extent applicable) 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 Adviser will not place orders with
brokers or dealers on the basis that the broker or dealer has or has not sold
shares of the Portfolio. Except for implementing the policy stated above, there
is no intention to place portfolio transactions with particular brokers or
dealers or groups thereof. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Portfolio and to the Adviser, it is the
opinion of the Adviser that such information will only supplement the Adviser's
own research effort since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Portfolio, and not all such
information will be used by the Adviser in connection with the Portfolio.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolio.
The Directors intend to review whether the recapture for the benefit of
the Portfolio of some portion of the brokerage commissions or similar fees paid
by the Portfolio on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
The Portfolio's average annual portfolio turnover rate is the ratio of
the lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. A higher rate
involves greater brokerage transaction expenses to the Portfolio and may result
in the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for the Portfolio whenever
necessary, in management's opinion, to meet the Portfolio's objective. Under
normal investment conditions, it is anticipated that the portfolio turnover rate
will not exceed 100% for the initial fiscal year.
NET ASSET VALUE
The net asset value of shares of the Portfolio 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 Portfolio, 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
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"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 high or "inside" bid quotation. The value of an equity security not
quoted on the NASDAQ System, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Portfolio's pricing agent(s) which reflect broker/dealer
supplied valuations and electronic data processing techniques. Short-term
securities 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.
If, in the opinion of the Company'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 Portfolio 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 Highlights of the Portfolio will be included in the
Prospectus and the Financial Statement is included in this Statement of
Additional Information in reliance on the report of Price Waterhouse LLP,
independent accountants, and given upon their authority as experts in accounting
and auditing.
Other Information
The CUSIP number of the Portfolio is 811161-88-4.
The Portfolio has a fiscal year end of December 31.
The law firm of Sullivan and Cromwell is counsel to the Company and the
law firm of Dechert Price and Rhoads acts as special counsel to the Portfolio.
Price Waterhouse LLP are the independent accountants for the Portfolio.
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Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, computes net
asset value for the Portfolio. The Portfolio pays SFAC an annual fee equal to
0.065% of the first $150 million of average daily net assets, 0.040% of the next
$850 million, and 0.020% of such assets in excess of $1 billion, plus holding
and transaction charges for this service.
Scudder Service Corporation (the "Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for the Portfolio and as such
performs the customary services of a transfer agent and dividend disbursing
agent. These services include, but are not limited to: (i) receiving for
acceptance in proper form orders for the purchase or redemption of Portfolio
shares and promptly effecting such orders; (ii) recording purchases of Portfolio
shares and, if requested, issuing stock certificates; (iii) reinvesting
dividends and distributions in additional shares or transmitting payments
therefor; (iv) receiving for acceptance in proper form transfer requests and
effecting such transfers; (v) responding to shareholder inquiries and
correspondence regarding shareholder account status; (vi) reporting abandoned
property to the various states; and (vii) recording and monitoring daily the
issuance in each state of shares of the Portfolio. The Service Corporation
applies a minimum annual charge of $220,000 for servicing all Portfolios of the
Company. An activity fee is charged on a monthly basis for the shareholder
accounts serviced. The difference between the activity fees charged and the
annual $220,000 minimum is allocated among all the Portfolios based on relative
net assets.
The Portfolio's Prospectus and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments which the Portfolio has filed with the SEC under the Securities Act
of 1933 and reference is hereby made to the Registration Statement for further
information with respect to the Portfolio and the securities offered hereby. The
Registration Statement and its amendments are available for inspection by the
public at the SEC in Washington, D.C.
The Portfolio employs Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109, as Custodian.
Costs of $27,500 incurred by the Portfolio in conjunction with its
organization are amortized over the five year period beginning April 3, 1996.
No Portfolio of the Company shall be liable for the obligations of any
other Portfolio of the Company.
FINANCIAL STATEMENTS
The Statement of Assets and Liabilities as of April 1, 1996 and the
Report of Independent Accountants are included herein.
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APPENDIX
The following is a description of the ratings given by Moody's and S&P
to corporate bonds.
Ratings of Corporate Bonds
S&P: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
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 debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
which are 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.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities. Bonds which are rated
A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated Ba are
<PAGE>
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
April 1, 1996
Assets
Cash................................................ $1,200
Deferred organization expenses (Note)............... 27,500
--------
Total assets........................................ 28,700
--------
Liabilities
Accrued liabilities (Note).......................... 27,500
--------
Total liabilities................................... 27,500
--------
Net Assets............................................ $1,200
========
Net Assets consist of:
Shares of beneficial interest, at par............... 0
Additional paid-in capital.......................... 1,200
--------
Net Assets............................................ $1,200
========
Net asset value, offering price per share
(Applicable to 100 shares of $.001 par value
Capital Stock outstanding; 100,000,000 shares
authorized)........................................... $12.00
========
The accompanying note is an integral part of the financial statement.
Institutional International Equity Portfolio (the "Portfolio") is a series of
Scudder Institutional Fund, Inc. (the "Company"), a no-load, open-end,
diversified, management investment company. The Company was formed on January 2,
1986 as a corporation under the laws of the State of Maryland. The authorized
capital stock of the Company consists of 25,000,000,000 shares having a par
value of $.001 per share, of which 5,000,000,000 shares each have been
designated for the Government Portfolio, Federal Portfolio and Cash Portfolio,
2,000,000,000 shares have been designated for the Tax-Free Portfolio and
100,000,000 have been designated for the International Equity Portfolio. The
Company is authorized to issue full and fractional shares in separate series.
The Portfolio has had no operations to date other than matters relating to its
organization as a diversified series and the sale and issuance of 100 shares of
its common stock for $1,200 to Scudder, Stevens, & Clark, Inc., the investment
adviser.
Costs incurred by the Portfolio in connection with its organization, estimated
at $27,500, will be amortized on a straight-line basis over a five-year period
beginning at the commencement of operations of the Portfolio. In the event that
any of the initial shares of the Portfolio are redeemed during the amortization
period, the redemption proceeds will be reduced by any unamortized organization
expense in the same proportion as the number of shares being redeemed bears to
the number of initial shares outstanding at the time of such redemption.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of Institutional
International Equity Portfolio:
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of
Institutional International Equity Portfolio, which constitutes part of the
Scudder Institutional Fund, Inc., at April 1, 1996 in conformity with generally
accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit of this financial statement in accordance
with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
April 2, 1996
