SCUDDER
Seeking to increase your capital
over the long term by investing
primarily in U.S. micro-cap
common stocks.
Pure no-load(TM)/No sales charges
Scudder
Micro Cap
Fund
(048)
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
Prospectus
January 1, 1999
The Securities and Exchange
Commission has not approved or
disapproved these securities or
passed upon the adequacy of this
prospectus. Any representation to
the contrary is a criminal offense.
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Contents
1 Fund Summary
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An overview of the
fund's goal and
strategy, main risks,
performance and
expenses
4 About The Fund
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Additional information 4 Principal strategies, investments and
that you should know additional principal risks
about the fund
7 A message from the President
8 Investment adviser
8 Portfolio management
9 Distributions
10 Taxes
11 Financial highlights
12 About Your Investment
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Information about 12 Transaction information
managing your fund
account 13 Buying and selling shares
14 Purchases
15 Exchanges and redemptions
16 Investment products and services
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Fund Summary
Investment objectives and principal strategies
Scudder Micro Cap Fund pursues long-term growth of capital by investing
primarily in micro-cap common stocks. The micro-cap sector represents the stocks
of America's smallest public companies -- companies with a stock market value
(or "market capitalization") of approximately $200 million or less. The
companies that normally comprise this sector include companies that may be in
the earliest stages of development, that offer unique products, services or
technologies, or that serve special or rapidly expanding niches. The fund
normally invests at least 80% of its assets in U.S. micro-cap common stocks.
Except as otherwise indicated, the fund's investment objective and policies may
be changed without a vote of shareholders.
The fund uses a disciplined strategy in pursuing its objective. This strategy
attempts to uncover micro-cap stocks that are undervalued, while controlling the
overall risk of the fund. In addition, the fund attempts to manage its risk
exposure by, among other things, investing in hundreds of micro-cap companies
across a broad range of U.S. industries. This fund may be appropriate for the
aggressive portion of a long-term investor's portfolio. It should not be viewed
as a complete investment program.
When total assets reach $150 million, the fund currently intends to close to new
individual investors. The fund believes that by limiting its assets it will be
in a position to react more quickly to new investment opportunities and remain
focused on only the most promising micro-cap stocks. It is expected that shares
of the fund will continue to be available to existing shareholders, as well as
certain retirement plans and investors of Personal Counsel from Scudder.
Principal risks
The principal risks of investing in the fund are stock market risk and, more
specifically, the risks associated with investing in micro-cap stocks.
As with all investments in the stock market, the fund's returns and net asset
value will go up and down, and it is possible to lose money invested in the
fund. Stock market movements will affect the fund's share price on a daily
basis. Declines are possible both in the overall stock market and in the value
of the types of securities held by the fund. In addition, the portfolio
management team's strategy and skill in choosing appropriate investments for the
fund will determine in large part the fund's ability to achieve its objective.
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In pursuit of higher investment returns, this fund may incur greater risks and
more dramatic fluctuations in value than a fund that invests in stocks of larger
companies. The inherent business characteristics and risks of micro-cap
companies include such things as untested management, less diversified product
lines and weaker financial positions. Also, micro-cap companies tend to have
less predictable earnings and less liquid securities than more established
companies. Therefore, this fund is suitable for long-term investors that have a
high degree of risk tolerance.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total return for year ended December 31
[GRAPHIC OMITTED]
1997 35.19%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 20.46% (the third quarter of 1997), and the fund's lowest
return for a calendar quarter was -3.46% (the fourth quarter of 1997).
The fund's year-to-date total return as of September 30, 1998 was -17.10%.
Average annual total returns
For periods ended
December 31, 1997 Fund Russell 2000 Index
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One Year 35.19% 22.36%
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Since Inception (8/12/96) 31.72% 24.37%*
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* Index comparisons begin on August 31, 1996.
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The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees or expenses.
Fee and expense information
Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund.
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Shareholder fees: Fees paid directly from your investment.
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Maximum sales charge (load) imposed on purchases (as % of
offering price) NONE
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Maximum deferred sales charge (load) NONE
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Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
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Redemption fee (as % of amount redeemed, if applicable) 1.00%*
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Exchange fee 1.00%*
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Annual fund operating expenses (expenses that are deducted from fund
assets):
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Management fee 0.75%
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Distribution (12b-1) fees NONE
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Other expenses 0.64%
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Total annual fund operating expenses 1.39%
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* There is a 1% fee retained by the fund which is imposed only on
redemptions or exchanges of shares held less than one year. You may redeem
by writing or calling the fund. If you wish to receive your redemption
proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "About Your Investment-- Exchanges and
Redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
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One Year $ 142
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Three Years $ 440
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Five Years $ 761
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Ten Years $ 1,669
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Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
About The Fund
Principal strategies, investments and additional principal risks
Principal strategies and investments
The fund attempts to achieve its objective by investing predominantly in U.S.
micro-cap common stocks. The median market value of the companies in the fund's
portfolio is not expected to exceed $125 million. The fund's portfolio
management team follows a disciplined strategy that focuses on selecting stocks
using a value style of investing while attempting to manage the overall risks of
the fund.
Disciplined investment strategy -- The fund uses a disciplined approach to
determine when to buy and sell a stock. Under normal market conditions, the fund
expects to be more than 80% invested in securities selected from among the more
than 4,000 publicly-traded U.S. micro-cap stocks based on a proprietary,
quantitative investment strategy. This strategy systematically analyzes the
return potential of micro-cap stocks and the effect that these stocks would have
on the overall risk of the fund's portfolio in order to identify attractive
investment opportunities for the fund.
Similarly, the fund is also committed to using a disciplined approach in
deciding when to sell a stock. A stock is typically sold when it is no longer
considered to be a "micro-cap" stock or when it becomes overvalued.
Value style investing -- The fund uses a value-oriented approach to selecting
micro-cap stocks -- that is, the fund's portfolio management team looks for
micro-cap stocks that appear to be undervalued. A stock is undervalued if its
stock price does not reflect its potential worth in the portfolio management
team's opinion.
The fund uses a proprietary computer model to comb through the financial data of
each micro-cap company in order to analyze such factors as earning trends,
valuation measures and financial strength, and to rank these companies based on
their return potential. The fund's portfolio management team considers both
return potential and diversification when selecting stocks it believes will
enable the fund to meet its objective.
Because of their small size and less frequent trading activities, micro-cap
stocks are often overlooked or not closely followed by investors. Therefore, the
stock price of a micro-cap company often does
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not adequately reflect its growth potential. As the business fundamentals of a
micro-cap company improve, its stock price may rise significantly. For example,
stock prices are often affected when a company's earnings exceed general
expectations or when investors begin to appreciate the full extent of a
company's business potential.
Managing overall risk -- Managing the risk exposure of the fund is an important
component of the fund's investment strategy. The fund attempts to control risk
at both the security and the portfolio level. At the security level, the fund
focuses on selecting undervalued stocks, which typically provide a degree of
downside protection relative to other micro-cap stocks. In addition, the
portfolio management team attempts to further control the fund's individual
security risk exposure by building a diversified portfolio that generally
consists of hundreds of micro-cap stocks, representing a broad cross-section of
U.S. industries. Typically, the fund limits purchases of a particular security
to no more than 2% of the fund's assets.
The fund also uses risk management software to assess the expected volatility of
its portfolio and the anticipated impact of different securities on the fund's
risk level. Although the fund cannot eliminate the above-average risks of
investing in micro-cap stocks, this risk management strategy may enable the fund
to experience less share price volatility than the micro-cap sector of the U.S.
stock market.
From time to time, the fund may invest, without limit, in cash and cash
equivalents for temporary defensive purposes. Because this defensive policy
differs from the fund's investment objective, the fund may not achieve its goal
during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about these and other investments and strategies of the fund is
provided in the Statement of Additional Information. Of course, there can be no
guarantee that, by following these investment strategies, the fund will achieve
its objective.
Additional principal risks
Micro-cap risk. While micro-cap stocks have historically outperformed large
company stocks, they also have been subject to greater investment risk. The
special risks generally associated with micro-cap companies include more limited
product lines, markets and financial resources, lack of management depth or
experience, dependency on key personnel and vulnerability to adverse market and
economic developments. Accordingly, the prices of micro-cap stocks tend to be
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more volatile than prices of large-cap stocks. Further, the prices of micro-cap
stocks are often adversely affected by limited trading volumes and the lack of
publicly available information.
Also, because micro-cap companies normally have fewer shares outstanding and
these shares generally trade less frequently than large companies, it may be
more difficult for the fund to buy and sell significant amounts of micro-cap
shares without having an unfavorable impact on the shares' stock market price.
Equity investing risk. An investment in the common stock of a company represents
a proportionate ownership interest in that company. Therefore, the fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on investment. However, the market value of common stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless.
Value investing risk. The determination that a stock is undervalued is
subjective; the market may not agree, and a stock's price may not rise to what
the portfolio management team believes is its full value. It may even decrease
in value. However, because of the fund's focus on undervalued stocks, the fund's
downside risk may be less than with other micro-cap stocks since value stocks
are in theory already underpriced.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of offsetting a fund's real return.
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A message from the President
[PHOTO OMITTED]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open- and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/ Edmond D. Villani
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Investment adviser
The fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), 345 Park Avenue, New York, NY, to manage the fund's daily
investment and business affairs subject to the policies established by the Board
of Trustees. The Adviser actively manages your investment in the fund.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities.
For the fiscal year ended August 31, 1998, the Adviser received an annual fee of
0.75% of the fund's daily net assets.
Portfolio management
The fund is managed by a team of investment professionals who each plays an
important role in the fund's management process. Team members work together to
develop investment strategies and select securities for the fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders and other investment specialists who work in the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits fund investors by bringing together many disciplines and
leveraging its extensive resources.
The following investment professionals are associated with the fund as
indicated:
Name and Title Joined the Fund Background
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Philip S. Fortuna 1996 Mr. Fortuna, who joined the Adviser
Co-Lead Manager in 1986 as a manager of
institutional equity accounts, has
oversight responsibility for the
fund's day-to-day management and
investment strategies. In addition
to his portfolio management
responsibilities, Mr. Fortuna is
currently director of the Adviser's
quantitative group.
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Name and Title Joined the Fund Background
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James M. Eysenbach 1996 Mr. Eysenbach, who joined the
Co-Lead Manager Adviser in 1991 as a senior
quantitative analyst, currently
manages quantitative equity products
and is responsible for the fund's
day-to-day management and investment
strategies. Mr. Eysenbach has more
than 11 years of investment
management experience, specializing
in quantitative research, analysis
and portfolio management.
Calvin S. Young 1998 Mr. Young joined the Adviser in 1990
Manager as a quantitative analyst. Since
1995 he has been providing
analytical support for the Adviser's
quantitative equity products. Mr.
Young has more than nine years of
investment industry experience, with
a special focus on small companies.
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Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
fund could be adversely affected if computer systems on which the fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. The risk is commonly called the Year 2000 issue.
Failure to successfully address the Year 2000 issue could result in
interruptions to and other material adverse effects on the fund's business and
operations, such as problems with calculating net asset value and difficulties
in implementing the fund's purchase and redemption procedures. The Adviser has
commenced a review of the Year 2000 issue as it may affect the fund and is
taking steps it believes are reasonably designed to address the Year 2000 issue,
although there can be no assurances that these steps will be sufficient. In
addition, there can be no assurances that the Year 2000 issue will not have an
adverse effect on the issuers whose securities are held by the fund or on global
markets or economies generally.
Distributions
Dividends and capital gains distributions
The fund intends to distribute dividends from its net investment income
annually, in November or December. The fund intends to distribute net realized
capital gains after utilization of capital loss
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carryforwards, if any, in November or December. An additional distribution may
be made at a later date, if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such 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.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a fund. If an investment is in the form of a
retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among funds are also taxable
events.
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable as ordinary income. A portion of dividends from
ordinary income may qualify for the dividends-received deduction for
corporations.
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
you owned the shares.
The fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year.
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
fund 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. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in the fund.
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Financial highlights
The financial highlights table is intended to help you understand the fund's
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single fund share outstanding throughout the
period (a). The total return figures represent the rate that an investor would
have earned (or lost) on an investment in the fund assuming reinvestment of all
dividends and distributions. This information has been audited by
PricewaterhouseCoopers LLP whose report, along with the fund's financial
statements, is included in the annual report, which is available upon request by
calling Scudder Investor Relations at 1-800-225-2470 or, for existing investors,
call the Scudder Automated Information Line (SAIL) at 1-800-343-2890.
Micro Cap Fund
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<TABLE>
<CAPTION>
For the Period
August 12, 1996
(commencement
Years Ended August 31, of operations) to
1998 1997 August 31, 1996
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<S> <C> <C> <C>
Net asset value, beginning -----------------------------------------
of period .............................. $ 16.77 $ 12.07 $ 12.00
-----------------------------------------
Income from investment operations:
Net investment income (loss) ............. (.08) (.03) .01
Net realized and unrealized gain
on investments ......................... (2.28) 4.74 .06
-----------------------------------------
Total from investment operations ......... (2.36) 4.71 .07
-----------------------------------------
Less distributions from:
Net investment income .................. -- (.02) --
Net realized gains from investment
transactions ........................... (.07) -- --
-----------------------------------------
Total distributions ...................... (.07) (.02) --
-----------------------------------------
Redemption fees .......................... .03 .01 --
-----------------------------------------
Net asset value, end of period ........... $ 14.37 $ 16.77 $ 12.07
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Total Return (%) ......................... (13.96) 39.10(b) .58(b)(c)**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ... 103 92 8
Ratio of operating expenses, net to
average daily net assets (%) ........... 1.39 1.75 1.75*
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ................... 1.39 2.19 22.06*
Ratio of net investment income (loss) to
average daily net assets (%) ........... (.44) (.21) 2.58*
Portfolio turnover rate (%) .............. 33.5 17.1 --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect to the shareholder of the 1%
redemption fee on shares held less than one year.
* Annualized
** Not annualized
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About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Net asset value per share is calculated by dividing the value of
total fund assets, less all liabilities, by the total number of shares
outstanding. Market prices are used to determine the value of the fund's assets.
If market prices are not readily available for a security or if a security's
price is not considered to be market indicative, that security may be valued by
another method that the Board or its delegate believes accurately reflects fair
value. In those circumstances where a security's price is not considered to be
market indicative, the security's valuation may differ from an available market
quotation.
Redemption fee
Upon the redemption or exchange of shares held less than one year, a fee of 1%
of the current net asset value of the shares will be assessed and retained by
the fund for the benefit of the remaining shareholders. The fee is waived for
all shares purchased through certain Scudder retirement plans, including 401(k)
plans, 403(b) plans, 457 plans, Keogh accounts, and Profit Sharing and Money
Purchase Pension Plans. However, if such shares are purchased through a broker,
financial institution or recordkeeper maintaining an omnibus account for the
shares, such waiver may not apply. (Before purchasing shares, please check with
your account representative concerning the availability of the fee waiver.) In
addition, this waiver does not apply to any IRA or SEP-IRA accounts. The fund
reserves the right to modify the terms of or terminate this fee at any time.
The fee applies to redemptions from the fund and exchanges to other Scudder
funds, but not to dividend or capital gains distributions which have been
automatically reinvested in the fund.
The fee is applied to the shares being redeemed or exchanged in the order in
which they were purchased.
Processing time
All purchase and redemption requests received in good order at the fund's
transfer agent by the close of regular trading on the Exchange are executed at
the net asset value per share calculated at the close of trading that day. All
other requests that are in good order will be executed the following business
day.
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Signature guarantees
A signature guarantee is required for redemptions over $100,000. You can obtain
a guarantee from most brokerage houses and financial institutions, although not
from a notary public. The fund will normally send redemption proceeds within one
business day following the redemption request, but may take up to seven business
days (or longer in the case of shares recently purchased by check). For more
information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent purchases and sales made in response
to short-term fluctuations in the fund's share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in the fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to the fund.
The fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Redemption-in-kind
The fund reserves the right to honor requests for redemption or repurchase
orders by making payment in whole or in part in readily marketable securities
("redemption in kind") if the amount of such a request is large enough to affect
operations (for example, if the request is greater than $250,000 or 1% of the
fund's assets). These securities will be chosen by the fund and valued as they
are for purposes of computing the fund's net asset value. A shareholder may
incur transaction expenses in converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For
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information about No-Fee IRAs, Roth IRAs and other retirement options, call
Scudder Investor Relations at 1-800-225-2470. For information on establishing
401(k) and 403(b) plans, call Scudder Defined Contribution Services at
1-800-323-6105.
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
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By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
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By Wire Call 1-800-225-5163 for instructions.
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In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston,
Chicago, New York and San Francisco.
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To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
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By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number and the
complete fund name, to the appropriate address listed above.
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By Wire Call 1-800-225-5163 for instructions.
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In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed above.
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By Phone Call 1-800-225-5163 for instructions.
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By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
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Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
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By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a day).
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By Mail Print or type your instructions and include:
or Fax - the name of the fund and class and the account number you
are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
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To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a
day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate address
or Fax or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
- --------------------------------------------------------------------------------
---
15
<PAGE>
Investment products and services
The Scudder Family of Funds[
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market Series -- Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series -- Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
- ---
16
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **[[
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
- -----------
[ Funds within categories are listed in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family
of Funds.
[[ A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on
the New York Stock Exchange and, in some cases, on various foreign stock
exchanges.
---
17
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of portfolio shares. The semiannual and
annual shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected the fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Phone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-2021
[PRINTED WITH SOY LOGO] [RECYCLE LOGO] Printed on recycled paper
335-2-19
PRO48199
<PAGE>
SCUDDER MICRO CAP FUND
A series of Scudder Securities Trust
A Pure No-Load(TM) (No Sales Charges) Diversified Mutual Fund
Seeking Long-Term Growth of Capital Through Investment
Primarily in a Diversified Portfolio of U.S. Micro-cap Stocks
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus. The
prospectus of Scudder Micro Cap Fund dated January 1, 1999, as amended from time
to time, may be obtained without charge by writing to Scudder Investor Services,
Inc., Two International Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders of the Scudder Micro Cap Fund dated
August 31, 1998 is incorporated by reference and is hereby deemed to be part of
this Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objective and Policies....................................................................1
Investments..................................................................................................1
Systematic Investment Approach...............................................................................1
Master/Feeder Structure......................................................................................2
Special Considerations.......................................................................................2
Large selection universe.....................................................................................2
Specialized Investment Techniques............................................................................5
Investment Restrictions.....................................................................................12
PURCHASES............................................................................................................14
Additional Information About Opening An Account.............................................................14
Minimum balances............................................................................................14
Additional Information About Making Subsequent Investments..................................................14
Additional Information About Making Subsequent Investments by QuickBuy......................................15
Checks......................................................................................................15
Wire Transfer of Federal Funds..............................................................................15
Share Price.................................................................................................16
Share Certificates..........................................................................................16
Other Information...........................................................................................16
EXCHANGES AND REDEMPTIONS............................................................................................16
Exchanges...................................................................................................16
Special Redemption and Exchange Information.................................................................17
Redemption by Telephone.....................................................................................18
Redemption by QuickSell.....................................................................................18
Redemption by Mail or Fax...................................................................................19
Redemption-in-Kind..........................................................................................19
Other Information...........................................................................................19
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................20
The Pure No-Load(TM)Concept.................................................................................20
Internet access.............................................................................................21
Dividends and Capital Gains Distribution Options............................................................22
Scudder Investor Centers....................................................................................22
Reports to Shareholders.....................................................................................22
Transaction Summaries.......................................................................................22
THE SCUDDER FAMILY OF FUNDS..........................................................................................22
SPECIAL PLAN ACCOUNTS................................................................................................27
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
Self-Employed Individuals..............................................................................27
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........28
Scudder IRA: Individual Retirement Account.................................................................28
Scudder Roth IRA: Individual Retirement Account............................................................29
Scudder 403(b) Plan.........................................................................................29
Automatic Withdrawal Plan...................................................................................29
Group or Salary Deduction Plan..............................................................................30
Automatic Investment Plan...................................................................................30
Uniform Transfers/Gifts to Minors Act.......................................................................30
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................31
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION..............................................................................................31
Average Annual Total Return.................................................................................31
Cumulative Total Return.....................................................................................32
Total Return................................................................................................32
Comparison of Fund Performance..............................................................................33
ORGANIZATION OF THE FUND.............................................................................................35
INVESTMENT ADVISER...................................................................................................36
Personal Investments by Employees of the Adviser............................................................39
TRUSTEES AND OFFICERS................................................................................................40
REMUNERATION.........................................................................................................42
Responsibilities of the Board --Board and Committee Meetings................................................42
Compensation of Officers and Trustees.......................................................................43
DISTRIBUTOR..........................................................................................................44
TAXES................................................................................................................44
PORTFOLIO TRANSACTIONS...............................................................................................48
Brokerage Commissions.......................................................................................48
Portfolio Turnover..........................................................................................49
NET ASSET VALUE......................................................................................................49
ADDITIONAL INFORMATION...............................................................................................50
Experts.....................................................................................................50
Shareholder Indemnification.................................................................................50
Other Information...........................................................................................50
FINANCIAL STATEMENTS.................................................................................................51
</TABLE>
ii
<PAGE>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES
(See "FUND SUMMARY - Investment Objectives and Strategies and
Principal Risks", and "ABOUT THE FUND - Principal Strategies,
Investments and Related Risks", in the Fund's prospectus.)
Scudder Micro Cap Fund (the "Fund") is a series of Scudder Securities
Trust (the "Trust"). The Fund is a pure no-load(TM), diversified, open-end
management investment companywhich continuously offers and redeems shares at net
asset value. Scudder Micro Cap Fund is a company of the type commonly known as a
mutual fund.
General Investment Objective and Policies
Scudder Micro Cap Fund seeks long-term growth of capital. The Fund
pursues its investment objective by investing primarily in a diversified
portfolio of U.S. micro-capitalization ("micro-cap") common stocks. These
domestic securities provide little or no current income but, in the opinion of
the Fund's investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"),
offer substantial long-term appreciation potential as well as the opportunity to
enhance the overall diversification of an investor's portfolio. Due to the
inherent business characteristics and risks of small companies, along with the
relatively limited trading market for micro-cap stocks, the Fund's share price
can experience periods of significant volatility. As a result, the Fund should
be considered a long-term investment and only one part of a well-diversified
personal investment portfolio. To encourage a long-term investment holding
period and to facilitate portfolio management, a 1% redemption and exchange fee,
described in greater detail below, is payable to the Fund for the benefit of
remaining shareholders on shares held less than one year.
When total assets reach $150 million, the Fund intends to close to new
individual investors. The Fund believes that by limiting its assets it will be
in a position to react quickly to new investment opportunities and remain
focused on only the most promising micro-cap stocks. It is expected that shares
of the Fund will continue to be available to existing shareholders, as well as
certain retirement plans and investors of Personal Counsel from Scudder.
Except as otherwise indicated, the Fund's investment objective and
policies are not fundamental and may be changed without a vote of shareholders.
If there is a change in investment objective, shareholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs. There can be no assurance that the Fund's
objective will be met.
Investments
The Fund seeks to provide long-term growth of capital by investing,
under normal market conditions, at least 80% of its assets in common stocks
issued by U.S. micro-cap companies. The Fund will typically invest in companies
that, at the time of purchase, are smaller than the 3,000 largest
publicly-traded U.S. companies. The median market capitalization (i.e., current
stock price times shares outstanding) of the portfolio is not expected to exceed
$125 million.
While the Fund invests predominantly in common stocks, it can purchase
other types of securities, including preferred stocks, convertible or
non-convertible securities, rights, warrants, and restricted and illiquid
securities. Securities may be listed on national exchanges or traded
over-the-counter. The Fund may invest up to 20% of its assets in U.S. Treasury
securities, agency and instrumentality obligations, may enter into repurchase
agreements and reverse repurchase agreements and may engage in strategic
transactions to increase stock market participation, enhance liquidity and
manage transaction costs. The Fund currently intends to borrow only for
temporary or emergency purposes, such as providing for redemptions or
distributions and not for investment leverage purposes.
For temporary defensive purposes, the Fund may invest without limit in
cash and cash equivalents when the Adviser deems such a position advisable in
light of economic or market conditions. It is impossible to accurately predict
how long such alternate strategies may be utilized.
Systematic Investment Approach
The Fund is actively managed using a quantitative, value-oriented
investment approach. The Adviser selects investments from among the more than
4,000 publicly-traded U.S. micro-cap stocks based on a proprietary, quantitative
investment strategy. Using this approach, the Adviser looks for companies
selling at prices that, in the opinion of the Adviser, do not reflect adequately
their long-term business potential. Because of their small size, and less
frequent trading activity, the companies represented in the Fund are often
overlooked or not closely followed by investors.
<PAGE>
Accordingly, their prices can rise either as a result of improved business
fundamentals, particularly when earnings grow faster than general expectations,
or as more investors appreciate the full extent of a company's underlying
business potential. The Fund seeks to avoid what are judged in the opinion of
the Adviser to be overpriced companies with high investment risk and
deteriorating fundamentals.
Portfolio diversification is an important component of the investment
management process. To help manage the Fund's above-average investment risk and
improve liquidity, the Adviser expects to invest in hundreds of small,
publicly-traded companies, representing a broad cross-section of U.S.
industries. The Fund's systematic, value-oriented approach to investing is
designed to mitigate volatility of the Fund's share price relative to the
micro-capitalization sector of the U.S. stock market. Risk is further managed by
employing specialized portfolio management and trading techniques. Despite these
techniques, the Fund's share price can move up and down significantly, even over
short periods of time.
Master/Feeder Structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Special Considerations
While, historically, micro-capitalization company stocks have
outperformed the stocks of large companies, the former have customarily involved
more investment risk as well. Micro-capitalization companies may have limited
product lines, markets or financial resources; may lack management depth or
experience; and may be more vulnerable to adverse general market or economic
developments than large companies. The prices of micro-capitalization company
securities are often more volatile than prices associated with large company
issues, and can display abrupt or erratic movements at times, due to limited
trading volumes and less publicly available information.
Also, because micro-capitalization companies normally have fewer shares
outstanding and these shares trade less frequently than large companies, it may
be more difficult for the Fund to buy and sell significant amounts of such
shares without an unfavorable impact on prevailing market prices.
Some of the companies in which the Fund may invest may distribute, sell
or produce products which have recently been brought to market and may be
dependent on key personnel.
The securities of micro-capitalization companies are often traded
over-the-counter and may not be traded in the volumes typical on a national
securities exchange. Consequently, in order to sell this type of holding, the
Fund may need to discount the securities from recent prices or dispose of the
securities over a long period of time.
Large selection universe
Over half of the U.S. companies traded on the three primary U.S.
exchanges (NYSE, AMEX and The Nasdaq Stock Market) are micro-cap companies. Of
the more than 7000 securities of U.S. companies traded on these exchanges, the
1000 largest (market capitalizations greater than $1.3 billion) are generally
considered to be large-cap stocks. The next 2000 largest (with market caps
currently in the range of approximately $0.2 to $1.3 billion) are often referred
to as small-cap stocks. This group roughly corresponds to the Russell 2000
Index, a widely followed index of small companies. The remaining stocks -- over
4000 securities with market capitalizations of less than approximately $200
million -- are considered micro-cap issues.
2
<PAGE>
US Equity Market Size Profile
o US Companies on NYSE, The Nasdaq Stock Market, AMEX
[GRAPHIC OMITTED]
Large Cap
(1000 Stocks)
> $1.3 Billion Market Cap
Small Cap
(2000 Stocks)
> $200 Million Market Cap
Micro
(4000+ Stocks)
Source: FactSet Research Systems, Scudder Kemper Investments, 12/97.
Because of the small size, limited liquidity and vast number of
micro-cap stocks, this segment (shown at the base of the pyramid in the diagram
above) is often overlooked by Wall Street analysts, offering a wide range of
investment opportunities. The Fund's Adviser seeks to exploit these
opportunities using a proprietary quantitative model.
The "micro-cap stock effect"
According to Ibbotson Associates, who has compiled market data back to
1926, the growth of $1 invested in smaller stocks over the period through
December 1997 would have grown to $5,520 compared to $1,828 invested in large
company stocks. Traditionally referred to as "small company stocks," the
Ibbotson index is actually a better representation of what are now called
micro-capitalization issues. With a dollar-weighted median market cap of only
$145 million, the stocks in this index are far smaller than the $585 million
median market cap of the typical small company mutual fund [Morningstar
Principia 12/31/97]. A micro-cap stock fund offers investors the opportunity to
experience the greater return potential represented in the study by Ibbotson
Associates and others.
3
<PAGE>
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
CHART PERIOD: December 1925 - December 1997
CHART DATA, DESCRIBING VALUE OF $1 INVESTED IN 1926:
Ibbotson
"Small" Stock S&P 500 T-Bills Inflation
------------- ------- ------- ---------
Dec-25 1 1 1 1
Dec-26 1.002767 1.116239 1.032665 0.985103
Dec-27 1.224347 1.534701 1.064932 0.96462
Dec-28 1.710344 2.20396 1.102822 0.955309
Dec-29 0.831923 2.018489 1.155184 0.957172
Dec-30 0.514574 1.515946 1.183028 0.899445
Dec-31 0.258553 0.858988 1.195722 0.813782
Dec-32 0.244618 0.788613 1.207221 0.729983
Dec-33 0.594095 1.214386 1.210812 0.733707
Dec-34 0.738003 1.196866 1.212784 0.748606
Dec-35 1.034634 1.767397 1.214829 0.770952
Dec-36 1.705066 2.366921 1.216984 0.780264
Dec-37 0.715996 1.537871 1.220732 0.804473
Dec-38 0.950833 2.016482 1.220534 0.782127
Dec-39 0.954128 2.008198 1.220784 0.778402
Dec-40 0.90494 1.811708 1.220843 0.785852
Dec-41 0.823495 1.601693 1.221572 0.862203
Dec-42 1.190012 1.927482 1.224846 0.942275
Dec-43 2.241665 2.426695 1.229098 0.972069
Dec-44 3.445939 2.906029 1.23316 0.992553
Dec-45 5.982521 3.964873 1.237224 1.0149
Dec-46 5.287035 3.644855 1.241593 1.199256
Dec-47 5.335413 3.852903 1.247843 1.307266
Dec-48 5.222728 4.064857 1.257965 1.342647
Dec-49 6.254129 4.828745 1.271836 1.318438
Dec-50 8.677417 6.360083 1.287042 1.394788
Dec-51 9.354568 7.887547 1.306255 1.476725
Dec-52 9.637729 9.336288 1.327887 1.489761
Dec-53 9.012508 9.243936 1.352104 1.499072
Dec-54 14.47254 14.10843 1.363785 1.491624
Dec-55 17.43084 18.56143 1.385246 1.49721
Dec-56 18.17739 19.77831 1.419312 1.540039
Dec-57 15.52892 17.64572 1.463865 1.586594
Dec-58 25.60512 25.29755 1.48643 1.614528
Dec-59 29.80392 28.3219 1.530309 1.638734
Dec-60 28.82297 28.45491 1.571058 1.662943
Dec-61 38.07163 36.106 1.604466 1.674116
Dec-62 33.5401 32.95448 1.648327 1.694602
Dec-63 41.44395 40.4685 1.699697 1.722536
Dec-64 51.19267 47.13881 1.759794 1.743024
Dec-65 72.56739 53.00808 1.828905 1.776543
Dec-66 67.47913 47.67373 1.915948 1.836132
Dec-67 123.8704 59.10382 1.99661 1.891996
Dec-68 168.4285 65.64154 2.100549 1.981385
Dec-69 126.2332 60.05902 2.238845 2.102428
Dec-70 104.2259 62.46532 2.384929 2.217886
Dec-71 121.4228 71.40581 2.489535 2.292376
Dec-72 126.8069 84.95586 2.585132 2.370591
Dec-73 87.61794 72.50028 2.76429 2.579162
Dec-74 70.14243 53.31099 2.985518 2.893878
Dec-75 107.1887 73.14431 3.158785 3.096859
Dec-76 168.6909 90.58422 3.319331 3.245838
Dec-77 211.4997 84.07665 3.489288 3.465579
Dec-78 261.1199 89.59223 3.739847 3.778429
Dec-79 374.6139 106.1126 4.127902 4.281222
Dec-80 523.9922 140.5137 4.591693 4.811953
Dec-81 596.7169 133.6161 5.267079 5.242126
Dec-82 763.829 162.2226 5.822392 5.445094
Dec-83 1066.828 198.7451 6.334665 5.651801
Dec-84 995.6805 211.1991 6.95859 5.875267
Dec-85 1241.234 279.1166 7.496023 6.096805
Dec-86 1326.275 330.6709 7.95796 6.16569
Dec-87 1202.966 347.9675 8.39291 6.437567
Dec-88 1478.135 406.4583 8.925676 6.722069
Dec-89 1628.59 534.4555 9.672793 7.034463
Dec-90 1277.449 517.499 10.42857 7.464006
Dec-91 1847.629 675.5922 11.01208 7.692725
Dec-92 2279.039 727.4115 11.3982 7.915865
Dec-93 2757.147 800.0785 11.7284 8.133425
Dec-94 2842.773 810.5379 12.18621 8.35099
Dec-95 3822.398 1113.918 12.86808 8.562973
Dec-96 5520 1828 14.25 9
Source: Ibbotson Associates
With the potential for higher returns comes higher risk, as shown in the chart
below:
THE ORIGINAL DOCUMENT CONTAINS A CHART HERE
CHART DATA:
Volatility Annualized Returns
(Standard Deviation) 12/26 - 12/96
T-Bills 3.26 3.80
S&P 500 20.32 11.00
Micro-Cap 34.13 12.70
Source: Ibbotson Associates, Micro-Cap based on Ibbotson Small Co. Portfolio.
Annualized returns for micro-cap stocks (12/26-12/97) are higher --
12.7% versus 11.0% for large-cap -- but this category experienced greater
volatility as measured by standard deviation (33.9% for micro-cap versus 20.3%
for large-cap). This higher volatility suggests the need for a long-term horizon
when investing in micro-capitalization stocks.
Diversification benefits
In addition to their return potential, smaller capitalization stocks
are often sought out by investors because they do not necessarily move in the
same direction at the same time as larger stocks. Indeed, the correlation
coefficient (one measure of this potential for diversification) between
small-cap and large-cap stock returns is only 0.67. Because of their low
profile, micro-cap stocks have an even lower correlation of 0.54 with large-cap
stock returns.
4
<PAGE>
Correlation of Total Returns
60 Months Ending 12/97
Micro Cap Small Cap
(CRSP 9-10) (S&P)
----------- -----
S&P 500 0.54 0.67
S&P Mid Cap 0.77 0.91
S&P Small Cap 0.88 1.00
Source: Ibbotson Associates
As a result, adding micro-cap stocks to a portfolio of larger stock
funds can provide excellent diversification. Furthermore, investors in the fund
will gain exposure to hundreds of micro-cap stocks, reducing the relatively high
risk associated with individual micro-cap issues.
Specialized Investment Techniques
Common stocks Under normal circumstances, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer the greatest potential for
gain on investment, compared to other classes of financial assets such as bonds
or cash equivalents.
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve the Fund's objective of long-term capital appreciation, the
Fund may invest in debt securities, including bonds of private issuers.
Portfolio debt investments will be selected on the basis of, among other things,
credit quality, and the fundamental outlooks for currency, economic and interest
rate trends, taking into account the ability to hedge a degree of currency or
local bond price risk. The Fund may purchase "investment-grade" bonds, rated
Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A
or BBB by Standard & Poor's Corporation ("S&P") or, if unrated, judged to be of
equivalent quality as determined by the Adviser.
The principal risks involved with investments in bonds include interest rate
risk, credit risk and pre-payment risk. Interest rate risk refers to the likely
decline in the value of bonds as interest rates rise. Generally, longer-term
securities are more susceptible to changes in value as a result of interest-rate
changes than are shorter-term securities. Credit risk refers to the risk that an
issuer of a bond may default with respect to the payment of principal and
interest. The lower a bond is rated, the more it is considered to be a
speculative or risky investment. Pre-payment risk is commonly associated with
pooled debt securities, such as mortgage-backed securities and asset backed
securities, but may affect other debt securities as well. When the underlying
debt obligations are prepaid ahead of schedule, the return on the security will
be lower than expected. Pre-payment rates usually increase when interest rates
are falling.
Strategic Transactions and Derivatives. The Fund 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 the fixed-income securities in the Fund'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 Fund 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 Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the fixed-
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income securities in the Fund's 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 Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic 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 to create leveraged exposure in the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund 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
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security 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
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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 Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or are determined to be of equivalent
credit quality by the Adviser. The staff of the Securities and Exchange
Commission (the "SEC") currently takes the position that OTC options purchased
by the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 15% of its net assets in illiquid
securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, 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 Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities), and on
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securities indices and futures contracts other than futures on individual
corporate debt and individual equity securities. The Fund will not sell put
options if, as a result, more than 50% of the Fund's assets would be required to
be segregated to cover its potential obligations under such put options other
than those with respect to futures and options thereon. In selling put options,
there is a risk that the Fund may be required to buy the underlying security at
a disadvantageous price above the market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate 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 Fund, 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, the net cash
amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such position.
The Fund's use of 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 Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, and multiple
interest rate transactions and any combination of futures, options, and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
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Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where
they do not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. The purchase of a cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling such cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believes such obligations do not constitute senior securities under
the Investment Company Act of 1940 (the "1940 Act") and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Fund will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from a NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
securities with its custodian, State Street Bank and Trust Company (the
"Custodian") to the extent Fund 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 Fund 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 Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund 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 Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund
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will segregate an amount of cash or liquid assets equal to the full value of the
option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures 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, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Convertible Securities. The Fund may invest in convertible securities which are
bonds, notes, debentures, preferred stocks, and other securities which are
convertible into common stocks. Investments in convertible securities can
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions, or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stocks changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis and so may not experience
market value declines to the same extent as the underlying common stock. When
the market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock, although typically not as much as the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes (LYONs). Zero coupon securities pay no cash income and are
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sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the purchase price and their value at maturity. Zero
coupon convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, any foreign bank or with any domestic or
foreign 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 Fund may
purchase.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. 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 Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price upon repurchase. In either case, the income to the
Fund 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. Some
repurchase commitment transactions may not provide the Fund with collateral
marked-to-market during the term of the commitment.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund 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 Fund may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund 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
Fund 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
Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the 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 Fund may incur a loss if the proceeds to the Fund
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 Fund 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 Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
A repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction, and such
repurchase agreements involve risks similar to repurchase agreements with U.S.
entities.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend to borrow for investment leverage purposes,
if such a strategy were implemented in the future it would increase the Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowings will be fixed, the Fund's assets may change in value during the time
a borrowing is outstanding, thus increasing exposure to capital risk.
Illiquid Securities. The Fund may occasionally purchase securities other than in
the open market. While such purchases may often offer attractive opportunities
for investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933 or the availability of an exemption from registration
(such as Rules 144 or 144A) or because they are subject to other legal or
contractual delays in or restrictions on resale.
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Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. The Fund may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event the Fund may be liable to purchasers
of such securities if such sale is made in violation of the 1933 Act or if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.
When-Issued Securities. The Fund may from time to time purchase equity and debt
securities on a "when-issued" or "forward delivery" basis. The price of such
securities, which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities takes place at a later date. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the Fund are
held in cash pending the settlement of a purchase of securities, the Fund would
earn no income; however, it is the Fund's intention to be fully invested to the
extent practicable and subject to the policies stated above. While when-issued
or forward delivery securities may be sold prior to the settlement date, the
Fund intends to purchase such securities with the purpose of actually acquiring
them unless a sale appears desirable for investment reasons. At the time the
Fund makes the commitment to purchase a security on a when-issued or forward
delivery basis, it will record the transaction and reflect the value of the
security in determining its net asset value. The market value of the when-issued
or forward delivery securities may be more or less than the purchase price. The
Fund does not believe that its net asset value or income will be adversely
affected by its purchase of securities on a when-issued or forward delivery
basis.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. The Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Adviser to be in good standing.
The value of the securities loaned will not exceed 5% of the value of the Fund's
total assets at the time any loan is made.
Investment Restrictions
Unless specified to the contrary, the following fundamental
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund involved which, under the 1940 Act and
the rules thereunder and as used in this Statement of Additional Information,
means the lesser of (1) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
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The Fund has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy, the
Fund will not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940 as amended,
and as interpreted or modified by regulatory authority having
jurisdiction from time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
Nonfundamental policies may be changed by the Trustees of the Trust and
without shareholder approval. As a matter of nonfundamental policy, the Fund
does not currently intend to:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
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PURCHASES
(See "Purchases" and "Transaction Information" in the Fund's prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per fund charge (with the fee to be paid
to the fund) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a
balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed
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out promptly following receipt of a request to buy. Federal regulations require
that payment be received within three business days. If payment is not received
within that time, the order is subject to cancellation. In the event of such
cancellation or cancellation at the purchaser's request, the purchaser will be
responsible for any loss incurred by the Fund or the principal underwriter by
reason of such cancellation. If the purchaser is a shareholder, the Trust shall
have the authority, as agent of the shareholder, to redeem shares in the account
in order to reimburse the Fund or the principal underwriter for the loss
incurred. Net losses on such transactions which are not recovered from the
purchaser will be absorbed by the principal underwriter. Any net profit on the
liquidation of unpaid shares will accrue to the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
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Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund also reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Fund with a tax identification number
during the 30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and Redemptions" and "Transaction Information"
in the Fund's prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be
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established with the same registration, tax identification number, address,
telephone redemption option, "Scudder Automated Information Line" (SAIL)
transaction authorization and dividend option as the existing account. Other
features will not carry over automatically to the new account. Exchanges to a
new fund account must be for a minimum of $2,500. When an exchange represents an
additional investment into an existing account, the account receiving the
exchange proceeds must have identical registration, address, and account
options/features as the account of origin. Exchanges into an existing account
must be for $100 or more. If the account receiving the exchange proceeds is to
be different in any respect, the exchange request must be in writing and must
contain an original signature guarantee as described under "Transaction
Information -- Signature guarantees" in the Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the net asset value
determined on that day. Exchange orders received after the close of regular
trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the phone or in writing. Automatic
exchanges will continue until the shareholder requests by phone or in writing to
have the feature removed, or until the originating account is depleted. The
Trust and the Transfer Agent each reserve the right to suspend or terminate the
privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
However, shares that are exchanged from the Fund may be subject to the Fund's 1%
redemption fee. (See "Special Redemption and Exchange Information") An exchange
into another Scudder fund is a redemption of shares, and therefore may result in
tax consequences (gain or loss) to the shareholder, and the proceeds of such an
exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
and the Transfer Agent each reserve the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Special Redemption and Exchange Information
In general, shares of the Fund may be exchanged or redeemed at net
asset value. However, shares of the Fund held for less than one year are
redeemable at a price equal to 99% of the Fund's then current net asset value
per share. This 1% discount, referred to in the prospectus and this Statement of
Additional Information as a redemption fee, directly affects the amount a
shareholder who is subject to the discount receives upon exchange or redemption.
It is intended to encourage long-term investment in the Fund, to avoid
transaction and other expenses caused by early redemptions and to facilitate
portfolio management. The fee is not a deferred sales charge, is not a
commission paid to the Adviser or its subsidiaries, and does not benefit the
Adviser in any way. The Fund reserves the right to modify the terms of or
terminate this fee at any time.
The redemption fee will not be applied to (a) a redemption of shares
held in certain retirement plans, including 401(k) plans, 403(b) plans, 457
plans, Keogh accounts, and profit sharing and money purchase pension plans
(however, this fee waiver does not apply to IRA and SEP-IRA accounts), (b) a
redemption of any shares of the Fund outstanding for one year or more, (c) a
redemption of reinvestment shares (i.e., shares purchased through the
reinvestment of dividends or capital gains distributions paid by the Fund), (d)
a redemption of shares by the Fund upon exercise of its right to liquidate
accounts (i) falling below the minimum account size by reason of shareholder
redemptions or (ii) when the shareholder has failed to provide tax
identification information or (e) a redemption of shares due to the death of the
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registered shareholder of a Fund account or due to the death of all registered
shareholders of a Fund account with more than one registered shareholder, (i.e.
joint tenant account), upon receipt from Scudder Service Corporation of
appropriate written instructions and documentation satisfactory to Scudder
Service Corporation. However, if shares are purchased for a retirement plan
account through a broker, financial institution or recordkeeper maintaining an
omnibus account for the shares, such waiver may not apply. For this purpose and
without regard to the shares actually redeemed, shares will be redeemed as
follows: first, reinvestment shares; second, purchased shares held one year or
more; and third, purchased shares held for less than one year. Finally, if a
shareholder enters into a transaction in Fund shares which, although it may
technically be treated as a redemption and purchase for recordkeeping purposes,
does not involve the termination of economic interest in the Fund, no redemption
fee will apply and applicability of the redemption fee, if any, on any
subsequent redemption or exchange will be determined by reference to the date
the shares were originally purchased, and not the date of the transaction.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may request to have the proceeds mailed
or wired to their predesignated bank account. In order to request redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit-Sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone redemption
proceeds are advised that if the savings bank is not a participant in the
Federal Reserve System, redemption proceeds must be wired through a commercial
bank which is a correspondent of the savings bank. As this may delay receipt by
the shareholder's account, it is suggested that investors wishing to use a
savings bank discuss wire procedures with their bank and submit any special wire
transfer information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to the
designated bank.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on
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the Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the
net asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request documents such as, but not restricted to, stock
powers, trust instruments, certificates of death, appointments as executor,
certificates of corporate authority and waivers of tax required in some states
when settling estates.
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven days of payment for shares tendered for repurchase or redemption may
result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-225-5163.
Redemption-in-Kind
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
Other Information
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct repurchase requests to the
Fund through Scudder Investor Services, Inc. at Two International Place, Boston,
Massachusetts 02110-4103 by letter, fax, TWX, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the repurchase
request. A written request in good order with a proper original signature
guarantee, as described in the Fund's prospectus under "Transaction information
- -- Signature guarantees," should be sent with a copy of the invoice to Scudder
Funds, c/o Scudder Confirmed Processing, Two International Place, Boston,
Massachusetts 02110-4103. Failure to deliver shares or required documents (see
above) by the settlement date may result in cancellation of the trade and the
shareholder will be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancellation. Net losses on such
transactions which are not recovered from the shareholder will be absorbed by
the principal underwriter. Any net gains so resulting will accrue to the Fund.
For this group, repurchases will be carried out at the net asset value next
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<PAGE>
computed after such repurchase requests have been received. The arrangements
described in this paragraph for repurchasing shares are discretionary and may be
discontinued at any time.
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. The Fund does not
impose a repurchase charge, although a wire charge may be applicable for
redemption proceeds wired to an investor's bank account. Redemption of shares,
including redemptions undertaken to effect an exchange for shares of another
Scudder fund, may result in tax consequences (gain or loss) to the shareholder
and the proceeds of such redemptions may be subject to backup withholding. (See
"TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value and a shareholder's right to
redeem shares and to receive payment may be suspended at times (a) during which
the Exchange is closed, other than customary weekend and holiday closings, (b)
during which trading on the Exchange is restricted for any reason, (c) during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
during which the SEC by order permits a suspension of the right of redemption or
a postponement of the date of payment or of redemption; provided that applicable
rules and regulations of the SEC (or any succeeding governmental authority)
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
(See "Investments Products and Services" in the Fund's prospectus.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds in the Scudder Family of Funds do not pay any asset-based
sales charges or service fees, Scudder developed and trademarked the phrase pure
no-load(TM) to distinguish Scudder funds from other no-load mutual funds.
Scudder pioneered the no-load concept when it created the nation's first no-load
fund in 1928, and later developed the nation's first family of no-load mutual
funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder Family of Funds pure no-load fund over investing
the same amount in a load fund that collects an 8.50% front-end load, a load
20
<PAGE>
fund that collects only a 0.75% 12b-1 and/or service fee, and a no-load fund
charging only a 0.25% 12b-1 and/or service fee. The hypothetical figures in the
chart show the value of an account assuming a constant 10% rate of return over
the time periods indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
====================================================================================================================
Scudder No-Load Fund with
Years Pure No-Load(TM) 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1
Fund 12b-1 Fee Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Investors are encouraged to review the fee tables on page 5 of the
Fund's prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
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<PAGE>
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See
"Investment Products and Services" in the Funds' prospectuses for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Investment Products and Services" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Funds.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment Products and Services" in the Fund's prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
22
<PAGE>
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
23
<PAGE>
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income
through investment primarily in investment-grade corporate debt
securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
24
<PAGE>
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
- ------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
25
<PAGE>
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in quality medium-size companies with the potential for
sustainable above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
- ------------------------
*** Only the International Shares are part of the Scudder Family of Funds.
26
<PAGE>
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction Information", "Purchases", and "Exchanges and
Redemptions" in the Fund's prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual
27
<PAGE>
or a group of self-employed individuals (including sole proprietorships and
partnerships), or other qualifying organization. Each of these forms was
approved by the IRS as a prototype. The IRS's approval of an employer's plan
under Section 401(a) of the Internal Revenue Code will be greatly facilitated if
it is in such approved form. Under certain circumstances, the IRS will assume
that a plan, adopted in this form, after special notice to any employees, meets
the requirements of Section 401(a) of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples if only one spouse has
earned income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
28
<PAGE>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married,
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the
29
<PAGE>
resulting liquidations may deplete or possibly extinguish the initial investment
and any reinvested dividends and capital gains distributions. Requests for
increases in withdrawal amounts or to change the payee must be submitted in
writing, signed exactly as the account is registered, and contain signature
guarantee(s) as described under "Transaction information -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the [Trust, Corporation] or its agent on written notice, and will
be terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
Scudder Savings Incentive Match Plans for Employees: SIMPLE IRA'S
Shares of the Fund may be purchased as the underlying investment for a
"SIMPLE IRA." A SIMPLE IRA is an IRA into which both an individual and the
individual's employer may make contributions. The individual may elect to make
pre-tax contributions, calculated as a percentage of compensation, to a SIMPLE
IRA, up to $6,000 a year. Subject to certain limits, the employer may either
match a portion of your contributions, or may make a contribution equal to 2% of
the employee's compensation without regard to the amount the employee
contributes under the SIMPLE IRA. Individuals will be immediately 100% vested in
all contributions made to a SIMPLE IRA.
30
<PAGE>
If amounts are distributed from a SIMPLE IRA account during the two
year period beginning on the date the employee first participates in the SIMPLE
salary reduction arrangement, a 25% penalty tax will be imposed on such
distribution. Also during that two year period, the SIMPLE IRA account can be
rolled over tax-free only to another SIMPLE IRA account. After that two year
period has passed, distributions from a SIMPLE IRA instead will be subject
generally to the rules applicable to other IRAs; for example, they may be rolled
over tax-free into any individual retirement plan, they will be subject to the
10% penalty tax on early distributions that are made before the individual
reaches age 59 1/2, and they will be fully taxed when withdrawn.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "DISTRIBUTIONS - Dividends and Capital Gains
Distributions and Taxes" in the Fund's prospectus.)
The Fund intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment after paying the
related federal income taxes for which the shareholders may then be asked to
claim a credit against their federal income tax liability. (See "TAXES.")
If the Fund does not distribute an amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, it may be subject to such tax. (See "TAXES.") In certain circumstances,
the Fund may determine that it is in the interest of shareholders to distribute
less than such an amount.
Earnings and profits distributed to shareholders on redemptions of Fund
shares may be utilized by the Fund, to the extent permissible, as part of the
Fund's dividend paid deduction on its federal tax return.
The Trust intends to distribute the Fund's investment company taxable
income and any net realized capital gains in November or December, although an
additional distribution may be made if necessary. Both types of distributions
will be made in shares of the Fund and confirmations will be mailed to each
shareholder unless a shareholder has elected to receive cash, in which case a
check will be sent. Distributions of investment company taxable income and net
realized capital gains are taxable (See "TAXES"), whether made in shares or
cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
(See "FUND SUMMARY -- Past Performance" in the Fund's prospectus.)
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures will be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for the periods of one year and the life of the Fund, ended on the last
day of a recent calendar quarter. Average annual total return quotations reflect
changes in the price of the Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
31
<PAGE>
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial payment of $1,000
n = Number of years
ERV = Ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Return for periods ended August 31, 1998
One Year Life of Fund(1)
(13.96)% 9.46%
(1) For the period August 12, 1996 (commencement of operations) to
August 31, 1998
Cumulative Total Return
Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rate 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.
Cumulative Total Return for periods ended August 31, 1998
One Year Life of Fund(1)
(13.96)% 20.38%
(1) For the period August 12, 1996 (commencement of operations) to August
31, 1998
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.
Quotations of the Fund's Performance are historical and are not
intended to indicate future performance. An investor's share when redeemed may
be worth more or less than the original cost. Performance of the Fund will vary
based on changes in market conditions and the level of Fund's expenses.
There may be quarterly periods following the periods reflected in the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.
32
<PAGE>
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer
33
<PAGE>
the potential for less return than growth funds. In addition, international
equity funds usually are considered more risky than domestic equity funds but
generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
34
<PAGE>
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUND
(See "Investment Adviser" in the Fund's prospectus.)
The Fund is a series of Scudder Securities Trust, formerly Scudder
Development Fund, a Massachusetts business trust established under a Declaration
of Trust dated October 16, 1985. The Trust's predecessor was organized
35
<PAGE>
as a Delaware corporation in 1970. The Trust's authorized capital consists of an
unlimited number of shares of beneficial interest of $0.01 par value, all of
which are of one class and have equal rights as to voting, dividends and
liquidation. The Trust's shares are currently divided into seven series, Scudder
Development Fund, Scudder Financial Services Fund, Scudder Health Care Fund,
Scudder Micro Cap Fund, Scudder Small Company Value Fund, Scudder Technology
Fund and Scudder 21st Century Growth Fund. The Trustees have the authority to
issue additional series of shares and to designate the relative rights and
preferences as between the different series. Each share of each Fund has equal
rights with each other share of that Fund as to voting, dividends and
liquidations. All shares issued and outstanding will be fully paid and
nonassessable by the Trust, and redeemable as described in this Statement of
Additional Information and in each Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting that
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series.
The Trustees, in their discretion, may authorize the division of shares
of the Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution. The Trustees have no present
intention of taking the action necessary to effect the division of shares into
separate classes, nor of changing the method of distribution of shares of the
Fund.
The Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Fund, except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Fund. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
INVESTMENT ADVISER
(See "Investment Adviser" in the Fund's prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
36
<PAGE>
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder
Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc., The Japan Fund, Inc. and Scudder Spain and Portugal Fund,
Inc. Some of the foregoing companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
An investment management agreement dated October 6, 1995 was approved
by the Trustees of the Trust on September 6, 1995 and by the initial shareholder
of the Fund on October 4, 1995. Because the transaction between Scudder and
Zurich resulted in the assignment of the Fund's investment management agreement
with Scudder, that agreement was deemed to be automatically terminated at the
consummation of the transaction. In anticipation of the transaction, however, a
new investment management agreement between the Trust on behalf of the Fund and
the Adviser
37
<PAGE>
was approved by the Trust's Trustees on August 6, 1997. At the special meeting
of the Fund's shareholders held on October 27, 1997, the shareholders also
approved the new investment management agreement. The investment management
agreement became effective as of December 31, 1997. The investment management
agreement is in all material respects on the same terms as the previous
investment management agreement which it supersedes. The Agreement incorporates
conforming changes which promote consistency among all of the funds advised by
the Adviser and which permit ease of administration.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in the Adviser) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with the Adviser was deemed to have been assigned and,
therefore, terminated. The Board approved a new investment management agreement
(the "Agreement") with the Adviser, which is substantially identical to the
current investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved at special meetings
held in December 1998. The Agreement will continue in effect until September 30,
1999 and from year to year thereafter only if its continuance is approved
annually by the vote of a majority of those Trustees who are not parties to such
Agreement or interested persons of the Adviser or the Fund, cast in person at a
meeting called for the purpose of voting on such approval, and either by a vote
of the Trust's Trustees or of a majority of the outstanding voting securities of
the Fund. The Agreement may be terminated at any time without payment of penalty
by either party on sixty days' written notice, and automatically terminates in
the event of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of the Fund's
assets shall be held uninvested, subject to the Trust's Declaration of Trust,
By-Laws, the 1940 Act, the Code and to the Fund's investment objective, policies
and restrictions, and subject, further, to such policies and instructions as the
Board of Trustees of the Fund may from time to time establish. The Adviser also
advises and assists the officers of the Fund in taking such steps as are
necessary or appropriate to carry out the decisions of its Trustees and the
appropriate committees of the Trustees regarding the conduct of the business of
the Fund.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, Custodian, accountants and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Fund's federal, state and local tax returns; preparing and filing the
Fund's federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Adviser pays the compensation and expenses of all Trustees,
officers and executive employees (except expenses incurred attending Board and
committee meetings outside New York, New York or Boston, Massachusetts) of the
Trust affiliated with the Adviser and makes available, without expense to the
Fund, the services of such Trustees, officers and employees of the Adviser as
may duly be elected officers of the Trust, subject to their individual consent
to serve and to any limitations imposed by law, and provides the Fund's office
space and facilities.
For these services, Micro Cap Fund will pay the Adviser an annual fee
equal to 0.75% of the Fund's average daily net assets payable monthly, provided
the Fund will make interim payments as may be requested by the Adviser not to
exceed 75% of the amount of the fee then accrued on the books of the Fund and
unpaid. Since inception, the Adviser agreed to limit the total annualized
expenses of the Fund at no more than 1.75% of the average daily net assets of
the Fund until December 31, 1997. From August 12, 1996 (commencement of
operations) until August 31, 1996 the Adviser
38
<PAGE>
waived its management fee. For the fiscal year ended August 31, 1997 the Adviser
waived impose a portion of its management fee amounting to $210,007, and the fee
imposed amounted to $152, 080. The investment advisory fee paid to the Adviser
for the fiscal year ended August 31, 1998 was $1,021,784.
Under the Agreement the Fund is responsible for all of its other
expenses including: organizational costs, fees and expenses incurred in
connection with membership in investment company organizations; fees and
expenses of the Fund's accounting agent; brokers' commissions; legal, auditing
and accounting expenses; taxes and governmental fees; the fees and expenses of
the Transfer Agent; any other expenses of issue, sale, underwriting,
distribution, redemption or repurchase of shares; the expenses of and the fees
for registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Fund who are not affiliated with the
Adviser; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees of the Trust who are not
"interested persons" of the Adviser are represented by independent counsel at
the Fund's expense.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Fund that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with a
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Fund.
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 Fund. 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.
39
<PAGE>
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Name, Age, Scudder Investor
and Address Position with Fund Principal Occupation** Services, Inc.
- ----------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
Daniel Pierce (64)+*@ President and Trustee Managing Director of Scudder Kemper Director, Vice
Investments, Inc. President and
Assistant Treasurer
Paul Bancroft III (68) Trustee Venture Capitalist and Consultant; --
79 Pine Lane Retired, President, Chief Executive
Box 6639 Officer and Director, Bessemer
Snowmass Village, CO 81615 Securities Corporation
Sheryle J. Bolton (52) Trustee CEO and Director, Scientific Learning --
Scientific Learning Corporation Corporation, Former President and
1995 University Avenue Chief Operating Officer, Physicians
Suite 400 Online, Inc. (electronic transmission
San Francisco, CA 94704 of clinical information for
physicians (1994-1995)
William T. Burgin (55) Trustee General Partner, Bessemer Venture --
83 Walnut Street Partners; General Partner, Deer &
Wellesley, MA 02181 Company; Director, Fort James
Corp.; Director of various
privately held companies
Keith R. Fox (44) Trustee Private Equity Investor, Exeter --
10 East 53rd Street Capital Management Corporation
New York, NY 10022
William H. Luers (69) Trustee President, The Metropolitan Museum of --
The Metropolitan Art (1986 to present)
Museum of Art
1000 Fifth Avenue
New York, NY 10028
Joan E. Spero (54) Trustee President, The Doris Duke Charitable --
Foundation (1997 to present),
Undersecretary of State for Economic,
Business, and Agricultural Affairs,
(1993-1997)
Kathryn L. Quirk (45) ++@ Trustee, Vice Managing Director of Scudder Kemper Director, Senior Vice
President and Investments, Inc. President, and
Assistant Secretary Assistant Clerk
Thomas J. Devine (72) Honorary Trustee Consultant --
149 East 73rd Street
New York, NY 10021
40
<PAGE>
Position with
Underwriter,
Name, Age, Scudder Investor
and Address Position with Fund Principal Occupation** Services, Inc.
- ----------- ------------------ ---------------------- --------------
Wilson Nolen (72) Honorary Trustee Consultant (1989 to present); --
1120 Fifth Avenue Corporate Vice President, Becton,
New York, NY 10128-0144 Dickinson & Company (manufacturer of
medical and scientific products)
until 1989
Robert G. Stone, Jr. (75) Honorary Trustee Chairman Emeritus and Director, Kirby --
405 Lexington Avenue Corporation (inland and offshore
39th Floor marine transportation and diesel
New York, NY 10174 repairs)
Edmund R. Swanberg (77)++ Honorary Trustee Advisory Managing Director of Scudder --
Kemper Investments, Inc.
Peter Chin (56)++ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
J. Brooks Dougherty (39)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
James M. Eysenbach (36)# Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
James E. Fenger (39)## Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Philip S. Fortuna (41)# Vice President Managing Director of Scudder Kemper Vice President
Investments
Thomas W. Joseph (59)+ Vice President Senior Vice President of Scudder Director, Vice
Kemper Investments, Inc. President, Treasurer
and Assistant Clerk
Ann M. McCreary (48)++ Vice President Managing Director of Scudder Kemper --
Investments
Thaddeus Paluszek (41)++ Vice President Vice President of Scudder Kemper --
Investments, Inc.
Kurt R. Stalzer (40)## Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Peter Taylor (61)++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Thomas F. McDonough (51)+ Vice President and Senior Vice President of Scudder Clerk
Secretary Kemper Investments, Inc.
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Richard W. Desmond (62)++ Assistant Secretary Vice President of Scudder Kemper Vice President
Investments, Inc.
41
<PAGE>
Position with
Underwriter,
Name, Age, Scudder Investor
and Address Position with Fund Principal Occupation** Services, Inc.
- ----------- ------------------ ---------------------- --------------
Caroline Pearson (36)+ Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
* Mr. Pierce and Ms. Quirk are considered by the Fund and its counsel to be persons who are "interested
persons" of the Adviser or of the Fund within the meaning of the 1940 Act.
** Unless otherwise stated, all officers and trustees have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
@ Mr. Pierce and Ms. Quirk are members of the Executive Committee which may exercise substantially all of
the powers of the Board of Trustees when it is not in session.
+ Address: Two International Place, Boston, Massachusetts 02110
++ Address: 345 Park Avenue, New York, New York 10154
# Address: 101 California Street, Suite 4100, San Francisco, CA 94111-5886
## Address: 222 South Riverside Plaza, Chicago, IL 60606-5808
</TABLE>
The Trustees and Officers of the Trust also serve in similar capacities
with other Scudder Funds.
To the knowledge of the Trust, as of November 30, 1998, all Trustees
and officers of the Fund as a group owned beneficially (as that term is defined
under Section 13(d) of the Securities Exchange Act of 1934) 261,332 shares, or
3.85% of the shares of the Fund outstanding on such date.
Certain accounts for which the Adviser acts as investment adviser owned
1,030,494 shares in the aggregate, or 15.19% of the outstanding shares on
November 30, 1998. The Adviser may be deemed to be the beneficial owner of such
shares but disclaims any beneficial ownership in such shares.
As of November 30, 1998, 475,568 shares in the aggregate 7.01% of the
outstanding shares of Scudder Small Company Value Fund, were held in the name of
Charles Schwab & Co., Inc., 101 Montgomery St., San Francisco, CA 94104, who may
be deemed to be the beneficial owner of certain of these shares, but disclaim
any beneficial ownership therein.
As of November 30, 1998, 627,206 shares in the aggregate 22.06% of the
outstanding shares of the Fund, were held in the name of State Street Bank &
Trust Co., for Scudder Pathway Series: Growth Portfolio, 1 Heritage Drive #P5S,
Quincy, MA 02171, who may be deemed to be the beneficial owner of certain of
these shares, but disclaim any beneficial ownership therein.
To the knowledge of the Trust, as of November 30, 1998, no person owned
beneficially more than 5% of the Fund's outstanding shares except as stated
above.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds.
42
<PAGE>
They are assisted in this process by the Fund's independent public accountants
and by independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder Securities Trust: an annual trustee's fee of $3,500; a fee of
$325 for attendance at each board meeting, audit committee meeting or other
meeting held for the purposes of considering arrangements between the Trust on
behalf of the Fund and the Adviser or any affiliate of the Adviser; $100 for all
other committee meetings; and reimbursement of expenses incurred for travel to
and from Board Meetings. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences or service on special
trustee task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1997 from the Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
Scudder Securities Trust* All Scudder Funds
------------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $38,155 $5,400 $156,922 (20 funds) $ 25,950 (20 funds)
Trustee
Sheryle J. Bolton, $5,068 $0.00 $86,213 (20 funds) $10,800 (20 funds)
Trustee**
William T. Burgin, $23,353 $5,400 $85,950 (20 funds) $17,550 (20 funds)
Trustee
Thomas J. Devine, $43,255 $5,400 $186,598 (21 funds) $27,150 (21 funds)
Honorary Trustee+
Keith R. Fox, Trustee $44,905 $5,400 $134,390 (18 funds) $17,550 (18 funds)
William H. Luers, $5,068 $0.00 $117,729 (20 funds) $16,350 (20 funds)
Trustee**
Wilson Nolen, Honorary $40,455 $5,400 $189,548 (21 funds) $25,300 (21 funds)
Trustee+
Joan E. Spero,*** $0.00 $0.00 $0.00 $0.00
Trustee
</TABLE>
43
<PAGE>
(1) The Adviser paid the compensation to the Trustees for meetings
associated with the Adviser's alliance with Zurich Insurance Company.
See "Investment Adviser" for additional information.
* Scudder Securities Trust consists of seven funds: Scudder Development
Fund, Scudder Financial Services Fund, Scudder Health Care Fund,
Scudder Technology Fund, Scudder Micro Cap Fund, Scudder Small Company
Value Fund and Scudder 21st Century Growth Fund.
** Elected as Trustee of the Trust in October 1997.
*** Elected as Trustee of the Trust in September 1998.
+ Elected as Honorary Trustee in December 1998, after serving as Trustee.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Adviser, a Delaware
corporation. The Trust's underwriting agreement dated September 7, 1998 will
remain in effect until September 30, 1999 and from year to year thereafter only
if its continuance is approved annually by a majority of the Trustees who are
not parties to such agreement or interested persons of any such party and either
by a vote of a majority of the Trustees or a majority of the outstanding voting
securities of the Fund. The underwriting agreement was last approved by the
Trustees on August 6, 1998.
Under the underwriting agreement, the Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Fund as a broker or dealer in the
various states as required; the fees and expenses of preparing, printing and
mailing prospectuses annually to existing shareholders (see below for expenses
relating to prospectuses paid by the Distributor), notices, proxy statements,
reports or other communications to shareholders of the Fund; the cost of
printing and mailing confirmations of purchases of shares and any prospectuses
accompanying such confirmations; any issuance taxes and/or any initial transfer
taxes; a portion of shareholder toll-free telephone charges and expenses of
shareholder service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
a portion of the cost of computer terminals used by both the Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of the Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by the Fund, unless a 12b-1 Plan is in effect which
provides that the Fund shall bear some or all of such expenses.
Note: Although the Fund does not currently have a 12b-1 Plan, the Fund would
also pay those fees and expenses permitted to be paid or assumed by the
Fund pursuant to a 12b-1 Plan, if any, were adopted by the Fund,
notwithstanding any other provision to the contrary in the underwriting
agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states in which shares of the Fund may from
time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of the Fund.
TAXES
(See "DISTRIBUTIONS - Dividends and Capital Gains
Distributions and Taxes" in the Fund's prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. It intends to continue to qualify for such treatment.
Such qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally
44
<PAGE>
is not subject to federal income tax to the extent that it distributes annually
its investment company taxable income and net realized capital gains in the
manner required under the Code.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions, would be taxable to shareholders to the extent of
current accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations in the case of corporate
shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year, and all ordinary income and capital gains for prior years
that were not previously distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund. Presently, the Fund has
no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of federal income taxes paid by
the Fund on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise a
substantial part of the Fund's gross income. To the extent that such dividends
constitute a portion of the Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law, and is eliminated if
either those shares or the shares of the Fund are deemed to have been held by
the Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the Fund
have been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($40,050 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $40,050
45
<PAGE>
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
$2,000 per individual for married couples if only one spouse has earned income)
for that year. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
stock. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying stock or substantially identical stock in the Fund's portfolio. If
the Fund writes a put or call option, no gain is recognized upon its receipt of
a premium. If the option lapses or is closed out, any gain or loss is treated as
a short-term capital gain or loss. If a call option is exercised, any resulting
gain or loss is a short-term or long-term capital gain or loss depending on the
holding period of the underlying stock. The exercise of a put option written by
the Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts
entered into by the Fund and all listed non-equity options written or purchased
by the Fund (including options on futures contracts and options on broad-based
stock indices) will be governed by Section 1256 of the Code. Absent a tax
election to the contrary, gain or loss attributable to the lapse, exercise or
closing out of any such position generally will be treated as 60% long-term and
40% short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, all outstanding Section 1256 positions will be marked to market
(i.e. treated as if such positions were closed out at their closing price on
such day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term. Under Section 988 of the Code, discussed below, foreign currency
gain or loss from foreign currency-related forward contracts and similar
financial instruments entered into or acquired by the Fund will be treated as
ordinary income. Under certain circumstances, entry into a futures contract to
sell a security may constitute a short sale for federal income tax purposes,
causing an adjustment in the holding period of the underlying security or a
substantially identical security in the Fund's portfolio.
Positions of the Fund which consist of at least one stock and at least
one other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Positions of the Fund which consist of at least one position not
governed by Section 1256 and at least one futures or forward contract or
non-equity option governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, certain tax elections exist for them which reduce or
eliminate the operation of these rules. The Fund intends to monitor its
transactions in options and futures and may make certain tax elections in
connection with these investments.
Notwithstanding any of the foregoing, recent tax law changes may
require the Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests
46
<PAGE>
(including options, futures and forward contracts and short sales) in stock,
partnership interests, certain actively traded trust instruments and certain
debt instruments. Constructive sale treatment of appreciated financial positions
does not apply to certain transactions closed in the 90-day period ending with
the 30th day after the close of the Fund's taxable year, if certain conditions
are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables, or pays such liabilities, generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency, and on disposition of certain options,
futures contracts and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
The Fund will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The Fund is organized as a series of a Massachusetts business trust and
is not liable for any income or franchise tax in the Commonwealth of
Massachusetts, provided that it qualifies as a regulated investment company for
federal income tax purposes.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Dividend and interest income received by the Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders 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.
47
<PAGE>
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions for the Fund to
pay a brokerage commission in excess of that which another broker might charge
for executing the same transaction on account of execution services and the
receipt of research, market or statistical information. The Adviser will not
place orders with broker/dealers on the basis that the broker/dealer has or has
not sold shares of the Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund, and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Trustees review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended August 31, 1997 and 1998, the Fund paid
brokerage commissions of $150,026 and $176,651, respectively. For the fiscal
year ended August 31, 1998, $108,803 (62% of the total brokerage commissions
paid) resulted from orders placed, consistent with the policy of obtaining the
most favorable net results, with brokers and dealers who provided supplementary
research market and statistical information to the Fund or the Adviser. The
total amount of brokerage transactions aggregated $79,321,244, of which
$32,128,369 (41% of all brokerage transactions) were transactions which included
research commissions.
48
<PAGE>
Portfolio Turnover
The portfolio turnover rates (defined by the SEC as the ratio of the
lesser of sales or purchases to the monthly average value of such securities
owned during the year, excluding all securities whose remaining maturities at
the time of acquisition were one year or less) for the fiscal years ended August
30, 1997 and 1998 were 17.1% and 33.5%, respectively.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Net asset value per share is determined by
dividing the value of the total assets of the Fund, less all liabilities, by the
total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation, the security is valued
at the most recent bid quotation on such exchange as of the Value Time. An
equity security which is traded on The National Association of Securities
Dealers Automated Quotation ("Nasdaq") system will be valued at its most recent
sale price on such system as of the Value Time. Lacking any sales, the security
will be valued at the most recent bid quotation as of the Value Time. The value
of an equity security not quoted on the Nasdaq System, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation, the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities 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 rates as of the date
on which the net asset value per share is determined.
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 Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
49
<PAGE>
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, One Post Office Square, Boston,
Massachusetts 02109, independent accountants, and given on the authority of that
firm as experts in accounting and auditing. Effective July 1, 1998, Coopers &
Lybrand L.L.P. and Price Waterhouse LLP merged to become PricewaterhouseCoopers
LLP. PricewaterhouseCoopers, LLP is responsible for performing annual audits of
the financial statements and financial highlights of the Fund in accordance with
generally accepted auditing standards, and the preparation of federal tax
returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund's property or
the acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the Fund's property of any shareholder held
personally liable for the claims and liabilities which a shareholder may become
subject by reason of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Other Information
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Adviser in light of the objective and policies of the
Fund, and other factors such as its other portfolio holdings and tax
considerations, and should not be construed as recommendations for similar
action by other investors.
The name "Scudder Securities Trust" is the designation of the Trustees
for the time being under a Declaration of Trust dated October 16, 1985, as
amended from time to time, and all persons dealing with the Fund must look
solely to the property of the Fund for the enforcement of any claims against the
Fund as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund. No series
of the Trust shall be liable for the obligations of any other series. Upon the
initial purchase of shares, the shareholder agrees to be bound by the Trust's
Declaration of Trust, as amended from time to time. The Declaration of Trust is
on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts.
The CUSIP number of Scudder Micro Cap Fund is 8111 96 302.
The Fund has a fiscal year end of August 31.
Dechert Price & Rhoads acts as general counsel for the Fund.
The Fund employs State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 as Custodian.
Costs incurred by the Fund in conjunction with its organization are
amortized over the five year period beginning August 12, 1996.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts, 02107-2291, a subsidiary of the Adviser, is the transfer
and dividend disbursing agent for the Fund. Service Corporation also serves as
shareholder service agent and provides subaccounting and recordkeeping services
for shareholder accounts in certain retirement and employee benefit plans. The
Fund pays Service Corporation an annual fee for each account maintained for a
participant. For the year ended August 31, 1998, the amount charged to the Fund
by SSC aggregated $342,162, of
50
<PAGE>
which $25,821 is unpaid at August 31, 1998. For the year ended August 31, 1997,
the amount charged to the Fund by SSC aggregated $251,988, of which $26,114 was
unpaid at August 31, 1997.
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
Annual service fees are paid by the Fund to Scudder Trust Company, Two
International Place, Boston, Massachusetts 02110-4103, an affiliate of the
Adviser, for certain retirement plan accounts. For the year ended August 31,
1998, the amount charged to the Fund by STC aggregated $32,442, of which $7,299
is unpaid at August 31, 1998. For the year ended August 31, 1997, the amount
charged to the Fund by STC aggregated $13,747, of which $1,589 was unpaid at
August 31, 1997.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts 02110-4103, a subsidiary of the Adviser, computes net asset values
for the Fund. The Fund pays Scudder Fund Accounting Corporation an annual fee
equal to 0.025% of the first $150 million of average daily net assets, 0.0075%
of such assets in excess of $150 million and 0.0045% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. For the year
ended August 31, 1998, the amount charged to the Fund by SFAC aggregated
$89,375, of which $6,397 is unpaid at August 31, 1998. For the year ended August
31, 1997, the amount charged to the Fund by SFAC aggregated $84,245, of which
$6,261 was unpaid at August 31, 1997.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Fund has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement for further information with respect to the Fund
and the securities offered hereby. This Registration Statement and its
amendments are available for inspection by the public at the SEC in Washington,
D.C.
FINANCIAL STATEMENTS
The financial statements, including the Investment Portfolio of Micro
Cap Fund, together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements in the Annual Report to the
Shareholders of the Fund dated August 31, 1998, are incorporated herein by
reference, and are hereby deemed to be a part of this Statement of Additional
Information.
51
<PAGE>
SCUDDER
Seeking to increase your capital
over the long term by investing
primarily in undervalued stocks
of small U.S. companies.
Pure no-load(TM)/No sales charges
Scudder
Small Company
Value Fund
(078)
Prospectus
January 1, 1999
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
The Securities and Exchange
Commission has not approved or
disapproved these securities or
passed upon the adequacy of this
prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
1 Fund Summary
- --------------------------------------------------------------------------------
An overview of the
fund's goal and
strategy, main risks,
performance and expenses
4 About The Fund
- --------------------------------------------------------------------------------
Additional information 4 Principal strategies, investments and
that you should know additional principal risks
about the fund
7 A message from the President
8 Investment adviser
9 Distributions
10 Taxes
11 Financial highlights
12 About Your Investment
- --------------------------------------------------------------------------------
Information about 12 Transaction information
managing your fund
account 13 Buying and selling shares
14 Purchases
15 Exchanges and redemptions
16 Investment products and services
<PAGE>
Fund Summary
Investment objectives and principal strategies
Scudder Small Company Value Fund pursues long-term growth of capital by
investing primarily in undervalued stocks of small U.S. companies. The fund
normally invests at least 90% of its assets in common stocks of companies that
are similar in size to those included in the Russell 2000 index -- a widely used
benchmark of small stock performance. Except as otherwise indicated, the fund's
investment objective and policies may be changed without a vote of shareholders.
The fund is designed to capture the long term growth potential of small company
stocks while reducing the downside risk typically associated with investing in
these securities. The fund uses a disciplined strategy in pursuing its
objective. This strategy attempts to uncover small company stocks that are
undervalued while controlling the overall risk of the fund. These stocks are
often out of favor or simply overlooked by investors, and thus their stock
prices may not accurately reflect their long-term business potential.
Accordingly, the prices of these stocks may rise dramatically as business
fundamentals improve and these companies become more widely known. In addition,
the fund attempts to manage its risk exposure by, among other things, generally
investing in over 150 small companies across a broad range of U.S. industries.
This fund may be appropriate for the aggressive portion of an investor's
portfolio. It should not be viewed as a complete investment program.
Principal risks
The principal risks of investing in the fund are stock market risk and, more
specifically, the risks associated with investing in undervalued small company
stocks.
As with all investments in the stock market, the fund's returns and net asset
value will go up and down, and it is possible to lose money invested in the
fund. Stock market movements will affect the fund's share prices on a daily
basis. Declines are possible both in the overall stock market and in the value
of the types of securities held by the fund. In addition, the portfolio
management team's strategy and skill in choosing undervalued small company
stocks for the fund will determine in large part the fund's ability to achieve
its objective.
In pursuit of higher investment returns, this fund may incur greater risks and
more dramatic fluctuations in value than a fund that invests in stocks of larger
companies. The inherent business characteristics and risks of small companies
include such things as untested management, less diversified product lines and
weaker financial positions. Also, small companies tend to have less predictable
earnings and less liquid
1
<PAGE>
securities than more established companies. Therefore, this fund is suitable for
long-term investors that have a high degree of risk tolerance.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to two broad measures of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[GRAPHIC OMITTED]
1996 23.84%
1997 37.01%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 17.56% (the second quarter of 1997), and the fund's lowest
return for a calendar quarter was -0.31% (the fourth quarter of 1997).
The fund's year-to-date total return as of September 30, 1998 was -12.39%.
Average annual total returns
For periods ended Russell 2000 Russell
December 31, 1997 Fund Value Index 2000 Index
- --------------------------------------------------------------------------------
One Year 37.01% 31.78% 22.36%
Since Inception
(10/6/95) 29.21% 28.17%* 21.46%*
- --------------------------------------------------------------------------------
* Index comparisons begin October 31, 1995.
2
<PAGE>
The Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth rates. The
Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees or expenses.
Fee and expense information
Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as % of offering NONE
price)
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested NONE
dividends/distributions
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) 1.00%*
- --------------------------------------------------------------------------------
Exchange fee 1.00%*
================================================================================
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.75%**
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.64%**
- --------------------------------------------------------------------------------
Total annual fund operating expenses 1.39%**
- --------------------------------------------------------------------------------
* There is a 1% fee retained by the fund which is imposed only on
redemptions or exchanges of shares held less than one year. You may redeem
by writing or calling the fund. If you wish to receive your redemption
proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "About Your Investment -- Exchanges and
Redemptions."
** Effective December 1, 1998 until November 30, 1999 the Adviser and its
subsidiaries have agreed to waive and/or reimburse fees and expenses to
the extent necessary so that total fund operating expenses do not exceed
1.25% of average daily net assets. The information contained in the above
table and the example below reflects the expenses of the fund without
taking into account any applicable fee waivers and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund
3
<PAGE>
operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
- --------------------------------------------------------------------------------
One Year $ 142
- --------------------------------------------------------------------------------
Three Years $ 440
- --------------------------------------------------------------------------------
Five Years $ 761
- --------------------------------------------------------------------------------
Ten Years $ 1,669
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
About The Fund
Principal strategies, investments and additional principal risks
Principal strategies and investments
The fund attempts to achieve its objective by investing predominantly in U.S.
small company stocks. The fund's portfolio management team follows a disciplined
strategy that focuses on selecting stocks using a value style of investing while
attempting to manage the overall risks of the fund.
Disciplined investment strategy. The fund uses a disciplined approach to
determine when to buy and sell a stock. Under normal market conditions, the fund
expects to be more than 90% invested in stocks of small U.S. companies based on
a proprietary, quantitative investment strategy. This strategy systematically
analyzes the return potential of small stocks and the effect that these stocks
would have on the overall risk of the fund's portfolio in order to identify
attractive investment opportunities for the fund.
Similarly, the fund is also committed to using a disciplined approach in
deciding when to sell a stock. A stock is typically sold when it is no longer
considered to be a small company stock or when it becomes overvalued.
Value style investing. The fund uses a value-oriented approach to selecting
small company stocks -- that is, the fund's portfolio management team looks for
stocks that appear to be undervalued. A stock is undervalued if its stock price
does not reflect its potential worth in the portfolio management team's opinion.
The fund uses a proprietary computer model to search for small companies that
appear to be undervalued relative to the Russell 2000 index. A company's
valuation is measured by comparing its stock price to its business fundamentals,
such as sales, cash flow and earnings. The
4
<PAGE>
higher the price relative to these fundamentals, the more "expensive" the stock.
The portfolio management team seeks stocks of companies selling at attractive
valuations, with favorable trends in measures such as earnings growth rates and
stock price momentum, and acceptable risk. The fund's management team considers
both return potential and diversification when selecting the stocks it believes
will enable the fund to meet its objective.
Stocks trade at a discount for many reasons. Typically, these companies, or
their industries, have fallen out of favor, or are not closely followed by
investors, and thus their stock prices do not adequately reflect their true
value. As the business fundamentals of a small company improve, its stock price
may rise significantly. For example, stock prices are often affected when a
company's earnings exceed general expectations or when investors begin to
appreciate the full extent of a company's business potential.
Managing overall risk. Managing the risk exposure of the fund is an important
component of the fund's investment strategy. The fund attempts to control risk
at both the security and the portfolio level. At the security level, the fund
focuses on selecting undervalued stocks, which typically provide a degree of
downside protection relative to other small company stocks. In addition, the
portfolio management team attempts to further control the fund's individual
security risk exposure by building a diversified portfolio that generally
consists of over 150 small company stocks, representing a broad cross-section of
U.S. industries. Typically, the fund limits purchases of a particular security
to no more than 2% of the fund's assets.
The fund also uses risk management software to assess the expected volatility of
its portfolio and the anticipated impact of different securities on the fund's
risk level. Although the fund cannot eliminate the above-average risks of
investing in small company stocks, this risk management strategy may enable the
fund to experience less share price volatility than the small company sector of
the U.S. stock market.
From time to time, the fund may invest, without limit, in cash and cash
equivalents for temporary defensive purposes. Because this defensive policy
differs from the fund's investment objective, the fund may not achieve its goal
during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about these and other investments and strategies of the fund is
provided
5
<PAGE>
in the Statement of Additional Information. Of course, there can be no guarantee
that, by following these investment strategies, the fund will achieve its
objective.
Additional principal risks
Small company risk. While small company stocks have historically outperformed
large company stocks, they also have been subject to greater investment risk.
The risks generally associated with small companies include more limited product
lines, markets and financial resources, lack of management depth or experience,
dependency on key personnel and vulnerability to adverse market and economic
developments. Accordingly, the prices of small company stocks tend to be more
volatile than prices of large company stocks. Further, the prices of small
company stocks are often adversely affected by limited trading volumes and the
lack of publicly available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the fund to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
Equity investing risk. An investment in the common stock of a company represents
a proportionate ownership interest in that company. Therefore, the fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on investment. However, the market value of common stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless.
Value investing risk. The determination that a stock is undervalued is
subjective; the market may not agree, and a stock's price may not rise to what
the portfolio management team believes is its full value. It may even decrease
in value. However, because of the fund's focus on undervalued stocks, the fund's
downside risk may be less than with other small company stocks since value
stocks are in theory already underpriced.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of offsetting a fund's real return.
6
<PAGE>
A message from the President
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
[PHOTO OMITTED]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open- and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/ Edward D. Villani
7
<PAGE>
Investment adviser
The fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), 345 Park Avenue, New York, NY, to manage the fund's daily
investment and business affairs subject to the policies established by the Board
of Trustees. The Adviser actively manages your investment in the fund.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities.
For the fiscal year ended August 31, 1998, the Adviser received an annual fee of
0.75% of the fund's average daily net assets.
Effective December 1, 1998 until November 30, 1999, the Adviser and its
subsidiaries have agreed to maintain the annualized expenses of the fund at no
more than 1.25% of the average daily net assets of the fund.
Portfolio management
The fund is managed by a team of investment professionals who each plays an
important role in the fund's management process. Team members work together to
develop investment strategies and select securities for the fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders and other investment specialists who work in the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits fund investors by bringing together many disciplines and
leveraging its extensive resources.
The following investment professionals are associated with the fund as
indicated:
Name and Title Joined the Fund Background
- --------------------------------------------------------------------------------
Philip S. Fortuna 1995 Mr. Fortuna, who joined the Adviser
Co-Lead Manager in 1986 as a manager of
institutional equity accounts, has
oversight responsibility for the
fund's investment strategies. In
addition to his portfolio
management responsibilities, Mr.
Fortuna is currently director of
the Adviser's quantitative group.
- --------------------------------------------------------------------------------
8
<PAGE>
Name and Title Joined the Fund Background
- --------------------------------------------------------------------------------
James M. Eysenbach 1995 Mr. Eysenbach, who joined the
Co-Lead Manager Adviser in 1991 as a senior
quantitative analyst, currently
manages quantitative equity
products and is responsible for the
fund's day-to-day management and
investment strategies. Mr.
Eysenbach has more than 11 years of
investment management experience,
specializing in quantitative
research, analysis and portfolio
management.
Calvin S. Young 1998 Mr. Young joined the Adviser in 1990
Manager as a quantitative analyst. Since
1995 he has been providing
analytical support for the
Adviser's quantitative equity
products. Mr. Young has more than
nine years of investment industry
experience, with a special focus on
small companies.
- --------------------------------------------------------------------------------
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
fund could be adversely affected if computer systems on which the fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. The risk is commonly called the Year 2000 issue.
Failure to successfully address the Year 2000 issue could result in
interruptions to and other material adverse effects on the fund's business and
operations, such as problems with calculating net asset value and difficulties
in implementing the fund's purchase and redemption procedures. The Adviser has
commenced a review of the Year 2000 issue as it may affect the fund and is
taking steps it believes are reasonably designed to address the Year 2000 issue,
although there can be no assurances that these steps will be sufficient. In
addition, there can be no assurances that the Year 2000 issue will not have an
adverse effect on the issuers whose securities are held by the fund or on global
markets or economies generally.
Distributions
Dividends and capital gains distributions
The fund intends to distribute dividends from its net investment income
annually, in November or December. The fund intends to distribute net realized
capital gains after utilization of capital loss
9
<PAGE>
carryforwards, if any, in November or December. An additional distribution may
be made at a later date, if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such 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.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a fund. If an investment is in the form of a
retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among funds are also taxable
events.
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable as ordinary income. A portion of dividends from
ordinary income may qualify for the dividends-received deduction for
corporations.
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution, because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
you owned the shares.
The fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year.
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
fund 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. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in the fund.
10
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the fund's
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single fund share outstanding throughout the
period (a). The total return figures represent the rate that an investor would
have earned (or lost) on an investment in the fund assuming reinvestment of all
dividends and distributions. This information has been audited by
PricewaterhouseCoopers LLP whose report, along with the fund's financial
statements, is included in the annual report, which is available upon request by
calling Scudder Investor Relations at 1-800-225-2470 or, for existing investors,
call the Scudder Automated Information Line (SAIL) at 1-800-343-2890.
Small Company Value Fund
- --------------------------------------------------------------------------------
For the Period
October 6, 1995
Years Ended (commencement of
August 31, operations) to
1998 1997 August 31, 1996
- --------------------------------------------------------------------------------
Net asset value, beginning ----------------------------------------
of period ........................... $ 19.58 $ 13.57 $ 12.00
----------------------------------------
Income from investment operations:
Net investment income ................. .07 .01 .07
Net realized and unrealized gain
(loss) on investment transactions ... (1.71) 6.03 1.53
----------------------------------------
Total from investment operations ...... (1.64) 6.04 1.60
----------------------------------------
Less distributions:
From net investment income ............ (.02) (.03) (.05)
From net realized gains on
investment transactions ............. (.30) (.01) --
----------------------------------------
Total distributions ................... (.32) (.04) (.05)
----------------------------------------
Redemption fees ....................... .03 .01 .02
----------------------------------------
Net asset value, end of period ........ $ 17.65 $ 19.58 $ 13.57
----------------------------------------
- --------------------------------------------------------------------------------
Total Return (%) ...................... (8.45) 44.67(b) 13.54(b)(c)**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ........................ 237 123 41
Ratio of operating expenses, net to
average daily net assets (%) ........ 1.39 1.50 1.50*
Ratio of operating expenses before
expense reductions, to
average daily net assets (%) ........ 1.39 1.63 2.61*
Ratio of net investment income to
average daily net assets (%) ........ .31 .07 .67*
Portfolio turnover rate (%) ........... 22.6 43.6 34.0*
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect to the shareholder of the 1%
redemption fee on shares held less than one year.
* Annualized
** Not annualized
- --------------------------------------------------------------------------------
11
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Net asset value per share is calculated by dividing the value of
total fund assets, less all liabilities, by the total number of shares
outstanding. Market prices are used to determine the value of the fund's assets.
If market prices are not readily available for a security or if a security's
price is not considered to be market indicative, that security may be valued by
another method that the Board or its delegate believes accurately reflects fair
value. In those circumstances where a security's price is not considered to be
market indicative, the security's valuation may differ from an available market
quotation.
Redemption fee
Upon the redemption or exchange of shares held less than one year, a fee of 1%
of the current net asset value of the shares will be assessed and retained by
the fund for the benefit of the remaining shareholders. The fee is waived for
all shares purchased through certain Scudder retirement plans, including 401(k)
plans, 403(b) plans, 457 plans, Keogh accounts, and Profit Sharing and Money
Purchase Pension Plans. However, if such shares are purchased through a broker,
financial institution or recordkeeper maintaining an omnibus account for the
shares, such waiver may not apply. (Before purchasing shares, please check with
your account representative concerning the availability of the fee waiver.) In
addition, this waiver does not apply to any IRA or SEP-IRA accounts. The fund
reserves the right to modify the terms of or terminate this fee at any time.
The fee applies to redemptions from the fund and exchanges to other Scudder
funds, but not to dividend or capital gains distributions which have been
automatically reinvested in the fund.
The fee is applied to the shares being redeemed or exchanged in the order in
which they were purchased.
Processing time
All purchase and redemption requests received in good order at the fund's
transfer agent by the close of regular trading on the Exchange are executed at
the net asset value per share calculated at the close of trading that day. All
other requests that are in good order will be executed the following business
day.
12
<PAGE>
Signature guarantees
A signature guarantee is required for redemptions over $100,000. You can obtain
one from most brokerage houses and financial institutions, although not from a
notary public. The fund will normally send redemption proceeds within one
business day following the redemption request, but may take up to seven business
days (or longer in the case of shares recently purchased by check). For more
information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent purchases and sales made in response
to short-term fluctuations in the fund's share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in the fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to the fund.
The fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Redemption-in-kind
The fund reserves the right to honor requests for redemption or repurchase
orders by making payment in whole or in part in readily marketable securities
("redemption in kind") if the amount of such a request is large enough to affect
operations (for example, if the request is greater than $250,000 or 1% of the
fund's assets). These securities will be chosen by the fund and valued as they
are for purposes of computing the fund's net asset value. A shareholder may
incur transaction expenses in converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For
13
<PAGE>
information about No-Fee IRAs, Roth IRAs and other retirement options, call
Scudder Investor Relations at 1-800-225-2470. For information on establishing
401(k) and 403(b) plans, call Scudder Defined Contribution Services at
1-800-323-6105.
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston,
Chicago, New York and San Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number
and the complete fund name, to the appropriate address
listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor
Center locations are listed above.
- --------------------------------------------------------------------------------
By Phone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
- --------------------------------------------------------------------------------
14
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Print or type your instructions and include:
or Fax - the name of the fund and class and the account number you
are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a
day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate address
or Fax or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
By You may arrange to receive automatic cash payments periodically.
Automatic Call 1-800-225-5163 for more information and an enrollment form.
Withdrawal
Plan
- --------------------------------------------------------------------------------
15
<PAGE>
Investment products and services
The Scudder Family of Funds##
- --------------------------------------------------------------------------------
Money Market
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market
Series -- Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series --
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax
Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and
Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
16
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
- ------------------- ------------------
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **####
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc. Scudder Global High Income Fund, Inc.
The Brazil Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Montgomery Street Income Scudder Spain and Portugal Fund, Inc.
Securities, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
- -----------
## Funds within categories are listed in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family
of Funds.
#### A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on
the New York Stock Exchange and, in some cases, on various foreign stock
exchanges.
17
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected the fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Phone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-2021
[GRAPHIC OMITTED]
[PRINTED WITH SOY LOGO] [RECYCLE LOGO] Printed on recycled paper
312-2-19
PRO78199
<PAGE>
SCUDDER SMALL COMPANY VALUE FUND
A series of Scudder Securities Trust
A Pure No-Load (TM) (No Sales Charges) Diversified Mutual Fund
Which Invests for Long-Term Growth of Capital by
Seeking out Undervalued Stocks of Small U.S. Companies
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus. The
Prospectus of Scudder Small Company Value Fund dated January 1, 1999, as amended
from time to time, may be obtained without charge by writing to Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders of the Scudder Small Company Value
Fund dated August 31, 1998 is incorporated by reference and is hereby deemed to
be part of this Statement of Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES..........................................................................1
General Investment Objective and Policies....................................................................1
Investments..................................................................................................1
Master/feeder structure......................................................................................2
Investments and Investment Techniques........................................................................2
Investment Restrictions.....................................................................................12
PURCHASES............................................................................................................13
Additional Information About Opening An Account.............................................................13
Minimum balances............................................................................................13
Additional Information About Making Subsequent Investments..................................................14
Additional Information About Making Subsequent Investments by QuickBuy......................................14
Checks......................................................................................................15
Wire Transfer of Federal Funds..............................................................................15
Share Price.................................................................................................15
Share Certificates..........................................................................................15
Other Information...........................................................................................15
EXCHANGES AND REDEMPTIONS............................................................................................16
Exchanges...................................................................................................16
Special Redemption and Exchange Information.................................................................17
Redemption by Telephone.....................................................................................17
Redemption by QuickSell.....................................................................................18
Redemption by Mail or Fax...................................................................................18
Redemption-In-Kind..........................................................................................19
Other Information...........................................................................................19
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................19
The Pure No-Load(TM)........................................................................................19
Internet access.............................................................................................20
Dividends and Capital Gains Distribution Options............................................................21
Scudder Investor Centers....................................................................................21
Reports to Shareholders.....................................................................................21
Transaction Summaries.......................................................................................21
THE SCUDDER FAMILY OF FUNDS..........................................................................................22
SPECIAL PLAN ACCOUNTS................................................................................................26
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
Self-Employed Individuals..............................................................................27
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........27
Scudder IRA: Individual Retirement Account.................................................................27
Scudder Roth IRA: Individual Retirement Account............................................................28
Scudder 403(b) Plan.........................................................................................29
Automatic Withdrawal Plan...................................................................................29
Group or Salary Deduction Plan..............................................................................29
Automatic Investment Plan...................................................................................29
Uniform Transfers/Gifts to Minors Act.......................................................................30
Scudder Savings Incentive Match Plans for Employees: SIMPLE IRA'S..........................................30
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................30
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION..............................................................................................30
Average Annual Total Return.................................................................................30
Cumulative Total Return.....................................................................................31
Total Return................................................................................................31
Comparison of Fund Performance..............................................................................32
FUND ORGANIZATION....................................................................................................35
INVESTMENT ADVISER...................................................................................................35
Personal Investments by Employees of the Adviser............................................................38
TRUSTEES AND OFFICERS................................................................................................39
REMUNERATION.........................................................................................................41
Responsibilities of the Board--Board and Committee Meetings.................................................41
Compensation of Officers and Trustees.......................................................................42
DISTRIBUTOR..........................................................................................................43
TAXES................................................................................................................44
PORTFOLIO TRANSACTIONS...............................................................................................47
Brokerage Commissions.......................................................................................47
Portfolio Turnover..........................................................................................48
NET ASSET VALUE......................................................................................................48
ADDITIONAL INFORMATION...............................................................................................49
Experts.....................................................................................................49
Shareholder Indemnification.................................................................................49
Other Information...........................................................................................49
FINANCIAL STATEMENTS.................................................................................................50
</TABLE>
ii
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
(See "FUND SUMMARY - Investment Objectives and Strategies and
Principal Risks", and "ABOUT THE FUND - Principal Strategies,
Investments and Related Risks", in the Fund's prospectus.)
Scudder Small Company Value Fund (the "Fund") is a pure no-load(TM),
diversified series of Scudder Securities Trust (the "Trust"), an open-end
management investment company which continuously offers and redeems its shares
at net asset value. It is a company of the type commonly known as a mutual fund.
General Investment Objective and Policies
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies. The Fund's
investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"), uses a
systematic, proprietary investment approach to identify small, domestic
companies that, in the opinion of the Adviser, are selling at prices that do not
reflect adequately their long-term business potential. These companies are often
out of favor or not closely followed by investors and, as a result, may offer
substantial appreciation potential over time.
The Fund is expected to provide little, if any, current income and is
designed for the aggressive portion of an investor's portfolio. Although the
Fund typically holds a large number of securities identified through a
quantitative, value-driven investment strategy, it does entail above-average
investment risk in comparison to larger stocks. Shares of the Fund should be
purchased with a long-term horizon in mind. To encourage long-term investment, a
1% redemption exchange fee, described more fully below, is payable to the Fund
for the benefit of remaining shareholders on shares held less than one year.
Except as otherwise indicated, the Fund's investment objective and
policies are not fundamental and may be changed without a vote of shareholders.
If there is a change in investment objective, shareholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs. There can be no assurance that the Fund's
objective will be met.
Investments
In pursuit of long-term growth of capital, the Fund invests, under
normal circumstances, at least 90% of its assets in the common stock of small
U.S. companies. The Fund will invest in securities of companies that are similar
in size to those in the Russell 2000(R) Index of small stocks. The Fund will
sell securities of companies that have grown in market capitalization above the
maximum of the Russell 2000 Index, as necessary to keep the Fund focused on
smaller companies.
The Fund takes a diversified approach to investing in small
capitalization issues. The Fund will typically invest in more than one hundred
and fifty small companies, representing a variety of U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (convertible
securities), rights, warrants, and restricted and illiquid securities.
Securities may be listed on national exchanges or traded over-the-counter. The
Fund also may invest up to 20% of its assets in U.S. Treasury, agency and
instrumentality obligations on a temporary basis, may enter into repurchase
agreements and reverse repurchase agreements and may engage in strategic
transactions, using such derivatives contracts as index options and futures, to
increase stock market participation, enhance liquidity and manage transaction
costs. The Fund currently intends to borrow only for temporary or emergency
purposes, such as providing for redemptions or distributions, and not for
investment leverage purposes.
For temporary defensive purposes, the Fund may invest without limit in
cash and cash equivalents when the Adviser deems such a position advisable in
light of economic or market conditions. It is impossible to accurately predict
how long such alternate strategies may be utilized. More information about these
investment techniques is provided under "Investment and Investment Techniques."
<PAGE>
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investments and Investment Techniques
Value Investment Approach. The Fund is actively managed using a disciplined,
value-oriented investment management approach. The Adviser uses a proprietary,
computerized model to identify for investment small public U.S. companies
selling at prices that, in the opinion of the Adviser, do not reflect adequately
their long-term business potential. Companies purchased for the Fund typically
have the following characteristics:
o attractive valuations relative to the Russell 2000 Index -- a widely
used benchmark of small stock performance-- based on measures such as
price to earnings, price to book value and price to cash flow ratios.
o favorable trends in earnings growth rates and stock price momentum.
The Fund's holdings are often out of favor or simply overlooked by
investors. Accordingly, their prices can rise either as a result of improved
business fundamentals, particularly when earnings grow faster than general
expectations, or as more investors come to recognize the full extent of a
company's underlying potential.
While the Fund involves above-average equity risk, the Fund's
value-oriented, systematic approach to investing is designed to mitigate
volatility of the Fund's share price relative to the small capitalization sector
of the U.S. stock market. This risk is further managed by purchasing a large
number of stocks, and employing specialized portfolio management techniques,
such as portfolio optimization.
The Fund focuses specifically on finding undervalued stocks of small
U.S. companies. Historically, small companies have been attractive because they
have been sources of new technologies and services, have competed with large
companies on the basis of lower labor costs and have grown faster than larger
firms. Their small size has also allowed them to respond rapidly to changing
business conditions. In addition, small companies have not been closely followed
by as many securities analysts as larger companies, so they have rewarded
investors with the patience and knowledge to have sought them out.
According to Ibbotson Associates, which has compiled market data back
to 1926, the growth of $1 invested in small company stocks over that 72 year
period would have grown to $3,453.29, compared to $1,828.33 if invested in large
company stocks. Over this period, the compound annual growth rate of that $1
investment would have been 11.98% for the small company investment versus 11%
for the large company investment. With the better performance, however, comes
greater volatility in returns -- from a one-year high of +121.77% to a one-year
low of 49.68% during the period for small stocks, vs. +54.0% and -43.0% for
large stocks.
2
<PAGE>
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
Cumulative Value of $1 Invested in 1926
(Periods ended December 31)
LINE CHART DATA:
Date Large Co. Stocks Small Co. Stocks
---- ---------------- ----------------
1925 1.00 1.00
1926 1.12 0.99
1927 1.53 1.24
1928 2.20 1.63
1929 2.02 0.98
1930 1.52 0.59
1931 0.86 0.30
1932 0.79 0.29
1933 1.21 0.65
1934 1.20 0.78
1935 1.77 1.25
1936 2.37 1.88
1937 1.54 0.96
1938 2.02 1.35
1939 2.01 1.40
1940 1.81 1.31
1941 1.60 1.18
1942 1.93 1.51
1943 2.43 2.38
1944 2.91 3.41
1945 3.96 5.59
1946 3.64 4.94
1947 3.85 4.80
1948 4.06 4.59
1949 4.83 5.56
1950 6.36 7.61
1951 7.89 8.80
1952 9.34 9.65
1953 9.24 9.37
1954 14.11 14.76
1955 18.56 17.85
1956 19.78 19.01
1957 17.65 15.59
1958 25.30 25.22
1959 28.32 29.59
1960 28.45 28.59
1961 36.11 37.09
1962 32.95 30.88
1963 40.47 36.56
1964 47.14 42.41
1965 53.01 57.31
1966 47.67 53.02
1967 59.10 86.40
1968 65.64 113.97
1969 60.06 88.36
1970 62.47 79.62
1971 71.41 96.21
1972 84.96 101.85
1973 72.50 66.97
1974 53.31 48.74
1975 73.14 79.25
1976 90.58 118.88
1977 84.08 139.88
1978 89.59 162.90
1979 106.11 235.13
1980 140.51 312.64
1981 133.62 321.81
1982 162.22 414.62
1983 198.75 533.96
1984 211.20 524.21
1985 279.12 697.79
1986 330.67 758.80
1987 347.97 707.23
1988 406.46 882.53
1989 534.46 1051.91
1990 517.50 864.72
1991 675.59 1287.38
1992 727.41 1514.17
1993 800.08 1786.68
1994 810.54 1765.44
1995 1113.92 2288.85
1996 1370.95 2701.77
1997 1828.33 3453.29
Source: Ibbotson Associates^1
The value approach entails searching for "bargains" in the market.
These are often companies that are selling at prices below their estimated
long-term business potential and may be less widely followed or out of favor due
to recent company downturns. "Value" stocks, as measured by the Russell 2000
Value Index, historically have been less volatile than small growth stocks which
generally have higher price/earnings ratios. As one would expect, value stocks
have tended to rise as business fundamentals improved or as investors began to
recognize their potential. "Growth" stocks have provided even more substantial
increases in up markets, but they are also subject to substantial decreases in
down markets, especially relative to value stocks. These greater ups and downs
for growth stocks have meant greater overall volatility or risk, according to
data compiled by Frank Russell Co. By contrast, historical performance indicates
that the value orientation tends to produce less extreme swings, and manages to
provide superior overall returns due to the limited downside risk inherent in
the discipline.
The Russell 2000 Index is a dynamic index comprised of approximately
2000 small U.S. company stocks. (Scudder Small Company Value Fund invests in
stocks of similar size -- see General Investment Objective and Policies.) For
measurement and analysis, Russell has split the Index into growth and value
subsets.
Russell 2000 Index of Small Stocks Performance in Up and Down Markets
---------------------------------------------------------------------
Compound Average Monthly Total Return: 1979* to December 1997
<TABLE>
<CAPTION>
# Months Russell 2000(R) Growth Russell 2000(R) Value Russell 2000(R)
<S> <C> <C> <C> <C>
Down Months 85 -5.1% -3.0% -4.0%
Up Months 143 4.9% 4.1% 4.5%
All Months 228 1.1% 1.4% 1.2%
(annualized) -- 13.4% 18.1% 15.9%
* Earliest performance for the Russell Indices.
</TABLE>
From 1979 to December 1997, a period that includes one of the most
significant "up market" periods in history, the Russell 2000 Value Index has
outperformed the overall Russell 2000 index by 2.2 percentage points on an
- ------------------------------
^1 Small stocks from 1926-1997 are described by the NYSE, AMEX, NASDAQ National
Market 6th-8th decile returns. Large stocks are described by the Standard &
Poor's Composite Index, currently comprised of 500 generally large stocks in the
U.S. Prior to 1957, the Index was comprised of 90 of the largest stocks. Source:
Stocks, Bonds Bills and Inflation 1995 Yearbook, Ibbotson Associates.
3
<PAGE>
annualized basis. Furthermore, small company value stocks tend to outperform
small company stocks over various rolling periods.^2
o Value has outperformed Russell 2000 in 62% of rolling 12 month
periods.
o Value has outperformed Russell 2000 in 97% of rolling 60 month
periods.
Small Cap Value Outperforms Small Stocks Over Long Term
o By 2.2% Points Annualized (1979-12/1997)
o In 135 of 217 (62%) Rolling 12 Month Periods
o In 164 of 169 (97%) Rolling 60 Month Periods
- --------------------------------------------------------------------------------
THE PRINTED DOCUMENT CONTAINS A GRAPH HERE
GRAPH DATA:
60 Months Annualized Return Difference
Ending R-2000 Value - R-2000
1984 0.0158
8401 0.0206
8402 0.0223
8403 0.0276
8404 0.0269
8405 0.0272
8406 0.026
8407 0.0268
8408 0.0253
8409 0.0323
8410 0.037
8411 0.0458
1985 0.0512
8501 0.0522
8502 0.0555
8503 0.0508
8504 0.0521
8505 0.0501
8506 0.052
8507 0.0549
8508 0.0592
8509 0.0652
8510 0.0692
8511 0.079
1986 0.0748
8601 0.0667
8602 0.0637
8603 0.0639
8604 0.0591
8605 0.0624
8606 0.0524
8607 0.0543
8608 0.0521
8609 0.0522
8610 0.0535
8611 0.0501
1987 0.0504
8701 0.0456
8702 0.0382
8703 0.0346
8704 0.0368
8705 0.0363
8706 0.0355
8707 0.0362
8708 0.0343
8709 0.0348
8710 0.0435
8711 0.0486
1988 0.0451
8801 0.0523
8802 0.0542
8803 0.0483
8804 0.0477
8805 0.0499
8806 0.0524
8807 0.0484
8808 0.0477
8809 0.045
8810 0.0406
8811 0.0415
1989 0.0369
8901 0.0312
8902 0.0303
8903 0.0271
8904 0.0259
8905 0.0235
8906 0.0272
8907 0.0227
8908 0.0246
8909 0.018
8910 0.0144
8911 0.0099
1990 0.0083
9001 0.0141
9002 0.0139
9003 0.0115
9004 0.0092
9005 0.0062
9006 0.0052
9007 0.0059
9008 0.0074
9009 0.0061
9010 0.0056
9011 0.0027
1991 0.0017
9101 0.0024
9102 0.0022
9103 0.0016
9104 0.0057
9105 0.006
9106 0.0094
9107 0.0046
9108 0.0013
9109 -0.0043
9110 -0.0052
9111 -0.0041
1992 -0.0083
9201 -0.0054
9202 0.0011
9203 0.0061
9204 0.0103
9205 0.0124
9206 0.0153
9207 0.0144
9208 0.016
9209 0.015
9210 0.0068
9211 0.0009
1993 0.0071
9301 0.006
9302 0.0127
9303 0.0153
9304 0.0163
9305 0.0124
9306 0.0134
9307 0.0122
9308 0.009
9309 0.0085
9310 0.0067
9311 0.0071
1994 0.0081
9401 0.0086
9402 0.0076
9403 0.0103
9404 0.0124
9405 0.0156
9406 0.0151
9407 0.0172
9408 0.0147
9409 0.0149
9410 0.013
9411 0.0134
1995 0.0158
9501 0.0138
9502 0.0144
9503 0.0131
9504 0.0156
9505 0.0206
9506 0.0178
9507 0.013
9508 0.0125
9509 0.0105
9510 0.0131
9511 0.0161
1996 0.0192
9601 0.0216
9602 0.0183
9603 0.0183
9604 0.0101
9605 0.007
9606 0.0114
9607 0.0217
9608 0.02
9609 0.019
9610 0.0287
9611 0.0306
1997 0.0351
9701 0.0331
9702 0.0365
9703 0.0359
9704 0.0338
9705 0.0244
9706 0.0229
9707 0.0213
9708 0.0176
9709 0.0173
9710 0.0232
9711 0.0303
1998 0.0325
Note: Small Cap Style Indices, currently defined by Frank Russell using
price-to-book ratios and the IBES Long Term Growth Forecast, are subsets of the
Russell 2000 Small Stock Index. Returns through 12/97. Source: Frank Russell
Co., Scudder Kemper Investments, Inc.
The performance advantage of value stocks has been fairly consistent
over rolling five year periods and has not been caused by exceptional
performance in any one year. Instead, this phenomenon appears to be driven by
the fact that the downside volatility of small cap value stocks is limited
relative to that of growth stocks, as indicated in the previous table. Upside
performance also tends to be limited, but is sufficiently high that, over time,
small cap value stocks have outperformed small cap growth stocks.
Investments Involving Above-Average Risk. The Fund may purchase securities
carrying above-average risk relative to larger cap stocks or fixed income
investments. The Fund's shares are suitable only for those investors who can
make such investments without concern for current income and who are in a
financial position to assume above-average stock market risks in search of
long-term rewards.
Small companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than large companies. The
prices of small company securities are often more volatile than prices
associated with large company issues, and can display abrupt or erratic
movements at times, due to limited trading volumes and less publicly available
information. To help reduce risk, the Fund allocates its investments among many
companies and different industries.
The securities of small companies are often traded only
over-the-counter and may not be traded in the volume typical of larger companies
trading on a national securities exchange. As a result, the disposition by the
Fund of
- ------------------------------
2 Rolling periods capture returns over overlapping uniform holding periods. In
examining 60-month rolling periods, the first rolling period would be
1/79-12/83, the second rolling period would be 2/79-1/84, the third rolling
period would be 3/79-2/84, etc. * These funds are not available for sale in all
states. For information, contact Scudder Investor
4
<PAGE>
holdings of such securities may require the Fund to offer a discount from recent
prices or dispose of the securities over a lengthy period of time. The prices of
this type of security may be more volatile than those of larger companies which
are often traded on a national securities exchange.
Common stocks. Under normal circumstances, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer the greatest potential for
gain on investment, compared to other classes of financial assets such as bonds
or cash equivalents.
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks, and other securities which are
convertible into common stocks.
The convertible securities in which the Fund may invest may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions, or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stocks changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis and so may not experience
market value declines to the same extent as the underlying common stock. When
the market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock, although typically not as much as the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As debt securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all debt securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
nonconvertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes (LYONS). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Illiquid Securities. The Fund may occasionally purchase securities other than in
the open market. While such purchases may often offer attractive opportunities
for investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933 or the availability of an exemption from registration
(such as Rules 144 or 144A) or because they are subject to other legal or
contractual delays in or restrictions on resale.
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Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. The Fund may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event the Fund may be liable to purchasers
of such securities if such sale is made in violation of the 1933 Act or if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.
The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of the Board of Trustees. In reaching liquidity
decisions, the Adviser will consider the following factors: (1) the frequency of
trades and quotes for the security, (2) the number of dealers wishing to
purchase or sell the security and the number of their potential purchasers, (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (i.e. the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Repurchase Agreements. The Fund 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 Fund 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 Investors Service ("Moody's") or Standard & Poor's
Corporation ("S&P").
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. 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 Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price upon repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the Obligation itself. Obligations
will be physically 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 Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund 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 Fund may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund 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
Fund would be at risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt obligation purchased for the
Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
security. However, if the market value of the Obligation subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Fund 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.
Warrants. The Fund may invest in warrants up to 5% of the value of total assets.
The holder of a warrant has the right, until the warrant expires, to purchase a
given number of shares of a particular issuer at a specified price. Such
investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The
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Fund maintains a segregated account in connection with outstanding reverse
repurchase agreements. The Fund will enter into reverse repurchase agreements
only when the Adviser believes that the interest income to be earned from the
investment of the proceeds of the transaction will be greater than the interest
expense of the transaction.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. The Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Adviser to be in good standing.
The value of the securities loaned will not exceed 5% of the value of the Fund's
total assets at the time any loan is made.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend to borrow for investment leverage purposes,
if such a strategy were implemented in the future it would increase the Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowings will be fixed, the Fund's assets may change in value during the time
a borrowing is outstanding, thus increasing exposure to capital risk.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks or to seek 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 Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and other financial instruments, purchase and sell financial
futures contracts and options thereon, and enter into various interest rate
transactions such as swaps, caps, floors or collars (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 Fund's portfolio resulting from
securities market fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of
fixed-income securities in the Fund's 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 Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic 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 to create leveraged exposure in the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures
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and options transactions for hedging should tend to minimize the risk of loss
due to a decline in the value of the hedged position, at the same time they tend
to limit any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security 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 Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within
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seven days. The Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any 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 Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 15% of its net assets in illiquid
securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, 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, and futures contracts. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, equity securities
(including convertible securities) and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices, and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Fund will not sell put options if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, 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 Fund, 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 Fund'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 Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment
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of a premium for the option without any further obligation on the part of the
Fund. If the Fund exercises an option on a futures contract it will be obligated
to post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, and multiple
interest rate transactions and any combination of futures, options, 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 Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund 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
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Adviser.
If there is a default
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by the Counterparty, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
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 Fund'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 Fund segregate cash or liquid
assets with its custodian to the extent Fund 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 Fund 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 Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash or
liquid assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
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Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures 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, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Investment Restrictions
Unless specified to the contrary, the following fundamental
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund involved which, under the 1940 Act and
the rules thereunder and as used in this Statement of Additional Information,
means the lesser of (1) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy, the
Fund will not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts related to physical
commodities; or
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
Nonfundamental policies may be changed by the Trustees of the Trust and
without shareholder approval. As a matter of nonfundamental policy, the Fund
does not currently intend to:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
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(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
PURCHASES
(See "Purchases" and "Transaction Information" in the Fund's prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
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o assess an annual $10 per fund charge (with the fee to be paid to the
fund) for anynon-fiduciary/non-custodial account without an automatic
investment plan (AIP) in place and a balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of the
account. The Fund will mail the proceeds of the redeemed account to the
shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the Fund or
the principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
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Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
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<PAGE>
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund also reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Fund with a tax identification number
during the 30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and Redemptions" and "Transaction
Information" in the Fund's prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in the other fund. When an exchange involves a new account, the
new account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is to be different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee as described under "Transaction Information -- Signature guarantees"
in the Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder Fund to an
existing account in another Scudder Fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
However, shares that are exchanged may be subject to the Fund's 1% redemption
fee. (See "Special Redemption and Exchange Information." An exchange into
another Scudder fund is a redemption of shares, and therefore may result in tax
consequences (gain or loss) to the shareholder, and the proceeds of such an
exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust, the Fund and the Transfer Agent each reserves the right to
suspend or terminate the privilege of exchanging by telephone or fax at any
time.
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The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Special Redemption and Exchange Information
In general, shares of the Fund may be exchanged or redeemed at net
asset value. However, shares of the Fund held for less than one year are
redeemable at a price equal to 99% of the then current net asset value per
share. This 1% discount, referred to in the prospectus and this statement of
additional information as a redemption fee, directly affects the amount a
shareholder who is subject to the discount receives upon exchange or redemption.
It is intended to encourage long-term investment in the Fund, to avoid
transaction and other expenses caused by early redemptions and to facilitate
portfolio management. The fee is not a deferred sales charge, is not a
commission paid to the Adviser or its subsidiaries, and does not benefit the
Adviser in any way. The Fund reserves the right to modify the terms of or
terminate this fee at any time.
The redemption discount will not be applied to (a) a redemption of
shares of the Fund outstanding for one year or more, (b) shares purchased
through certain Scudder retirement plans, including 401(k) plans, 403(b) plans,
457 plans, Keogh accounts, and Profit Sharing and Money Purchase Pension Plans
provided, however, if such shares are purchased through a broker, financial
institution or recordkeeper maintaining an omnibus account for the shares, such
waiver may not apply. (Before purchasing shares, please check with your account
representative concerning the availability of the fee waiver. In addition, this
waiver does not apply to IRA and SEP-IRA accounts.) (c) a redemption of
reinvestment shares (i.e., shares purchased through the reinvestment of
dividends or capital gains distributions paid by the Fund), (d) a redemption of
shares by the Fund upon exercise of its right to liquidate accounts (i) falling
below the minimum account size by reason of shareholder redemptions or (ii) when
the shareholder has failed to provide tax identification information, or (e) a
redemption of shares due to the death of the registered shareholder of a Fund
account, or, due to the death of all registered shareholders of a Fund account
with more than one registered shareholder, (i.e., joint tenant account), upon
receipt by Scudder Service Corporation of appropriate written instructions and
documentation satisfactory to Scudder Service Corporation. For this purpose and
without regard to the shares actually redeemed, shares will be treated as
redeemed as follows: first, reinvestment shares; second, purchased shares held
one year or more; and third, purchased shares held for less than one year.
Finally, if a redeeming shareholder acquires Fund shares through a transfer from
another shareholder, applicability of the discount, if any, will be determined
by reference to the date the shares were originally purchased, and not from the
date of transfer between shareholders.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit-Sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption payments
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
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If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net asset
value per share calculated at the close of trading on the day of your call.
QuickSell requests received after the close of regular trading on the Exchange
will begin their processing and be redeemed at the net asset value calculated
the following business day. QuickSell transactions are not available for Scudder
IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary, agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within five business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays in
payment of more than seven days for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information please call 1-800-225-5163.
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Redemption-In-Kind
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Trust and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Fund has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Trust is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed or repurchased may be more or less than the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. A wire
charge may be applicable for redemption proceeds wired to an investor's bank
account. Redemptions of shares, including an exchange into another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such redemptions may be subject to backup withholding. (see
"TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value and a shareholder's right to
redeem shares and to receive payment may be suspended at times and a
shareholder's right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Trust's shareholders; provided that
applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
(See "Investment Products and Services" in the Fund's prospectus.)
The Pure No-Load(TM)
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
19
<PAGE>
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds in the Scudder Family of Funds do not pay any asset-based
sales charges or service fees, Scudder developed and trademarked the phrase pure
no-load(TM) to distinguish Scudder funds from other no-load mutual funds.
Scudder pioneered the no-load concept when it created the nation's first no-load
fund in 1928, and later developed the nation's first family of no-load mutual
funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder Family of Funds pure no-load fund over investing
the same amount in a load fund that collects an 8.50% front-end load, a load
fund that collects only a 0.75% 12b-1 and/or service fee, and a no-load fund
charging only a 0.25% 12b-1 and/or service fee. The hypothetical figures in the
chart show the value of an account assuming a constant 10% rate of return over
the time periods indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
====================================================================================================================
Scudder No-Load Fund
Years Pure No-Load(TM) 8.50% Load Fund Load Fund with 0.75% with 0.25% 12b-1
Fund 12b-1 Fee Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Investors are encouraged to review the fee tables on page 5 of the
Fund's prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between
20
<PAGE>
Scudder Funds, the Fund Exchange option provides a step-by-step procedure to
exchange shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See
"Investment Products and Services" in the Funds' prospectuses for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Investment Products and Services" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Funds.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
21
<PAGE>
THE SCUDDER FAMILY OF FUNDS
(See "Investment Products and Services" in the Fund's prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
22
<PAGE>
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income
through investment primarily in investment-grade corporate debt
securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
23
<PAGE>
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
24
<PAGE>
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in quality medium-size companies with the potential for
sustainable above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
- ------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
25
<PAGE>
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction Information", "Purchases", and "Exchanges and
Redemptions" in the Fund's prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an
26
<PAGE>
investor considering the funding of the investment plans described below to
consult with an attorney or other investment or tax adviser with respect to the
suitability requirements and tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples if only one spouse has
earned income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
27
<PAGE>
<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
<TABLE>
<CAPTION>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married,
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
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Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction Information -- Signature guarantees" in the Fund's
prospectus. Any such requests must be received by the Fund's transfer agent ten
days prior to the date of the first automatic withdrawal. An Automatic
Withdrawal Plan may be terminated at any time by the shareholder, the Trust or
its agent on written notice, and will be terminated when all shares of the Fund
under the Plan have been liquidated or upon receipt by the Trust of notice of
death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
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Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
Scudder Savings Incentive Match Plans for Employees: SIMPLE IRA'S
Shares of the Fund may be purchased as the underlying investment for a
"SIMPLE IRA." A SIMPLE IRA is an IRA into which both an individual and the
individual's employer may make contributions. The individual may elect to make
pre-tax contributions, calculated as a percentage of compensation, to a SIMPLE
IRA, up to $6,000 a year. Subject to certain limits, the employer may either
match a portion of your contributions, or may make a contribution equal to 2% of
the employee's compensation without regard to the amount the employee
contributes under the SIMPLE IRA. Individuals will be immediately 100% vested in
all contributions made to a SIMPLE IRA.
If amounts are distributed from a SIMPLE IRA account during the two
year period beginning on the date the employee first participates in the SIMPLE
salary reduction arrangement, a 25% penalty tax will be imposed on such
distribution. Also during that two year period, the SIMPLE IRA account can be
rolled over tax-free only to another SIMPLE IRA account. After that two year
period has passed, distributions from a SIMPLE IRA instead will be subject
generally to the rules applicable to other IRAs; for example, they may be rolled
over tax-free into any individual retirement plan, they will be subject to the
10% penalty tax on early distributions that are made before the individual
reaches age 59 1/2, and they will be fully taxed when withdrawn.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "DISTRIBUTIONS -- Dividends and Capital Gains Distributions and
Taxes" in the Fund's prospectus.)
The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
The Fund may allow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Fund may retain all or part of such gain for reinvestment, after
paying the related federal income taxes for which the shareholders may claim a
credit against their federal income tax liability. If the Fund does not
distribute the amount of capital gains and/or ordinary income required to be
distributed by an excise tax provision of the Code, the Fund may be subject to
that excise tax. In certain circumstances, the Fund may determine that it is in
the interest of shareholders to distribute less than the required amount. (See
"TAXES.")
The Fund intends to distribute investment company taxable income and
any net realized capital gains resulting from Fund investment activity in
November or December each year. Both types of distributions will be made in
shares of the Fund and confirmations will be mailed to each shareholder unless a
shareholder has elected to receive cash, in which case a check will be sent.
Distributions of investment company taxable income and net realized capital
gains are taxable (see "TAXES"), whether made in shares or cash.
PERFORMANCE INFORMATION
(See "FUND SUMMARY -- Past Performance" in the Fund's prospectus.)
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures will be calculated in the following manner:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for the periods of one year and the life of the Fund, all ended on the
last day of a recent calendar quarter. Average annual total return quotations
reflect changes in the price of the Fund's shares and assume that all dividends
and capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
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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.
Average Annual Total Return for the periods ended August 31, 1998
One Year Life of Fund(1)
(8.45%) 15.08%
(1) For the period October 6, 1995 (commencement of operations) to
August 31, 1998
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 Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative Total Return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
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.
Cumulative Total Return for the periods ended August 31, 1998
One Year Life of Fund(1)
(8.45%) 50.37%
(1) For the period October 6, 1995 (commencement of operations) to
August 31, 1998
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.
Quotations of the Fund's Performance are historical and are not
intended to indicate future performance. An investor's share when redeemed may
be worth more or less than their original cost. Performance of the Fund will
vary based on changes in market conditions and the level of Fund's expenses.
There may be quarterly periods following the periods reflected in the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.
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Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
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A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about this Fund. Sources for Fund performance information and articles
about the Fund include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
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<PAGE>
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
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Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
FUND ORGANIZATION
(See "Investment Adviser" in the Fund's prospectus.)
The Fund is a series of Scudder Securities Trust, formerly Scudder
Development Fund, a Massachusetts business trust established under a Declaration
of Trust dated October 16, 1985. The Trust's predecessor was organized as a
Delaware corporation in 1970. The Trust's authorized capital consists of an
unlimited number of shares of beneficial interest of $0.01 par value, all of
which are of one class and have equal rights as to voting, dividends and
liquidation. The Trust's shares are currently divided into seven series, Scudder
Development Fund, Scudder Financial Services Fund, Scudder Health Care Fund,
Scudder Micro Cap Fund, Scudder Small Company Value Fund, Scudder Technology
Fund and Scudder 21st Century Growth Fund. The Trustees have the authority to
issue additional series of shares and to designate the relative rights and
preferences as between the different series. Each share of each Fund has equal
rights with each other share of that Fund as to voting, dividends and
liquidations. All shares issued and outstanding will be fully paid and
nonassessable by the Trust, and redeemable as described in this Statement of
Additional Information and in each Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting that
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series.
The Trustees, in their discretion, may authorize the division of shares
of the Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution. The Trustees have no present
intention of taking the action necessary to effect the division of shares into
separate classes, nor of changing the method of distribution of shares of the
Fund.
The Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Fund, except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Fund. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
INVESTMENT ADVISER
(See " Investment Adviser" in the Fund's prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
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investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Scudder Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds,
Inc., Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder
Pathway Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil
Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc. and Scudder Spain and
Portugal Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
Scudder has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by Scudder with respect to assets invested by AMA members in Scudder
funds in connection with the AMA InvestmentLink(SM) Program. Scudder will also
pay AMA Solutions, Inc. a general monthly fee, currently in the amount of $833.
The AMA and AMA Solutions, Inc. are not engaged in the business of providing
investment advice and neither is registered as an investment adviser or
broker/dealer under federal securities laws. Any person who participates in the
AMA InvestmentLink(SM) Program will be a customer of Scudder (or of a subsidiary
thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLink(SM) is a
service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. In this work, the Adviser
utilizes certain reports and statistics from a wide variety of sources,
including brokers and dealers who may execute portfolio transactions for the
Fund and other clients of the Adviser, but conclusions are based primarily on
investigations and critical analyses by the Adviser's own research specialists.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view toward achieving their respective investment
objectives and after consideration of such factors as their current holdings,
availability of cash for investment and the size of their investments generally.
Frequently, a particular security may be bought or sold for only one client or
in different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients in a
manner believed by the Adviser to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale
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orders for the Fund may be combined with those of other clients of the Adviser
in the interest of achieving the most favorable net results to the Fund.
An investment management agreement dated October 6, 1995 was approved
by the Trustees of the Trust on September 6, 1995 and by the initial shareholder
of the Fund on October 4, 1995. Because the transaction between Scudder and
Zurich resulted in the assignment of the Fund's investment management agreement
with Scudder, that agreement was deemed to be automatically terminated at the
consummation of the transaction. In anticipation of the transaction, however, a
new investment management agreement between the Trust on behalf of the Fund and
the Adviser was approved by the Trust's Trustees on August 6, 1997. At the
special meeting of the Fund's shareholders held on October 27, 1997, the
shareholders also approved the new investment management agreement. The
investment management agreement became effective as of December 31, 1997. The
investment management agreement is in all material respects on the same terms as
the previous investment management agreement which it supersedes. The investment
management agreement incorporates conforming changes which promote consistency
among all of the funds advised by the Adviser and which permit ease of
administration.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in the Adviser) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with the Adviser was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement (the "Agreement") with the Adviser, which is substantially identical
to the current investment management agreement, except for the date of execution
and termination. This Agreement became effective upon the termination of the
then current investment management agreement and will be submitted for
shareholder approval at special meetings currently scheduled to conclude in
December 1998.
The Agreement dated September 7, 1998, was approved by the Trustees of
the Fund on August 6, 1998. The Agreement will continue in effect until
September 30, 1999 and from year to year thereafter only if its continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreement or interested persons of the Adviser or the Fund, cast
in person at a meeting called for the purpose of voting on such approval, and
either by a vote of the Trust's Trustees or of a majority of the outstanding
voting securities of the Fund. The Agreement may be terminated at any time
without payment of penalty by either party on sixty days' written notice, and
automatically terminates in the event of its assignment.
Under the Agreement, the Adviser provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased, held or sold and what portion of the Fund's assets shall be
held uninvested, subject always to the provisions of the Trust's Declaration of
Trust and By-Laws, the 1940 Act, the Code and to the Fund's investment
objective, policies and restrictions, and subject, further, to such policies and
instructions as the Board of Trustees of the Fund may from time to time
establish. The Adviser also advises and assists the officers of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Fund.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, custodian, accountants and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Fund's federal, state and local tax returns; preparing and filing the
Fund's federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
37
<PAGE>
The Adviser pays the compensation and expenses (except those for
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all Trustees, officers and executive employees of the Fund
affiliated with the Adviser, and makes available, without expense to the Fund,
the services of such directors, officers and employees of the Adviser as may
duly be elected officers of the Fund, subject to their individual consent to
serve and to any limitations imposed by law, and provides the Fund's office
space and facilities.
For these services the Fund pays the Adviser a fee equal to an annual
rate of 0.75% of the Fund's average daily net assets payable monthly, provided
the Fund will make such interim payments as may be requested by the Adviser not
to exceed 75% of the amount of the fee then accrued on the books of the Fund and
unpaid. The Adviser agreed until December 31, 1997 to maintain the total
annualized expenses of the Fund at no more than 1.50% of the average daily net
assets of the Fund. For the period October 6, 1995 (commencement of operations)
to August 31, 1997, the Adviser waived a portion of its management fee amounting
to $89,398. The investment advisory fees paid to the Adviser for the fiscal
years ending August 31, 1997 and 1998 were $436,985 and $1,778,500,
respectively.
Under the Agreement, the Fund is responsible for all of its other
expenses including: fees and expenses incurred in connection with membership in
investment company organizations; broker's commissions, legal, auditing and
accounting expenses; the calculation of net asset value; taxes and governmental
fees; the fees and expenses of the Transfer Agent; the cost of preparing share
certificates or any other expenses including expenses of issuance, redemption or
repurchase of shares; the expenses of and the fees for registering or qualifying
securities for sale; the fees and expenses of Trustees, officers and employees
of the Fund who are not affiliated with the Adviser; the cost of printing and
distributing reports and notices to shareholders; and the fees and disbursements
of custodians. The Fund may arrange to have third parties assume all or part of
the expenses of sale, underwriting and distribution of shares of the Fund. The
Fund is also responsible for expenses of shareholders' meetings, the cost of
responding to shareholders' inquiries and expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees with respect thereto.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees of the Fund who are not
"interested persons" of the Adviser are represented by independent counsel at
the Fund's expense.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Fund.
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 Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain
38
<PAGE>
types of transactions absent prior approval, imposes time periods during which
personal transactions may not be made in certain securities, and requires the
submission of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
Daniel Pierce (64)+*@ President and Trustee Managing Director of Scudder Kemper Director, Vice
Investments, Inc. President and
Assistant Treasurer
Paul Bancroft III (68) Trustee Venture Capitalist and Consultant; --
79 Pine Lane Retired, President, Chief Executive
Box 6639 Officer and Director, Bessemer
Snowmass Village, CO 81615 Securities Corporation
Sheryle J. Bolton (52) Trustee CEO and Director, Scientific Learning --
Scientific Learning Corporation Corporation; Former President and
1995 University Ave Chief Operating Officer, Physicians
Suite 400 Online, Inc. (electronic transmission
San Francisco, CA 94704 of clinical information for
physicians (1994-1995)
William T. Burgin (55) Trustee General Partner, Bessemer Venture --
83 Walnut Street Partners; General Partner, Deer &
Wellesley, MA 02481-2101 Company; Director, Fort James
Corp.; Director of various
privately held companies
Keith R. Fox (44) Trustee Private Equity Investor, Exeter --
10 East 53rd Street Capital Management Corporation
New York, NY 10022
William H. Luers (69) Trustee President, The Metropolitan Museum of --
The Metropolitan Art (1986 to present)
Museum of Art
1000 Fifth Avenue
New York, NY 10028
Joan E. Spero (54) Trustee President, The Doris Duke Charitable --
Foundation (1997 to present),
Undersecretary of State for Economic,
Business, and Agricultural Affairs,
(1993-1997)
Kathryn L. Quirk (45) ++@ Trustee, Vice Managing Director of Scudder Kemper Director, Senior Vice
President and Investments, Inc. President and
Assistant Secretary Assistant Clerk
39
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- --------------
Thomas J. Devine (72) Honorary Trustee Consultant --
149 East 73rd Street
New York, NY 10022
Wilson Nolen (72) Honorary Trustee Consultant (1989 to present); --
1120 Fifth Avenue Corporate Vice President, Becton,
New York, NY 10128-0144 Dickinson & Company (manufacturer of
medical and scientific products)
until 1989
Robert G. Stone, Jr. (75) Honorary Trustee Chairman Emeritus and Director, Kirby --
405 Lexington Avenue Corporation (inland and offshore
39th Floor marine transportation and diesel
New York, NY 10174 repairs)
Edmund R. Swanberg (77)++ Honorary Trustee Advisory Managing Director of Scudder --
Kemper Investments, Inc.
Peter Chin (56)++ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
J. Brooks Dougherty (39)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
James M. Eysenbach (36)# Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
James E. Fenger (39)## Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Philip S. Fortuna (41)# Vice President Managing Director of Scudder Kemper Vice President
Investments
Thomas W. Joseph (59)+ Vice President Senior Vice President of Scudder Director, Vice
Kemper Investments, Inc. President, Treasurer
and Assistant Clerk
Ann M. McCreary (48)++ Vice President Managing Director of Scudder Kemper --
Investments
Thaddeus Paluszek (41)++ Vice President Vice President of Scudder Kemper --
Investments, Inc.
Kurt R. Stalzer (40)## Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Peter Taylor (61)++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Thomas F. McDonough (51)+ Vice President and Senior Vice President of Scudder Clerk
Secretary Kemper Investments, Inc.
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
40
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- --------------
Richard W. Desmond (62)++ Assistant Secretary Vice President of Scudder Kemper Vice President
Investments, Inc.
Caroline Pearson (36)+ Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
* Mr. Pierce and Ms. Quirk are considered by the Fund and its counsel to be persons who are "interested
persons" of the Adviser or of the Fund within the meaning of the 1940 Act.
** Unless otherwise stated, all officers and trustees have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
@ Mr. Pierce and Ms. Quirk are members of the Executive Committee which may exercise substantially all of
the powers of the Board of Trustees when it is not in session.
+ Address: Two International Place, Boston, Massachusetts 02110
++ Address: 345 Park Avenue, New York, New York 10154
# Address: 101 California Street, Suite 4100, San Francisco, CA 94111-5886
## Address: 222 South Riverside Plaza, Chicago, IL 60606-5808
</TABLE>
The Trustees and Officers of the Trust also serve in similar capacities
with other Scudder Funds.
To the knowledge of the Trust, as of November 30, 1998, all Trustees
and officers of the Fund as a group owned beneficially (as that term is defined
under Section 13(d) of the Securities Exchange Act of 1934) 311,890 shares, or
2.17% of the shares of the Fund outstanding on such date.
Certain accounts for which the Adviser acts as investment adviser owned
2,207,618 shares in the aggregate, or 15.38% of the outstanding shares on
November 30, 1998. The Adviser may be deemed to be the beneficial owner of such
shares but disclaims any beneficial ownership in such shares.
As of November 30, 1998, 982,667 shares in the aggregate 6.84% of the
outstanding shares of Scudder Small Company Value Fund, were held in the name of
Charles Schwab & Co., Inc., 101 Montgomery St., San Francisco, CA 94104, who may
be deemed to be the beneficial owner of certain of these shares, but disclaim
any beneficial ownership therein.
To the knowledge of the Trust, as of November 30, 1998, no person owned
beneficially more than 5% of the Fund's outstanding shares except as stated
above.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds.
41
<PAGE>
They are assisted in this process by the Fund's independent public accountants
and by independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder Securities Trust: an annual trustee's fee of $3,500; a fee of
$325 for attendance at each board meeting, audit committee meeting or other
meeting held for the purposes of considering arrangements between the Trust on
behalf of the Fund and the Adviser or any affiliate of the Adviser; $100 for all
other committee meetings; and reimbursement of expenses incurred for travel to
and from Board Meetings. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences or service on special
trustee task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1997 from the Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
Scudder Securities Trust* All Scudder Funds
------------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $38,155 $5,400 $156,922 (20 funds) $ 25,950 (20 funds)
Trustee
Sheryle J. Bolton, $5,068 $0.00 $86,213 (20 funds) $10,800 (20 funds)
Trustee**
William T. Burgin, $23,353 $5,400 $85,950 (20 funds) $17,550 (20 funds)
Trustee
Thomas J. Devine, $43,255 $5,400 $186,598 (21 funds) $27,150 (21 funds)
Honorary Trustee+
Keith R. Fox, Trustee $44,905 $5,400 $134,390 (18 funds) $17,550 (18 funds)
William H. Luers, $5,068 $0.00 $117,729 (20 funds) $16,350 (20 funds)
Trustee**
Wilson Nolen, Honorary $40,455 $5,400 $189,548 (21 funds) $25,300 (21 funds)
Trustee+
Joan E. Spero,*** $0.00 $0.00 $0.00 $0.00
Trustee
</TABLE>
42
<PAGE>
(1) The Adviser paid the compensation to the Trustees for meetings
associated with the Adviser's alliance with Zurich Insurance Company.
See "Investment Adviser" for additional information.
* Scudder Securities Trust consists of seven funds: Scudder Development
Fund, Scudder Financial Services Fund, Scudder Health Care Fund,
Scudder Technology Fund, Scudder Micro Cap Fund, Scudder Small Company
Value Fund and Scudder 21st Century Growth Fund.
** Elected as Trustee of the Trust in October 1997.
*** Elected as Trustee of the Trust in September 1998.
+ Elected as Honorary Trustee in December 1998, after serving as Trustee.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Adviser, a Delaware
corporation. The Trust's underwriting agreement dated September 7, 1998 will
remain in effect until September 30, 1999 and from year to year thereafter only
if its continuance is approved annually by a majority of the Trustees who are
not parties to such agreement or interested persons of any such party and either
by a vote of a majority of the Trustees or a majority of the outstanding voting
securities of the Fund. The underwriting agreement was last approved by the
Trustees on August 6, 1998.
Under the underwriting agreement, the Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Fund as a broker or dealer in the
various states as required; the fees and expenses of preparing, printing and
mailing prospectuses annually to existing shareholders (see below for expenses
relating to prospectuses paid by the Distributor), notices, proxy statements,
reports or other communications to shareholders of the Fund; the cost of
printing and mailing confirmations of purchases of shares and any prospectuses
accompanying such confirmations; any issuance taxes and/or any initial transfer
taxes; a portion of shareholder toll-free telephone charges and expenses of
shareholder service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
a portion of the cost of computer terminals used by both the Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of the Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by the Fund, unless a 12b-1 Plan is in effect which
provides that the Fund shall bear some or all of such expenses.
NOTE: Although the Fund does not currently have a 12b-1 Plan, the
Fund would also pay those fees and expenses permitted to be
paid or assumed by the Fund pursuant to a 12b-1 Plan, if any,
were adopted by the Fund, notwithstanding any other provision
to the contrary in the underwriting agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states in which shares of the Fund may from
time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of the Fund.
43
<PAGE>
TAXES
(See "DISTRIBUTIONS -- Dividends and Capital Gains Distributions and
Taxes" in the Fund's prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. It intends to continue to qualify for such treatment.
Such qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions, would be taxable to shareholders to the extent of
current accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations in the case of corporate
shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year, and all ordinary income and capital gains for prior years
that were not previously distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund. Presently, the Fund has
no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of federal income taxes paid by
the Fund on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise a
substantial part of the Fund's gross income. To the extent that such dividends
constitute a portion of the Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law, and is eliminated if
either those shares or the shares of the Fund are deemed to have been held by
the Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the Fund
have been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
44
<PAGE>
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($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 $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has earnings in a given year if the
spouse elects to be treated as having no earnings (for IRA contribution
purposes) for the year.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
stock. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying stock or substantially identical stock in the Fund's portfolio. If
the Fund writes a put or call option, no gain is recognized upon its receipt of
a premium. If the option lapses or is closed out, any gain or loss is treated as
a short-term capital gain or loss. If a call option is exercised, any resulting
gain or loss is a short-term or long-term capital gain or loss depending on the
holding period of the underlying stock. The exercise of a put option written by
the Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts
entered into by the Fund and all listed non-equity options written or purchased
by the Fund (including options on futures contracts and options on broad-based
stock indices) will be governed by Section 1256 of the Code. Absent a tax
election to the contrary, gain or loss attributable to the lapse, exercise or
closing out of any such position generally will be treated as 60% long-term and
40% short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, all outstanding Section 1256 positions will be marked to market
(i.e. treated as if such positions were closed out at their closing price on
such day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term. Under certain circumstances, entry into a futures contract to sell a
security may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or a substantially
identical security in the Fund's portfolio.
Positions of the Fund which consist of at least one stock and at least
one other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Positions of the Fund which consist of at least one position not
governed by Section 1256 and at least one futures or forward contract or
non-equity option governed by Section 1256 which substantially diminishes the
Fund's
45
<PAGE>
risk of loss with respect to such other position will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, certain tax elections exist for them which reduce or eliminate
the operation of these rules. The Fund intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may
require the Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
The Fund will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The Fund is organized as a series of a Massachusetts business trust and
is not liable for any income or franchise tax in the Commonwealth of
Massachusetts, provided that it qualifies as a regulated investment company for
federal income tax purposes.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Dividend and interest income received by the Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders 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.
46
<PAGE>
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions for the Fund to
pay a brokerage commission in excess of that which another broker might charge
for executing the same transaction on account of execution services and the
receipt of research, market or statistical information. The Adviser will not
place orders with broker/dealers on the basis that the broker/dealer has or has
not sold shares of the Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund, and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Trustees review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended August 31, 1997 and 1998, the Fund paid
brokerage commissions of $150,026 and $250,097, respectively. For the fiscal
year ended August 31, 1998, $151,007 (60% of the total brokerage commissions
paid) resulted from orders placed, consistent with the policy of obtaining the
most favorable net results, with brokers and dealers who provided supplementary
research market and statistical information to the Fund or the Adviser. The
total amount of brokerage transactions aggregated $185,996,842, of which
$90,770,575 (49% of all brokerage transactions) were transactions which included
research commissions.
47
<PAGE>
Portfolio Turnover
The portfolio turnover rates (defined by the SEC as the ratio of the
lesser of sales or purchases to the monthly average value of such securities
owned during the year, excluding all securities whose remaining maturities at
the time of acquisition were one year or less) for the fiscal years ended August
30, 1997 and 1998 were 43.6% and 22.6%, respectively.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Net asset value per share is determined by
dividing the value of the total assets of the Fund, less all liabilities, by the
total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation, the security is valued
at the most recent bid quotation on such exchange as of the Value Time. An
equity security which is traded on The National Association of Securities
Dealers Automated Quotation (Nasdaq) system will be valued at its most recent
sale price on such system as of the Value Time. Lacking any sales, the security
will be valued at the most recent bid quotation as of the Value Time. The value
of an equity security not quoted on the Nasdaq System, but traded in another
over-the-counter market, is its most recent sale price, if there are any sales
of such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation, the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less shall be 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 currency exchange rates as of
the date on which the net asset value per share is to be determined.
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 Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
48
<PAGE>
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, One Post Office Square, Boston,
Massachusetts 02109, independent accountants, and given on the authority of that
firm as experts in accounting and auditing. Effective July 1, 1998, Coopers &
Lybrand L.L.P. and Price Waterhouse LLP merged to become PricewaterhouseCoopers
LLP. PricewaterhouseCoopers, LLP is responsible for performing annual audits of
the financial statements and financial highlights of the Fund in accordance with
generally accepted auditing standards, and the preparation of federal tax
returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund's property or
the acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the Fund's property of any shareholder held
personally liable for the claims and liabilities which a shareholder may become
subject by reason of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Other Information
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Adviser in light of the objective and policies of the
Fund, and other factors such as its other portfolio holdings and tax
considerations, and should not be construed as recommendations for similar
action by other investors.
The name "Scudder Securities Trust" is a designation of the Trustees
for the time being under a Declaration of Trust dated October 16, 1985, as
amended from time to time, and all persons dealing with the Fund must look
solely to the property of the Fund for the enforcement of any claims against the
Fund as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund. No series
of the Trust shall be liable for the obligations of any other series. Upon the
initial purchase of shares of the Fund, the shareholder agrees to be bound by
the Trust's Declaration of Trust, as amended from time to time. The Declaration
of Trust is on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts.
The Fund has a fiscal year end of August 31.
The CUSIP number of the Fund is 811196-20-3.
The Fund employs State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 as custodian.
The firm of Dechert Price & Rhoads is counsel to the Fund.
Costs incurred by the Fund in conjunction with its organization are
being amortized over the five year period beginning October 6, 1995.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value for the Fund. The Fund pays SFAC an annual fee equal to 0.025% of
the first $150 million of average daily net assets, 0.0075% of such assets in
excess of $150 million, 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. For the period October 6, 1995
(commencement of operations) to August 31, 1996, SFAC did not impose a portion
of their fee amounting to $31,965, and the fee imposed amounted to $36,531. For
the fiscal years ended August 31, 1997 and 1998, the amounts
49
<PAGE>
charged to the Fund by SFAC aggregated $57,935 and $81,326, respectively, of
which $ $5,319 and $6,320 was unpaid at August 31, 1997 and 1998.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston,
Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer and
dividend paying agent for the Fund. The Fund pays SSC an annual fee for each
account maintained for a participant. For the period October 6, 1995
(commencement of operations) to August 31, 1996, SSC did not impose a portion of
their fee amounting to $50,693, and the fee imposed amounted to $57,935. For the
fiscal years ended August 31, 1997 and 1998, the amounts charged by SSC
aggregated $285,621 and $736,233, respectively, of which $31,498 and $72,297 was
unpaid at August 31, 1997 and 1998.
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the period October 6, 1995
(commencement of operations) to August 31, 1996, STC did not impose a portion of
their fee amounting to $1,082, and the fee imposed amounted to $1,236. For the
fiscal years ended August 31, 1997 and 1998, the amounts charged to the Fund by
STC aggregated $20,160 and $255,111, of which $3,172 and $77,328 was unpaid at
August 31, 1997 and 1998.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Fund has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement for further information with respect to the Fund
and the securities offered hereby. This Registration Statement and its
amendments are available for inspection by the public at the SEC in Washington,
D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio, of
Scudder Small Company Value Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements in the
Annual Report to the Shareholders of the Fund dated August 31, 1998, are
incorporated herein by reference, and are hereby deemed to be a part of this
Statement of Additional Information.
50
<PAGE>
<PAGE>
SCUDDER
Seeking to increase your capital
over the long term by investing
primarily in emerging growth
companies that are poised to be
leaders in the 21st century.
Pure no-load(TM)/No Sales Charges
Scudder
21st Century
Growth Fund
(050)
Mutual funds: Prospectus
o are not FDIC-insured
o have no bank guarantees
o may lose value January 1, 1999
The Securities and Exchange
Commission has not approved or
disapproved these securities or
passed upon the adequacy of this
prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
1 Fund Summary
- --------------------------------------------------------------------------------
An overview of the
fund's goal and
strategy, main risks,
performance and
expenses
4 About The Fund
- --------------------------------------------------------------------------------
Additional information 4 Principal strategies, investments and
that you should know additional principal risks
about the fund
7 A message from the President
8 Investment adviser
9 Distributions
9 Taxes
11 Financial highlights
12 About Your Investment
- --------------------------------------------------------------------------------
Information about 12 Transaction information
managing your fund
account 14 Buying and selling shares
14 Purchases
15 Exchanges and redemptions
16 Investment products and services
<PAGE>
Fund Summary
Investment objectives and principal strategies
Scudder 21st Century Growth Fund pursues long-term growth of capital by
investing primarily in the common stocks of emerging growth companies that are
poised to be leaders in the next century. Emerging growth companies tend to be
small or little-known companies that have strong prospects for growth because
they may offer such things as cutting edge products, unique services, innovative
distribution channels or technological advances. The fund normally invests at
least 80% of its assets in common stocks. Companies in which the fund invests
generally are similar in size to those included in the Russell 2000 index -- a
widely used benchmark of small stock performance. Except as otherwise indicated,
the fund's investment objective and policies may be changed without a vote of
shareholders.
The fund is designed to uncover the growth potential of tomorrow's leaders
today. It attempts to achieve this goal through extensive research and detailed
analysis that focus on a number of different factors, including a company's
financial position, earnings growth rate, management experience and industry
position. This fund may be appropriate for the aggressive portion of an
investor's portfolio. It should not be viewed as a complete investment program.
Principal risks
The principal risks of investing in the fund are stock market risk and, more
specifically, the risks associated with investing in small company stocks.
As with all investments in the stock market, the fund's returns and net asset
value will go up and down, and it is possible to lose money invested in the
fund. Stock market movements will affect the fund's share prices on a daily
basis. Declines are possible both in the overall stock market and in the value
of the types of securities held by the fund. In addition, the portfolio
management team's strategy and skill in choosing appropriate investments for the
fund will determine in large part the fund's ability to achieve its objective.
In pursuit of higher investment returns, this fund may incur greater risks and
more dramatic fluctuations in value than a fund that invests in stocks of larger
companies. The inherent business characteristics and risks of small companies
include such things as untested management, less diversified product lines and
weaker financial positions. Also, small companies tend to have less predictable
earnings and less liquid securities than more established companies. Therefore,
this fund is suitable for long-term investors that have a high degree of risk
tolerance.
1
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total return for year ended December 31
[GRAPHIC OMITTED]
1997 9.74%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 21.11% (the second quarter of 1997), and the fund's lowest
return for a calendar quarter was -13.38% (the first quarter of 1997).
The fund's year-to-date total return as of September 30, 1998 was -14.66%.
Average annual total returns
For periods ended Russell 2000
December 31, 1997 Fund Growth Index
- --------------------------------------------------------------------------------
One Year 9.74% 12.85%
Since Inception (9/9/96) 6.05% 13.91%*
- --------------------------------------------------------------------------------
* Index comparisons begin September 30, 1996.
The Russell 2000 Growth Index is an unmanaged capitalization-weighted measure
of 2,000 of the smallest capitalized U.S. companies with a greater-than-average
growth orientation and whose common stocks trade on the New York Stock Exchange,
American Stock Exchange and Nasdaq Stock Market, Inc. Index returns assume
reinvestment of dividends and, unlike fund returns, do not reflect any fees or
expenses.
2
<PAGE>
Fee and expense information
Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as % of NONE
offering price)
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested NONE
dividends/distributions
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) 1.00%*
- --------------------------------------------------------------------------------
Exchange fee 1.00%*
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 1.00%**
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 1.17%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 2.17%**
- --------------------------------------------------------------------------------
* There is a 1% fee retained by the fund which is imposed only on
redemptions or exchanges of shares held less than one year. You may redeem
by writing or calling the fund. If you wish to receive your redemption
proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "About Your Investment -- Exchanges and
Redemptions."
** Because the Adviser and its subsidiaries agreed to waive and/or reimburse
a portion of their fees until December 1, 1998 so that the total
annualized expenses of the fund did not exceed 1.75% of average daily net
assets, actual fund expenses for the year ended August 31, 1998 were:
investment management fee 0.58%, other expenses 1.17% and total operating
expenses 1.75%. Until November 30, 1999, the Adviser and its subsidiaries
have agreed to continue to waive and/or reimburse all or portions of their
fees payable by the fund to the extent necessary so that the total
annualized expenses of the fund do not exceed 1.75% of average daily net
assets. The information contained in the above table and the example below
reflects the expenses of the fund without taking into account any
applicable fee waivers and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
3
<PAGE>
- --------------------------------------------------------------------------------
One Year $ 220
- --------------------------------------------------------------------------------
Three Years $ 679
- --------------------------------------------------------------------------------
Five Years $ 1,164
- --------------------------------------------------------------------------------
Ten Years $ 2,503
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
About The Fund
Principal strategies, investments and additional principal risks
Principal strategies and investments
The fund attempts to achieve its objective by investing predominantly in U.S.
small company stocks. The fund's portfolio management team identifies promising
small companies through extensive fundamental and field research. Using a
"bottom-up" approach, the fund focuses on companies that, in fund management's
view, have the following characteristics:
o low debt positions;
o clean balance sheets;
o conservative accounting methods;
o excellent management who own a significant stake in the company;
o projected annual earnings growth rates of at least 15%; and
o either, a commanding position in a growing market or the ability to build
such a position in the future.
In addition, the fund favors companies that are in an "emerging growth" phase of
development. At this stage, a young company may enjoy certain advantages, such
as niche products and lean organizations, and thus be well-positioned for
significant growth and greater market recognition.
In order to locate tomorrow's leaders before they are widely known, the fund's
portfolio management team searches for companies developing new, innovative
products and services that will have the potential to substantially impact their
particular industries or dramatically change consumer behavior in the next
century. The portfolio management team expects to find these companies in many
rapidly changing sectors of the economy. Examples of these sectors include
innovative retailing concepts, the transition in the U.S. to a service-based
economy,
4
<PAGE>
advances occurring in health care and biotechnology, as well as the rapidly
developing areas of communications, computing, software and technology
generally.
To help reduce the fund's risk exposure, the portfolio management team
diversifies the fund's assets among many companies and industries in both the
U.S. and abroad.
As companies in the fund's portfolio exceed the maximum market value of the
companies in the Russell 2000 index, the fund may continue to hold these
securities, but will generally not add to these holdings. A stock is typically
sold when, in the opinion of the portfolio management team, (i) the stock has
reached its fair market value and its appreciation potential is limited, (ii) a
company's fundamentals have deteriorated or (iii) the fund's portfolio is too
heavily weighted in a particular stock or industry sector.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would affect the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
From time to time for temporary defensive purposes, the fund may invest, without
limit, in cash and cash equivalents, U.S. government securities, money market
instruments and high quality debt securities without equity features. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goal during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about these and other investments and strategies of the fund is
provided in the Statement of Additional Information. Of course, there can be no
guarantee that, by following these investment strategies, the fund will achieve
its objective.
Additional principal risks
Small company risk. While small company stocks have historically outperformed
large company stocks, they also have been subject to greater investment risk.
The risks generally associated with small companies include more limited product
lines, markets and financial resources, lack of management depth or experience,
dependency on key personnel and vulnerability to adverse market and economic
developments. Accordingly, the prices of small company stocks tend to be more
volatile than prices of large company stocks. Further, the
5
<PAGE>
prices of small company stocks are often adversely affected by limited trading
volumes and the lack of publicly available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the fund to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
Equity investing risk. An investment in the common stock of a company represents
a proportionate ownership interest in that company. Therefore, the fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on investment. However, the market value of common stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of offsetting a fund's real return.
6
<PAGE>
A message from the President
[PHOTO OMITTED]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open-and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/ Edmond D. Villani
7
<PAGE>
Investment adviser
The fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), 345 Park Avenue, New York, NY, to manage the fund's daily
investment and business affairs subject to the policies established by the Board
of Trustees. The Adviser actively manages your investment in the fund.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities.
The Adviser and its subsidiaries have agreed to maintain the annualized expenses
of the fund at no more than 1.75% of the average daily net assets of the fund
until November 30, 1999. As a result of this waiver, the Adviser received an
investment management fee of 0.58% of the fund's average daily net assets for
the fiscal year ended August 31, 1998.
Portfolio management
The fund is managed by a team of investment professionals who each plays an
important role in the fund's management process. Team members work together to
develop investment strategies and select securities for the fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders and other investment specialists who work in the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits fund investors by bringing together many disciplines and
leveraging its extensive resources.
The following investment professionals are associated with the fund as
indicated:
Name and Title Joined the Fund Background
- -------------------------------------------------------------------------------
Peter Chin 1996 Mr. Chin has responsibility for the
Lead Manager fund's day-to-day management and
investment strategies. He has over 25
years of research and portfolio
management experience, primarily in
small company growth stocks.
Roy C. McKay 1996 Mr. McKay has over 31 years of
Manager investment experience, including 22
years of experience specializing in
small company growth stocks.
- -------------------------------------------------------------------------------
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
fund could be adversely affected if computer systems on which the fund relies,
which primarily include those used by the
8
<PAGE>
Adviser, its affiliates or other service providers, are unable to correctly
process date-related information on and after January 1, 2000. The risk is
commonly called the Year 2000 issue. Failure to successfully address the Year
2000 issue could result in interruptions to and other material adverse effects
on the fund's business and operations, such as problems with calculating net
asset value and difficulties in implementing the fund's purchase and redemption
procedures. The Adviser has commenced a review of the Year 2000 issue as it may
affect the fund and is taking steps it believes are reasonably designed to
address the Year 2000 issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 issue will not have an adverse effect on the issuers whose securities are
held by the fund or on global markets or economies generally.
Distributions
Dividends and capital gains distributions
The fund intends to distribute dividends from its net investment income
annually, in November or December. The fund intends to distribute net realized
capital gains after utilization of capital loss carryforwards, if any, in
November or December. An additional distribution may be made at a later date, if
necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such 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.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a fund. If an investment is in the form of a
retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among funds are also taxable
events.
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable as ordinary income. A portion of dividends from
ordinary income may qualify for the dividends-received deduction for
corporations.
9
<PAGE>
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution, because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
you owned the shares.
The fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year.
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
fund 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. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in the fund.
10
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the fund's
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single fund share outstanding throughout the
period (a). The total return figures represent the rate that an investor would
have earned (or lost) on an investment in the fund assuming reinvestment of all
dividends and distributions. This information has been audited by
PricewaterhouseCoopers LLP whose report, along with the fund's financial
statements, is included in the annual report, which is available upon request by
calling Scudder Investor Relations at 1-800-225-2470 or, for existing investors,
call the Scudder Automated Information Line (SAIL) at 1-800-343-2890.
21st Century Growth Fund
- --------------------------------------------------------------------------------
For the Period
September 9, 1996
(commencement of
Year Ended operations) to
August 31, 1998 August 31, 1997
- --------------------------------------------------------------------------------
-------------------------------------
Net asset value, beginning of period .... $ 13.11 $ 12.00
-------------------------------------
Income from investment operations:
Net investment gain (loss) .............. (.19) (.15)
Net realized and unrealized gain
on investments .......................... (2.78) 1.25
-------------------------------------
Total from investment operations ........ (2.97) 1.10
-------------------------------------
Redemption fees ......................... .01 .01
-------------------------------------
Net asset value, end of period .......... $ 10.15 $ 13.11
-------------------------------------
- --------------------------------------------------------------------------------
Total Return (%) (b) (c) ................ (22.58) 9.25**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .. 27 23
Ratio of operating expenses, net
to average daily net assets (%) ......... 1.75 1.75*
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) .................... 2.17 3.52*
Ratio of net investment gain (loss)
to average daily net assets (%) ......... (1.38) (1.27)*
Portfolio turnover rate (%) ............. 119.8 92.0*
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect to the shareholder of the 1%
redemption fee on shares held less than one year.
* Annualized
** Not annualized
- --------------------------------------------------------------------------------
11
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Net asset value per share is calculated by dividing the value of
total fund assets, less all liabilities, by the total number of shares
outstanding. Market prices are used to determine the value of the fund's assets.
If market prices are not readily available for a security or if a security's
price is not considered to be market indicative, that security may be valued by
another method that the Board or its delegate believes accurately reflects fair
value. In those circumstances where a security's price is not considered to be
market indicative, the security's valuation may differ from an available market
quotation.
To the extent that the fund invests in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the fund does not price
its shares. As a result, the net asset value per share of the fund may change at
a time when shareholders are not able to purchase or redeem their shares.
Redemption fee
Upon the redemption or exchange of shares held less than one year, a fee of 1%
of the current net asset value of the shares will be assessed and retained by
the fund for the benefit of the remaining shareholders. The fee is waived for
all shares purchased through certain Scudder retirement plans, including 401(k)
plans, 403(b) plans, 457 plans, Keogh accounts, and Profit Sharing and Money
Purchase Pension Plans. However, if such shares are purchased through a broker,
financial institution or recordkeeper maintaining an omnibus account for the
shares, such waiver may not apply. (Before purchasing shares, please check with
your account representative concerning the availability of the fee waiver.) In
addition, this waiver does not apply to any IRA or SEP-IRA accounts. The fund
reserves the right to modify the terms of or terminate this fee at any time.
The fee applies to redemptions from the fund and exchanges to other Scudder
funds, but not to dividend or capital gains distributions which have been
automatically reinvested in the fund.
The fee is applied to the shares being redeemed or exchanged in the order in
which they were purchased.
12
<PAGE>
Processing time
All purchase and redemption requests received in good order at the fund's
transfer agent by the close of regular trading on the Exchange are executed at
the net asset value per share calculated at the close of trading that day. All
other requests that are in good order will be executed the following business
day.
Signature guarantees
A signature guarantee is required for redemptions over $100,000. You can obtain
one from most brokerage houses and financial institutions, although not from a
notary public. The fund will normally send redemption proceeds within one
business day following the redemption request, but may take up to seven business
days (or longer in the case of shares recently purchased by check). For more
information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent purchases and sales made in response
to short-term fluctuations in the fund's share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in the fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to the fund.
The fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Redemption-in-kind
The fund reserves the right to honor requests for redemption or repurchase
orders by making payment in whole or in part in readily marketable securities
("redemption in kind") if the amount of such a request is large enough to affect
operations (for example, if the request is greater than $250,000 or 1% of the
fund's assets). These securities will be chosen by the fund and valued as they
are for purposes of computing the fund's net asset value. A shareholder may
incur transaction expenses in converting these securities to cash.
13
<PAGE>
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston, Chicago,
New York and San Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number and the
complete fund name, to the appropriate address listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed above.
- --------------------------------------------------------------------------------
By Phone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
- --------------------------------------------------------------------------------
14
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Print or type your instructions and include:
or Fax - the name of the fund and class and the account number you
are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
by regular mail to: Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a
day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate
or Fax address or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
By You may arrange to receive automatic cash payments periodically.
Automatic Call 1-800-225-5163 for more information and an enrollment form.
Withdrawal
Plan
- --------------------------------------------------------------------------------
15
<PAGE>
Investment products and services
The Scudder Family of Funds##
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund
Prime Reserve Shares* Scudder S&P 500 Index Fund
Premium Shares* Scudder Real Estate Investment Fund
Managed Shares*
Scudder Government Money Market U.S. Growth
Series -- Managed Shares* Value
Scudder Large Company Value Fund
Tax Free Money Market+ Scudder Value Fund***
Scudder Tax Free Money Fund Scudder Small Company Value Fund
Scudder Tax Free Money Market Series -- Scudder Micro Cap Fund
Managed Shares* Growth
Scudder California Tax Free Money Scudder Classic Growth Fund***
Fund** Scudder Large Company Growth
Scudder New York Tax Free Money Fund
Fund** Scudder Development Fund
Scudder 21st Century Growth Fund
Tax Free+
Scudder Limited Term Tax Free Fund Global Equity
Scudder Medium Term Tax Free Fund Worldwide
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder High Yield Tax Free Fund Scudder International Value Fund
Scudder California Tax Free Fund** Scudder International Growth and
Scudder Massachusetts Limited Term Tax Income Fund
Free Fund** Scudder International Fund++
Scudder Massachusetts Tax Free Fund** Scudder International Growth Fund
Scudder New York Tax Free Fund** Scudder Global Discovery Fund***
Scudder Ohio Tax Free Fund** Scudder Emerging Markets Growth
Scudder Pennsylvania Tax Free Fund** Fund
Scudder Gold Fund
U.S. Income
Scudder Short Term Bond Fund Regional
Scudder Zero Coupon 2000 Fund Scudder Greater Europe Growth
Scudder GNMA Fund Fund
Scudder Income Fund Scudder Pacific Opportunities Fund
Scudder Corporate Bond Fund Scudder Latin America Fund
Scudder High Yield Bond Fund The Japan Fund, Inc.
Global Income Industry Sector Funds
Scudder Global Bond Fund Choice Series
Scudder International Bond Fund Scudder Financial Services Fund
Scudder Emerging Markets Income Fund Scudder Health Care Fund
Scudder Technology Fund
Asset Allocation
Scudder Pathway Conservative Portfolio Preferred Series
Scudder Pathway Balanced Portfolio Scudder Tax Managed Growth Fund
Scudder Pathway Growth Portfolio Scudder Tax Managed Small Company
Scudder Pathway International Portfolio Fund
</TABLE>
16
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **####
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc. Scudder Global High Income Fund, Inc.
The Brazil Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Montgomery Street Income Scudder Spain and Portugal Fund, Inc.
Securities, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
- -----------
## Funds within categories are listed in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family
of Funds.
#### A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on
the New York Stock Exchange and, in some cases, on various foreign stock
exchanges.
17
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected the fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Phone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder
Automated Information Line (SAIL) at 1-800-343-2890
(24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-2021
[SOYINK LOGO] PRINTED WITH [RECYCLE LOGO] Printed on recycled paper
SOYINK
340-2-19
PR050199
<PAGE>
SCUDDER 21st CENTURY GROWTH FUND
A series of Scudder Securities Trust
A Pure No-Load(TM) (No Sales Charges) Diversified Mutual Fund Seeking
Long-Term Capital Appreciation Through Investment
Primarily in Securities of Emerging Growth Companies
Poised to be Leaders in the 21st Century
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus. The
prospectus of Scudder 21st Century Growth Fund dated January 1, 1999, as amended
from time to time, may be obtained without charge by writing to Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders of the Scudder 21st Century Growth
Fund dated August 31, 1998 is incorporated by reference and is hereby deemed to
be part of this Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES.....................................................1
General Investment Objective and Policies of Scudder 21st Century Growth Fund............1
Master/feeder structure..................................................................2
Special Considerations...................................................................2
Specialized Investment Techniques........................................................4
Investment Restrictions.................................................................14
PURCHASES.......................................................................................16
Additional Information About Opening An Account.........................................16
Minimum balances........................................................................16
Additional Information About Making Subsequent Investments..............................16
Additional Information About Making Subsequent Investments by QuickBuy..................17
Checks..................................................................................17
Wire Transfer of Federal Funds..........................................................18
Share Price.............................................................................18
Share Certificates......................................................................18
Other Information.......................................................................18
EXCHANGES AND REDEMPTIONS.......................................................................19
Exchanges...............................................................................19
Special Redemption and Exchange Information.............................................20
Redemption by Telephone.................................................................20
Redemption by QuickSell.................................................................21
Redemption by Mail or Fax...............................................................21
Redemption-in-Kind......................................................................22
Other Information.......................................................................22
The Pure No-Load(TM)Concept.............................................................22
Internet access.........................................................................23
Dividends and Capital Gains Distribution Options........................................24
Scudder Investor Centers................................................................25
Reports to Shareholders.................................................................25
Transaction Summaries...................................................................25
THE SCUDDER FAMILY OF FUNDS.....................................................................25
SPECIAL PLAN ACCOUNTS...........................................................................30
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension
Plans for Corporations and Self-Employed Individuals.................................31
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations
and Self-Employed Individuals........................................................31
Scudder IRA: Individual Retirement Account.............................................31
Scudder Roth IRA: Individual Retirement Account........................................32
Scudder 403(b) Plan.....................................................................32
Automatic Withdrawal Plan...............................................................33
Group or Salary Deduction Plan..........................................................33
Automatic Investment Plan...............................................................33
Uniform Transfers/Gifts to Minors Act...................................................33
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.......................................................34
PERFORMANCE INFORMATION.........................................................................34
Average Annual Total Return.............................................................35
Cumulative Total Return.................................................................35
Total Return............................................................................35
<PAGE>
TABLE OF CONTENTS (continued)
Page
Comparison of Fund Performance..........................................................36
ORGANIZATION OF THE FUND........................................................................39
INVESTMENT ADVISER..............................................................................40
Personal Investments by Employees of the Adviser........................................43
TRUSTEES AND OFFICERS...........................................................................43
REMUNERATION....................................................................................46
Responsibilities of the Board -- Board and Committee Meetings...........................46
Compensation of Officers and Trustees...................................................46
DISTRIBUTOR.....................................................................................47
TAXES...........................................................................................48
PORTFOLIO TRANSACTIONS..........................................................................52
Brokerage Commissions...................................................................52
Portfolio Turnover......................................................................53
NET ASSET VALUE.................................................................................53
ADDITIONAL INFORMATION..........................................................................54
Experts.................................................................................54
Shareholder Indemnification.............................................................54
Other Information.......................................................................54
FINANCIAL STATEMENTS............................................................................55
</TABLE>
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES (See
"FUND SUMMARY - Investment Objectives and Strategies and Principal
Risks", and "ABOUT THE FUND - Principal Strategies,
Investments and Related Risks", in
the Fund's prospectus.)
Scudder 21st Century Growth Fund (the "Fund") is a series of Scudder
Securities Trust. The Fund is a pure no-load(TM), diversified, open-end
management investment company which continuously offers and redeems shares at
net asset value. The Fund is a company of the type commonly known as a mutual
fund.
General Investment Objective and Policies of Scudder 21st Century Growth Fund
Scudder 21st Century Growth Fund pursues long-term growth of capital by
investing in emerging growth companies that are poised to be leaders in the next
century. The Fund is designed for investors in search of substantial long-term
growth who can accept above-average stock market risk and little or no current
income.
Due to the business characteristics and risks of emerging growth
companies, the Fund's share price can experience periods of volatility. As a
result, the Fund should be considered a long-term investment and only one part
of a well-diversified personal investment portfolio. To encourage a long-term
holding period and to facilitate portfolio management, a 1% redemption and
exchange fee, described in greater detail below, is payable to the Fund for the
benefit of remaining shareholders on shares held less than one year.
Except as otherwise indicated, the Fund's investment objective and
policies are not fundamental and may be changed without a vote of shareholders.
If there is a change in investment objective, shareholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs. There can be no assurance that the Fund's
objective will be met.
The fund normally invests at least 80% of its assets in common stocks.
Companies in which the fund invests generally are similar in size to those
included in the Russell 2000(R) Index --a widely used benchmark of small stock
performance. The Fund's investment adviser, Scudder Kemper Investments, Inc.
(the "Adviser"), believes these companies are well-positioned for above-average
earnings growth and/or greater market recognition. Such favorable prospects may
be a result of new or innovative products or services a given company is
developing or provides, products or services that have the potential to impact
significantly the industry in which the company competes or to change
dramatically customer behavior into the 21st century. The above-average earnings
growth potential and/or greater market recognition expected are factors believed
to offer significant opportunity for capital appreciation, and the Adviser will
attempt to identify these opportunities before their potential is recognized by
investors in general.
To help reduce risk in its search for high quality, emerging growth
companies, the Adviser allocates the Fund's investments among many companies and
different industries in the U. S. and, where opportunity warrants, abroad as
well. The Adviser seeks companies that, in the Adviser's opinion, have excellent
management which own a significant stake in the company, clean balance sheets,
conservative accounting, and either a commanding position in a growing market or
the real possibility of building a commanding position as the 21st century
approaches. Emerging growth companies are those with the ability, in the
Adviser's opinion, to expand earnings per share by at least 15% per annum over
the next three to five years at a minimum. In selecting specific industries and
companies for investment, the Adviser will make full use of its extensive
fundamental and field research capabilities in taking into account such other
factors as overall growth prospects and financial condition, competitive
situation, technology, research and development activities, productivity, labor
costs, raw material costs and sources, profit margins, return on investment,
structural changes in local economies, capital resources, the degree of
governmental regulation or deregulation facing a company, and quality and
experience of management.
For temporary defensive purposes the Fund may vary from its investment
policy during periods in which conditions in securities markets or other
economic or political conditions warrant. It is impossible to accurately predict
how long such alternate strategies may be utilized. In such cases, the Fund may
hold without limit, cash, high grade debt securities, without equity features,
which are rated Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's") or
AAA, AA or A by Standard & Poor's ("S&P"), or, if unrated, are deemed by the
Adviser to be of equivalent quality, U.S. Government securities and invest in
money market instruments which are rated in the two highest categories by
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Moody's or S&P, or, if unrated, are deemed by the Adviser to be of equivalent
quality. The Fund may borrow money for temporary, emergency or other purposes,
including investment leverage purposes, as determined by the Trustees. The Fund
may also borrow under reverse repurchase agreements. The Investment Company Act
of 1940 (the "1940 Act") requires borrowings to have 300% asset coverage.
In addition, the Fund may invest in preferred stocks when management
anticipates that the capital appreciation on such stocks is likely to equal or
exceed that of common stocks over a selected time.
The Fund may enter into repurchase agreements and may engage in
strategic transactions. More information about these investment techniques is
provided under "Specialized Investment Techniques."
The Fund offers participation in the potential growth of emerging growth
companies that may be destined to become leading companies in the 21st century.
The Fund offers the benefit of professional management to identify investments
in emerging growth companies with the greatest potential, in the Adviser's
opinion, to have a profound and positive impact on the lives of consumers and
businesses as we enter the 21st century. The Adviser anticipates finding these
companies in many rapidly changing sectors of the economy. Examples include
innovative retailing concepts, the on-going U.S. transition to an increasingly
service-based economy, advances in health care in areas such as biotechnology,
and the tremendous, rapid advances occurring in communications, computing,
software and technology generally. In return for accepting above-average market
risk, investors gain access to a broadly diversified portfolio designed for
above-average capital appreciation compared to that available from larger
companies such as those in the S&P 500 Stock Index.
Foreign securities such as those which may be purchased by the Fund may
be subject to foreign government taxes which could reduce the return on such
securities, although a shareholder of the Fund 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.")
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Special Considerations
Historical small stock performance. The Ibbotson US Small Stock Index is
commonly used to show historical performance of smaller stocks due to the
extensive range of data points offered (1926 to the present). According to
Ibbotson, smaller stocks outperform larger stocks over time. For the years 1973
to 1997 (25 years), the average annual return for the Ibbotson Index was 16.30%
compared with 13.10% for larger stocks -- a difference of over 3%.
While, historically, small company stocks have outperformed the stocks
of large companies, the former have customarily involved more investment risk as
well. Small companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than large companies. The
prices of small company securities are often more volatile than prices
associated with large company issues, and can display abrupt or erratic
movements at times, due to limited trading volumes and less publicly available
information.
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Also, because small companies normally have fewer shares outstanding and
these shares trade less frequently than large companies, it may be more
difficult for the Fund to buy and sell significant amounts of such shares
without an unfavorable impact on prevailing market prices. Some of the companies
in which the Fund may invest may distribute, sell or produce products which have
recently been brought to market and may be dependent on key personnel. The
securities of small companies are often traded over-the-counter and may not be
traded in the volumes typical on a national securities exchange. Consequently,
in order to sell this type of holding, the Fund may need to discount the
securities from recent prices or dispose of the securities over a long period of
time.
Defining "emerging growth" companies. The Advisor's model of the corporate life
cycle begins with investment of venture capital, and proceeds to an `emerging
growth' stage. An `emerging growth' company is publicly traded, with a market
value of at least $50 million. Emerging growth companies are part of the `small
stock universe' as described above.
Emerging growth companies grow into `established growth' companies with
market values exceeding $500 million. Companies become mature over time as
growth slows and market capitalizations grow beyond $1 billion.
Foreign Securities. While the Fund generally emphasizes investments in companies
domiciled in the U.S., it may invest in listed and unlisted foreign securities
of the same types as the domestic securities in which the Fund may invest when
the anticipated performance of foreign securities is believed by the Adviser to
offer more potential than domestic alternatives in keeping with the investment
objective of the Fund. However, the Fund has no current intention of investing
more than 20% of its net assets in foreign securities.
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 Fund's performance. As foreign companies are not
generally subject to uniform accounting and 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 stock markets, while growing
in volume of trading activity, have substantially less volume than the New York
Stock Exchange, Inc. (the "Exchange"), and securities of some foreign companies
are less liquid and more volatile than securities of domestic companies.
Further, foreign markets have different clearance and settlement procedures and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems either
could result in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Fixed commissions
on some foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Fund may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Fund's agents to keep
currently informed about corporate actions such as stock dividends or other
matters 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. Investments
in foreign securities may also entail certain risks, such as possible currency
blockages or transfer restrictions, and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the 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.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance may be greater in these countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through
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diversification and active professional management. Investments in companies
domiciled in developing countries may be subject to potentially greater risks
than investments in developed countries.
Investments in foreign securities usually are denominated currencies of
foreign countries. Moreover, the Fund temporarily may hold funds in bank
deposits in foreign currencies during the completion of investment programs.
Accordingly, the value of the assets for the Fund 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 Fund may incur costs and
experience conversion difficulties and uncertainties in connection with
conversions between various currencies. Although the Fund values its assets
daily in terms of U.S. dollars, it does not intend to convert its holdings of
foreign currencies, if any, into U.S. dollars on a daily basis. It may 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 foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Fund will conduct its foreign currency exchange
transactions, if any, either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or through strategic
transactions involving currencies.
To the extent that the Fund invests in foreign securities, the Fund's
share price could reflect the movements of the stock markets in which it is
invested and the currencies in which the investments are denominated; the
strength or weakness of the U.S. dollar against foreign currencies could account
for part of the Fund's investment performance.
Specialized Investment Techniques
Common stocks. Under normal circumstances, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer the greatest potential for
gain on investment, compared to other classes of financial assets such as bonds
or cash equivalents.
Foreign Currencies. The Fund may invest in foreign securities. Because
investments in foreign securities usually will involve currencies of foreign
countries, and because the Fund may hold foreign currencies and forward
contracts, futures contracts and options on futures contracts on foreign
currencies, the value of the assets of the Fund 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 Fund may incur costs in
connection with conversions between various currencies. Although the Fund 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 foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should that Fund desire to resell that
currency to the dealer. The Fund 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 forward or
futures contracts to purchase or sell foreign currencies.
Depositary Receipts. The Fund may invest indirectly in securities of emerging
country issuers through sponsored or unsponsored American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs"), International Depositary Receipts
("IDRs") and other types of Depositary Receipts (which, together with ADRs, GDRs
and IDRs are hereinafter referred to as "Depositary Receipts"). Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the stock of unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of the Depositary
Receipts. ADRs are Depositary Receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. GDRs, IDRs and other types of Depositary Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
United States banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a United States corporation. Generally,
Depositary Receipts in
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registered form are designed for use in the United States securities markets and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. For purposes of the Fund's investment policies, the
Fund's investments in ADRs, GDRs and other types of Depositary Receipts will be
deemed to be investments in the underlying securities. Depositary Receipts other
than those denominated in U.S. dollars will be subject to foreign currency
exchange rate risk. Certain Depositary Receipts may not be listed on an exchange
and therefore may be illiquid securities.
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve the Fund's objective of long-term capital appreciation, the
Fund may invest in debt securities including bonds of private issuers, bonds of
foreign governments and supranational organizations. Portfolio debt investments
will be selected on the basis of, among other things, credit quality, and the
fundamental outlooks for currency, economic and interest rate trends, taking
into account the ability to hedge a degree of currency or local bond price risk.
The Fund may purchase high quality bonds, rated Aaa, Aa or A by Moody's or AAA,
AA or A by S&P or, if unrated, judged to be of equivalent quality as determined
by the Adviser.
The principal risks involved with investments in bonds include interest
rate risk, credit risk and pre-payment risk. Interest rate risk refers to the
likely decline in the value of bonds as interest rates rise. Generally,
longer-term securities are more susceptible to changes in value as a result of
interest-rate changes than are shorter-term securities. Credit risk refers to
the risk that an issuer of a bond may default with respect to the payment of
principal and interest. The lower a bond is rated, the more it is considered to
be a speculative or risky investment. Pre-payment risk is commonly associated
with pooled debt securities, such as mortgage-backed securities and asset backed
securities, but may affect other debt securities as well. When the underlying
debt obligations are prepaid ahead of schedule, the return on the security will
be lower than expected. Pre-payment rates usually increase when interest rates
are falling.
Strategic Transactions and Derivatives. The Fund 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 the fixed-income securities in the Fund'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 Fund 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 Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the fixed-income
securities in the Fund's 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 Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic 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 to create leveraged exposure in the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had
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not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
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 Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security 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 Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
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The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although they are 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 Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or are determined to be of equivalent
credit quality by the Adviser. The staff of the Securities and Exchange
Commission (the "SEC") currently takes the position that OTC options purchased
by the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 15% of its net assets in illiquid
securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, 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 Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes that Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities), and on
securities indices and futures contracts other than futures on individual
corporate debt and individual equity securities. The Fund may each also purchase
and sell put options in foreign sovereign debt, Eurodollar instruments and
currencies. The Fund will not sell put options if, as a result, more than 50% of
the Fund'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 Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or equity market changes, for duration
management and for risk management purposes. In addition, the Fund may enter
into financial futures contracts or
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purchase or sell put and call options on such futures as a hedge against
anticipated currency market changes. Futures are generally bought and sold on
the commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of 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 Fund'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 Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund 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 Fund 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 (except for OTC currency options)
are determined to be of equivalent credit quality by the Adviser.
The Fund'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.
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Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of its portfolio 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 Fund 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 as described below.
The Fund 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 Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund'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 Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund'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 Fund 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 Fund
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 Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, that Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. The Fund is subject to currency transactions
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 Fund 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 Fund 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 Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of their portfolios, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
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securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where they do not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. 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 Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believes such obligations do not constitute senior securities under
the Investment Company Act of 1940 (the "1940 Act") and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Fund will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from a NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
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 Fund'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 Fund segregate liquid assets
with its custodian, State Street Bank and Trust Company (the "Custodian") to the
extent Fund 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 Fund 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 Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid securities sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by the Fund
on an index will require the Fund to own portfolio securities which correlate
with the index or to segregate liquid assets equal to the excess of the index
value over the exercise price on a
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current basis. A put option written by the Fund requires the Fund to segregate
liquid high grade assets equal to the exercise price.
Except when the Fund 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 Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate liquid high grade assets equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating 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 Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid 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 Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund 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.
Convertible Securities. The Fund may invest in convertible securities which are
bonds, notes, debentures, preferred stocks, and other securities which are
convertible into common stocks. Investments in convertible securities can
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest may be converted
or exchanged at a stated or determinable exchange ratio into underlying shares
of common stock. The exchange ratio for any particular convertible security may
be adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions, or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a
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yield basis and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes (LYONs). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, any foreign bank or with any domestic or
foreign 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 Fund may
purchase. Some repurchase commitment transactions may not provide the Fund with
collateral marked-to-market during the term of the commitment.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. 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 Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price upon repurchase. In either case, the income to the
Fund 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. Some
repurchase commitment transactions may not provide the Fund with collateral
marked-to-market during the term of the commitment.
For purposes of the 1940 Act a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund 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 Fund may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund 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
Fund 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
Fund, the Adviser seeks to minimize the risk of loss through repurchase
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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 Fund may incur a loss if the proceeds to the Fund
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 Fund 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 Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
A repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction, and such
repurchase agreements involve risks similar to repurchase agreements with U.S.
entities.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend to borrow for investment leverage purposes,
if such a strategy were implemented in the future it would increase the Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowings will be fixed, the Fund's assets may change in value during the time
a borrowing is outstanding, thus increasing exposure to capital risk.
Illiquid Securities. A Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. The absence of a
trading market can make it difficult to ascertain a market value for these
investments. This investment practice, therefore, could have the effect of
increasing the level of illiquidity of a Fund. It is a Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the Fund's net assets. The Trust's Board of Trustees has
approved guidelines for use by the Adviser in determining whether a security is
illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) in limited quantities after they have been
held for a specified period of time and other conditions are met pursuant to an
exemption from registration; or (iv) in a public offering for which a
registration statement is in effect under the 1933 Act. Issuers of restricted
securities may not be subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
If adverse market conditions were to develop during the period between a Fund's
decision to sell a restricted or illiquid security and the point at which the
Fund is permitted or able to sell such security, the Fund might obtain a price
less favorable than the price that prevailed when it decided to sell. Where a
registration statement is required for the resale of restricted securities, a
Fund may be required to bear all or part of the registration expenses. A Fund
may be deemed to be an "underwriter" for purposes of the 1933 Act when selling
restricted securities to the public and, in such event, the Fund may be liable
to purchasers of such securities if the registration statement prepared by the
issuer is materially inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
When-Issued Securities. The Fund may from time to time purchase equity and debt
securities on a "when-issued" or "forward delivery" basis. The price of such
securities, which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities takes place at a later date. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the Fund are
held in cash pending the settlement of a
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purchase of securities, the Fund would earn no income; however, it is the Fund's
intention to be fully invested to the extent practicable and subject to the
policies stated above. While when-issued or forward delivery securities may be
sold prior to the settlement date, the Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued or forward delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of the when-issued or forward delivery securities may be
more or less than the purchase price. The Fund does not believe that its net
asset value or income will be adversely affected by its purchase of securities
on a when-issued or forward delivery basis.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. The Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Adviser to be in good standing.
The value of the securities loaned will not exceed 5% of the value of the Fund's
total assets at the time any loan is made.
Investment Restrictions
Unless specified to the contrary, the following fundamental restrictions
may not be changed without the approval of a majority of the outstanding voting
securities of the Fund involved which, under the 1940 Act and the rules
thereunder and as used in this Statement of Additional Information, means the
lesser of (1) 67% or more of the voting securities present at such meeting, if
the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy, the
Fund will not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
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<PAGE>
(3) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership of
securities;
(6) purchase physical commodities or contracts related to physical
commodities; or
(7) make loans except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
Nonfundamental policies may be changed by the Trustees of the Trust and
without shareholder approval. As a matter of nonfundamental policy, the Fund
does not currently intend to:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments, (iv)
that transactions in futures contracts and options shall not be
deemed to constitute selling securities short, and (v) that the
Fund may obtain such short-term credits as may be necessary for
the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its
total assets; or sell put options, if as a result, the aggregate
value of the obligations underlying such put options would
exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate
initial margin with respect to such futures contracts entered
into on behalf of the Fund and the premiums paid for such
options on futures contracts does not exceed 5% of the fair
market value of the Fund's total assets; provided that in the
case of an option that is in-the-money at the time of purchase,
the in-the-money amount may be excluded in computing the 5%
limit;
(6) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of
the value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to
have no value); and
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
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<PAGE>
PURCHASES
(See "Purchases" and "Transaction Information" in the Fund's
prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per fund charge (with the fee to be paid to
the fund) for any non-fiduciary/non-custodial account without an
automatic investment plan (AIP) in place and a balance of less
than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange or
transfer out of the account. The Fund will mail the proceeds of
the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
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<PAGE>
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the Fund or
the principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted subject
to collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
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Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge for
the service. Presently, the Distributor pays a fee for receipt by State Street
Bank and Trust Company (the "Custodian") of "wired funds," but the right to
charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may be
open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund also reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Fund with a tax identification number
during the 30-day notice period.
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The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and Redemptions" and "Transaction Information" in the Fund's
prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more. If the account receiving the
exchange proceeds is to be different in any respect, the exchange request must
be in writing and must contain an original signature guarantee as described
under "Transaction Information -- Signature guarantees" in the Fund's
prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the net asset value
determined on that day. Exchange orders received after the close of regular
trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the phone or in writing. Automatic
exchanges will continue until the shareholder requests by phone or in writing to
have the feature removed, or until the originating account is depleted. The
Trust and the Transfer Agent each reserve the right to suspend or terminate the
privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
However, shares that are exchanged from the Fund may be subject to the Fund's 1%
redemption fee. (See "Special Redemption and Exchange Information.") An exchange
into another Scudder fund is a redemption of shares, and therefore may result in
tax consequences (gain or loss) to the shareholder, and the proceeds of such an
exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
and the Transfer Agent each reserve the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds. For more information, please call
1-800-225-5163.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
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<PAGE>
Special Redemption and Exchange Information
In general, shares of the Fund may be exchanged or redeemed at net asset
value. However, shares of a Fund held for less than one year are redeemable at a
price equal to 99% of the Fund's then current net asset value per share. This 1%
discount, referred to in the prospectus and this Statement of Additional
Information as a redemption fee, directly affects the amount a shareholder who
is subject to the discount receives upon exchange or redemption. It is intended
to encourage long-term investment in the Fund, to avoid transaction and other
expenses caused by early redemptions and to facilitate portfolio management. The
fee is not a deferred sales charge, is not a commission paid to the Adviser or
its subsidiaries, and does not benefit the Adviser in any way. The Fund reserves
the right to modify the terms of or terminate this fee at any time.
The redemption fee will not be applied to (a) a redemption of shares
held in certain retirement plans, including 401(k) plans, 403(b) plans, 457
plans, Keogh accounts, and profit sharing and money purchase pension plans
(however, this fee waiver does not apply to IRA and SEP-IRA accounts), (b) a
redemption of any shares of a Fund outstanding for one year or more, (c) a
redemption of reinvestment shares (i.e., shares purchased through the
reinvestment of dividends or capital gains distributions paid by a Fund), or (d)
a redemption of shares by a Fund upon exercise of its right to liquidate
accounts (i) falling below the minimum account size by reason of shareholder
redemptions or (ii) when the shareholder has failed to provide tax
identification information. However, if shares are purchased for a retirement
plan account through a broker, financial institution or recordkeeper maintaining
an omnibus account for the shares, such waiver may not apply. For this purpose
and without regard to the shares actually redeemed, shares will be redeemed as
follows: first, reinvestment shares; second, purchased shares held one year or
more; and third, purchased shares held for less than one year. Finally, if a
shareholder enters into a transaction in Fund shares which, although it may
technically be treated as a redemption and purchase for recordkeeping purposes,
does not involve the termination of economic interest in a Fund, no redemption
fee will apply and applicability of the redemption fee, if any, on any
subsequent redemption or exchange will be determined by reference to the date
the shares were originally purchased, and not the date of the transaction.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may request to have the proceeds mailed
or wired to their predesignated bank account. In order to request redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate section
on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
Pension and Profit-Sharing, Scudder 401(k) and Scudder 403(b)
Planholders) who wish to establish telephone redemption to a
predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed. The
letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account.
There will be a $5 charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and
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<PAGE>
submit any special wire transfer information with the telephone
redemption authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated bank.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request documents such as, but not restricted to, stock
powers, trust instruments, certificates of death, appointments as executor,
certificates of corporate authority and waivers of tax required in some states
when settling estates.
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven days of payment for shares tendered for repurchase or redemption may
result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-225-5163.
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<PAGE>
Redemption-in-Kind
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
Other Information
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct repurchase requests to the
Fund through Scudder Investor Services, Inc. at Two International Place, Boston,
Massachusetts 02110-4103 by letter, fax, TWX, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the repurchase
request. A written request in good order with a proper original signature
guarantee, as described in the Fund's prospectus under "Transaction information
- -- Signature guarantees," should be sent with a copy of the invoice to Scudder
Funds, c/o Scudder Confirmed Processing, Two International Place, Boston,
Massachusetts 02110-4103. Failure to deliver shares or required documents (see
above) by the settlement date may result in cancellation of the trade and the
shareholder will be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancellation. Net losses on such
transactions which are not recovered from the shareholder will be absorbed by
the principal underwriter. Any net gains so resulting will accrue to the Fund.
For this group, repurchases will be carried out at the net asset value next
computed after such repurchase requests have been received. The arrangements
described in this paragraph for repurchasing shares are discretionary and may be
discontinued at any time.
If a shareholder redeems all shares in the account after the record date
of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. The Fund does not
impose a repurchase charge, although a wire charge may be applicable for
redemption proceeds wired to an investor's bank account. Redemption of shares,
including redemptions undertaken to effect an exchange for shares of another
Scudder fund, may result in tax consequences (gain or loss) to the shareholder
and the proceeds of such redemptions may be subject to backup withholding. (See
"TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts should
contact the employer, trustee or custodian of the Plan for the requirements.
The determination of net asset value and a shareholder's right to redeem
shares and to receive payment may be suspended at times (a) during which the
Exchange is closed, other than customary weekend and holiday closings, (b)
during which trading on the Exchange is restricted for any reason, (c) during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
during which the SEC by order permits a suspension of the right of redemption or
a postponement of the date of payment or of redemption; provided that applicable
rules and regulations of the SEC (or any succeeding governmental authority)
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its Scudder Family of
Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or
22
<PAGE>
maintenance of shareholder accounts. Asset-based sales charges and service fees
are typically paid pursuant to distribution plans adopted under 12b-1 under the
1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not a fund also
charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds in the Scudder Family of Funds do not pay any asset-based
sales charges or service fees, Scudder developed and trademarked the phrase pure
no-load(TM) to distinguish Scudder funds from other no-load mutual funds.
Scudder pioneered the no-load concept when it created the nation's first no-load
fund in 1928, and later developed the nation's first family of no-load mutual
funds.
The following chart shows the potential long-term advantage of investing
$10,000 in a Scudder Family of Funds pure no-load fund over investing the same
amount in a load fund that collects an 8.50% front-end load, a load fund that
collects only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only
a 0.25% 12b-1 and/or service fee. The hypothetical figures in the chart show the
value of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Scudder No-Load Fund
Years Pure No-Load(TM) 8.50% Load Fund Load Fund with with 0.25% 12b-1
Fund 0.75% 12b-1 Fee Fee
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- ------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- ------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
- ------------------------------------------------------------------------------------------------
</TABLE>
Investors are encouraged to review the fee tables on page 5 of the
Fund's prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data
23
<PAGE>
from both Scudder and Lipper Analytical Services, Inc. are available on the
site. Also offered on the site is a news feature, which provides timely and
topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See
"Investment Products and Services" in the Funds' prospectuses for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan
must reinvest any dividends or capital gains. For most retirement plan accounts,
the reinvestment of dividends and capital gains is also required.
24
<PAGE>
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Investment Products and Services" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Funds.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment Products and Services" in the Funds'
prospectuses.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a constant
net asset value of $1.00 per share, although in certain circumstances
this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain a
constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
25
<PAGE>
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its investment
policies and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income
taxes and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of New York municipal securities.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
26
<PAGE>
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting primarily
of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income through
investment primarily in investment-grade corporate debt securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds denominated
in foreign currencies and the U.S. dollar. As a secondary objective, the
Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
27
<PAGE>
Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select
mix of Scudder equity mutual funds designed to provide long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of capital
by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in quality medium-size companies with the potential for
sustainable above-average earnings growth.
- ------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
28
<PAGE>
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository
Receipts) of Japanese companies.
- ------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
29
<PAGE>
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of capital
on an after-tax basis through investment primarily in undervalued stocks
of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction Information", "Purchases", and "Exchanges and
Redemptions" in the Fund's prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
30
<PAGE>
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples if only one spouse has
earned income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- --------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------
Contributions 5% 10% 15%
- --------------------------------------------------------------------------------
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
31
<PAGE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
- --------------------------------------------------------------------------------
Starting
Age of Annual Rate of Return
--------------------------------------------------------
Contributions 5% 10% 15%
- --------------------------------------------------------------------------------
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married,
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
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Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Signature guarantees" in the Fund's
prospectus. Any such requests must be received by the Fund's transfer agent ten
days prior to the date of the first automatic withdrawal. An Automatic
Withdrawal Plan may be terminated at any time by the shareholder, the Trust or
its agent on written notice, and will be terminated when all shares of the Fund
under the Plan have been liquidated or upon receipt by the Trust of notice of
death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where satisfactory
arrangements have been made with Scudder Investor Services, Inc. for forwarding
regular investments through a single source. The minimum annual investment is
$240 per investor which may be made in monthly, quarterly, semiannual or annual
payments. The minimum monthly deposit per investor is $20. Except for trustees
or custodian fees for certain retirement plans, at present there is no separate
charge for maintaining group or salary deduction plans; however, the Trust and
its agents reserve the right to establish a maintenance charge in the future
depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
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The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
Scudder Savings Incentive Match Plans for Employees: SIMPLE IRA'S
Shares of the Fund may be purchased as the underlying investment for a
"SIMPLE IRA." A SIMPLE IRA is an IRA into which both an individual and the
individual's employer may make contributions. The individual may elect to make
pre-tax contributions, calculated as a percentage of compensation, to a SIMPLE
IRA, up to $6,000 a year. Subject to certain limits, the employer may either
match a portion of your contributions, or may make a contribution equal to 2% of
the employee's compensation without regard to the amount the employee
contributes under the SIMPLE IRA. Individuals will be immediately 100% vested in
all contributions made to a SIMPLE IRA.
If amounts are distributed from a SIMPLE IRA account during the two year
period beginning on the date the employee first participates in the SIMPLE
salary reduction arrangement, a 25% penalty tax will be imposed on such
distribution. Also during that two year period, the SIMPLE IRA account can be
rolled over tax-free only to another SIMPLE IRA account. After that two year
period has passed, distributions from a SIMPLE IRA instead will be subject
generally to the rules applicable to other IRAs; for example, they may be rolled
over tax-free into any individual retirement plan, they will be subject to the
10% penalty tax on early distributions that are made before the individual
reaches age 59 1/2, and they will be fully taxed when withdrawn.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "DISTRIBUTIONS -- Dividends and Capital Gains Distributions"
and "TAXES" in the Fund's prospectus.)
The Fund intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment after paying the
related federal income taxes for which the shareholders may then be asked to
claim a credit against their federal income tax liability. (See "TAXES.")
If the Fund does not distribute an amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, it may be subject to such tax. (See "TAXES.") In certain circumstances,
the Fund may determine that it is in the interest of shareholders to distribute
less than such an amount.
Earnings and profits distributed to shareholders on redemptions of Fund
shares may be utilized by the Fund, to the extent permissible, as part of the
Fund's dividend paid deduction on its federal tax return.
The Trust intends to distribute the Fund's 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 Fund and confirmations will be
mailed to each shareholder unless a shareholder has elected to receive cash, in
which case a check will be sent. Distributions of investment company taxable
income and net realized capital gains are taxable (See "TAXES"), whether made in
shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
(See "FUND SUMMARY -- Past Performance" in the Fund's
prospectus.)
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures will be calculated in the following manner:
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Average Annual Total Return
Average annual total return is the average annual compound rate of
return for the periods of one year and the life of the Fund, ended on the last
day of a recent calendar quarter. Average annual total return quotations reflect
changes in the price of the Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial payment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
Average Annual Total Return for the periods ended August 31, 1998
One Year Life of Fund(1)
(22.58%) (8.13)%
(1) For the period September 6, 1996 (commencement of operations) to
August 31, 1998
Cumulative Total Return
Cumulative total return is the compound rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rate 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.
Cumulative Total Return for the periods ended August 31, 1998
One Year Life of Fund(1)
(22.58%) (15.42)%
(1) For the period October 6, 1995 (commencement of operations) to
August 31, 1998
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.
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Quotations of the Fund's performance are historical and are not intended
to indicate future performance. An investor's shares when redeemed may be worth
more or less than their original cost. Performance of the Fund will vary based
on changes in market conditions and the level of the Fund's expenses.
There may be quarterly periods following the periods reflected in the
performance bar chart in the Fund's prospectus which may be higher or lower than
those included in the bar chart.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond
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funds these factors include, but are not limited to, a fund's overall investment
objective, the average portfolio maturity, credit quality of the securities
held, and interest rate movements. For equity funds, factors include a fund's
overall investment objective, the types of equity securities held and the
financial position of the issuers of the securities. The risks/returns
associated with an investment in international bond or equity funds also will
depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
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IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
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<PAGE>
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUND
(See "Investment Adviser" in the Fund's prospectus.)
The Fund is a series of Scudder Securities Trust, formerly Scudder
Development Fund, a Massachusetts business trust established under a Declaration
of Trust dated October 16, 1985. The Trust's predecessor was organized as a
Delaware corporation in 1970. The Trust's authorized capital consists of an
unlimited number of shares of beneficial interest of $0.01 par value, all of
which are of one class and have equal rights as to voting, dividends and
liquidation. The Trust's shares are currently divided into seven series, Scudder
Development Fund, Scudder Financial Services Fund, Scudder Health Care Fund,
Scudder Micro Cap Fund, Scudder Small Company Value Fund, Scudder Techonology
Fund and Scudder 21st Century Growth Fund. The Trustees have the authority to
issue additional series of shares and to designate the relative rights and
preferences as between the different series. Each share of each Fund has equal
rights with each other share of that Fund as to voting, dividends and
liquidations. All shares issued and outstanding will be fully paid and
nonassessable by the Trust, and redeemable as described in this Statement of
Additional Information and in each Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting that
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series.
The Trustees, in their discretion, may authorize the division of shares
of the Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution. The Trustees have no present
intention of taking the action necessary to effect the division of shares into
separate classes, nor of changing the method of distribution of shares of the
Fund.
The Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Fund, except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable
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belief that their actions were in the best interests of the Fund. However,
nothing in the Declaration of Trust protects or indemnifies a Trustee or officer
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
INVESTMENT ADVISER
(See "Investment Adviser" in the Fund's prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder
Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc., The Japan Fund, Inc. and Scudder Spain and Portugal Fund,
Inc. Some of the foregoing companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute
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portfolio transactions for the Adviser's clients. However, the Adviser regards
this information and material as an adjunct to its own research activities.
Scudder's international investment management team travels the world,
researching hundreds of companies. In selecting the securities in which the Fund
may invest, the conclusions and investment decisions of the Adviser with respect
to the Fund are based primarily on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
An investment management agreement dated September 9, 1996 was approved
by the Trustees of the Trust on September 4, 1996 and by the initial shareholder
of the Fund on September 10, 1997. Because the transaction between Scudder and
Zurich resulted in the assignment of the Fund's investment management agreement
with Scudder, that agreement was deemed to be automatically terminated at the
consummation of the transaction. In anticipation of the transaction, however, a
new investment management agreement between the Trust on behalf of the Fund and
the Adviser was approved by the Trust's Trustees on August 6, 1997. At the
special meeting of the Fund's shareholders held on October 27, 1997, the
shareholders also approved the new investment management agreement. The
investment management agreement became effective as of December 31, 1997. The
investment management agreement is in all material respects on the same terms as
the previous investment management agreement which it supersedes. The investment
management agreement incorporates conforming changes which promote consistency
among all of the funds advised by the Adviser and which permit ease of
administration.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in the Adviser) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with the Adviser was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement (the "Agreement") with the Adviser, which is substantially identical
to the current investment management agreement, except for the date of execution
and termination. This Agreement became effective upon the termination of the
then current investment management agreement and will be submitted for
shareholder approval at special meetings currently scheduled to conclude in
December 1998.
The Agreement dated September 7, 1998, was approved by the Trustees of
the Fund on August 6, 1998. The Agreement will continue in effect until
September 30, 1999 and from year to year thereafter only if its continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreement or interested persons of the Adviser or the Fund, cast
in person at a meeting called for the purpose of voting on such approval, and
either by a vote of the Trust's Trustees or of a majority of the outstanding
voting securities of the Fund. The Agreement may be terminated at any time
without payment of penalty by either party on sixty days' written notice, and
automatically terminates in the event of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of the Fund's
assets shall be held uninvested, subject to the Fund's Declaration of Trust,
By-Laws, the 1940 Act, the Code and to the Fund's investment objective, policies
and restrictions, and subject, further, to such policies and instructions as the
Board of Trustees of the Fund may from time to time
41
<PAGE>
establish. The Adviser also advises and assists the officers of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Fund.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, Custodian, accountants and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Fund's federal, state and local tax returns; preparing and filing the
Fund's federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Adviser pays the compensation and expenses of all Trustees, officers
and executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York or Boston, Massachusetts) of the Trusts
affiliated with the Adviser and makes available, without expense to the Fund,
the services of such Trustees, officers and employees of the Adviser as may duly
be elected officers of the Trust, subject to their individual consent to serve
and to any limitations imposed by law, and provides the Fund's office space and
facilities.
For these services, the Fund will pay the Adviser a fee equal to 1.00%
of the Fund's average daily net assets, payable monthly, provided the Fund will
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Fund and unpaid. Since
inception, the Adviser has agreed until November 30, 1999 to maintain the total
annualized expenses of the Fund at no more than 1.75% of the average daily net
assets of the Fund. For the period September 9, 1996 (commencement of
operations) to August 31, 1997, the Adviser waived its management fee amounting
to $129,231. For the fiscal year ended August 31, 1998, the Adviser did not
impose a portion of its management fee amounting to $136,802 and the amount paid
to the Adviser amounted to $187,185.
Under the Agreement the Fund is responsible for all of its other
expenses including: organizational costs, fees and expenses incurred in
connection with membership in investment company organizations; brokers'
commissions; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the Transfer Agent; any other expenses of issue,
sale, underwriting, distribution, redemption or repurchase of shares; the
expenses of and the fees for registering or qualifying securities for sale; the
fees and expenses of Trustees, officers and employees of the Fund who are not
affiliated with the Adviser; the cost of printing and distributing reports and
notices to stockholders; and the fees and disbursements of custodians. The Fund
may arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of the Fund. The Fund is also
responsible for its expenses of shareholders' meetings, the cost of responding
to shareholders' inquiries, and its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees of the Fund with respect thereto.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees who are not "interested persons"
of the Adviser are represented by independent counsel at the Fund's expense.
The Agreement provide that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
42
<PAGE>
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Fund.
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 Fund. 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.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
Daniel Pierce (64)+*@ President and Managing Director of Scudder Director, Vice
Trustee Kemper Investments, Inc. President and
Assistant Treasurer
Paul Bancroft III (68) Trustee Venture Capitalist and --
79 Pine Lane Consultant; Retired,
Box 6639 President, Chief Executive
Snowmass Village, CO Officer and Director,
81615 Bessemer Securities
Corporation
Sheryle J. Bolton (52) Trustee CEO and Director, Scientific --
Scientific Learning Learning Corporation; Former
Corporation President and Chief Operating
1995 University Avenue Officer, Physicians Online,
Suite 400 Inc. (electronic transmission
San Francisco, CA 94704 of clinical information for
physicians (1994-1995)
William T. Burgin (55) Trustee General Partner, Bessemer --
83 Walnut Street Venture Partners; General
Wellesley, MA 02481 Partner, Deer & Company;
Director, Fort James Corp.;
Director of various
privately held companies
43
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- --------------
Keith R. Fox (44) Trustee Private Equity Investor, --
10 East 53rd Street Exeter Capital Management
New York, NY 10022 Corporation
William H. Luers (69) Trustee President, The Metropolitan --
The Metropolitan Museum of Art (1986 to
Museum of Art present)
1000 Fifth Avenue
New York, NY 10028
Joan E. Spero (54) Trustee President, The Doris Duke --
Charitable Foundation (1997
to present), Undersecretary
of State for Economic,
Business, and Agricultural
Affairs, (1993-1997)
Kathryn L. Quirk (45) ++@ Trustee, Vice Managing Director of Scudder Director, Senior
President and Kemper Investments, Inc. Vice President
Assistant and Assistant Clerk
Secretary
Thomas J. Devine (72) Honorary Trustee Consultant --
149 East 73rd Street
New York, NY 10021
Robert G. Stone, Jr. (75) Honorary Trustee Chairman Emeritus and --
405 Lexington Avenue Director, Kirby Corporation
39th Floor (inland and offshore marine
New York, NY 10174 transportation and diesel
repairs)
Wilson Nolen (72) Honorary Trustee Consultant (1989 to present); --
1120 Fifth Avenue Corporate Vice President,
New York, NY 10128-0144 Becton, Dickinson & Company
(manufacturer of medical and
scientific products) until
1989
Edmund R. Swanberg (77)++ Honorary Trustee Advisory Managing Director of --
Scudder Kemper Investments,
Inc.
Peter Chin (56)++ Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
J. Brooks Dougherty (39)+ Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
James M. Eysenbach (36)# Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
James E. Fenger (39)## Vice President Managing Director of Scudder --
Kemper Investments, Inc.
44
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- --------------
Philip S. Fortuna (41)# Vice President Managing Director of Scudder Vice President
Kemper Investments
Thomas W. Joseph (59)+ Vice President Senior Vice President of Director, Vice
Scudder Kemper Investments, President,
Inc. Treasurer and
Assistant Clerk
Ann M. McCreary (48)++ Vice President Managing Director of Scudder --
Kemper Investments
Thaddeus Paluszek Vice President Vice President of Scudder --
(41)++ Kemper Investments, Inc.
Kurt R. Stalzer (40)## Vice President Managing Director or Scudder --
Kemper Investments, Inc.
Peter Taylor (61)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas F. McDonough (51)+ Vice President Senior Vice President of Clerk
and Secretary Scudder Kemper Investments,
Inc.
John R. Hebble (40)+ Treasurer Senior Vice President of --
Scudder Kemper Investments,
Inc.
Richard W. Desmond (62)++ Assistant Vice President of Scudder Vice President
Secretary Kemper Investments, Inc.
Caroline Pearson (36)+ Assistant Senior Vice President of --
Secretary Scudder Kemper Investments,
Inc.; Associate, Dechert
Price & Rhoads (law firm)
1989 - 1997
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Fund and its counsel to
be persons who are "interested persons" of the Adviser or of the Fund
within the meaning of the 1940 Act.
** Unless otherwise stated, all officers and trustees have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
@ Mr. Pierce and Ms. Quirk are members of the Executive Committee which
may exercise substantially all of the powers of the Board of Trustees
when it is not in session.
+ Address: Two International Place, Boston, Massachusetts 02110
++ Address: 345 Park Avenue, New York, New York 10154
# Address: 101 California Street, Suite 4100, San Francisco, CA
94111-5886
## Address: 222 South Riverside Plaza, Chicago, IL 60606-5808
The Trustees and Officers of the Trust also serve in similar capacities
with other Scudder Funds.
To the knowledge of the Trust, as of November 30, 1998, all Trustees and
officers of the Fund as a group owned beneficially (as that term is defined
under Section 13(d) of the Securities Exchange Act of 1934) 103,367 shares, or
3.63% of the shares of the Fund outstanding on such date.
45
<PAGE>
As of November 30, 1998, 627,206 shares in the aggregate 22.06% of the
outstanding shares of the Fund, were held in the name of State Street Bank &
Trust Co., for Scudder Pathway Series: Growth Portfolio, 1 Heritage Drive #P5S,
Quincy, MA 02171, who may be deemed to be the beneficial owner of certain of
these shares, but disclaim any beneficial ownership therein.
As of November 30, 1998, 144,822 shares in the aggregate 5.09% of the
outstanding shares of the Fund, were held in the name of A. Lindsay & Oliver B.
O'Connor Foundation, c/o The O'Connor Foundation Box D, Hobart, NY 13788, who
may be deemed to be the beneficial owner of certain of these shares, but
disclaim any beneficial ownership therein.
To the knowledge of the Trust, as of November 30, 1998, no person owned
beneficially more than 5% of the Fund's outstanding shares except as stated
above.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder Securities Trust: an annual trustee's fee of $3,500; a fee of
$325 for attendance at each board meeting, audit committee meeting or other
meeting held for the purposes of considering arrangements between the Trust on
behalf of the Fund and the Adviser or any affiliate of the Adviser; $100 for all
other committee meetings; and reimbursement of expenses incurred for travel to
and from Board Meetings. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences or service on special
trustee task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other funds
managed by the Adviser. These funds differ broadly in type and complexity and in
some cases have substantially different Trustee fee schedules. The following
table shows the aggregate compensation received by each Independent Trustee
during 1997 from the Trust and from all of the Scudder funds as a group.
46
<PAGE>
<TABLE>
<CAPTION>
Scudder Securities Trust* All Scudder Funds
------------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $38,155 $5,400 $156,922 (20 funds) $ 25,950 (20
Trustee funds)
Sheryle J. Bolton, $5,068 $0.00 $86,213 (20 funds) $10,800 (20
Trustee** funds)
William T. Burgin, $23,353 $5,400 $85,950 (20 funds) $17,550 (20
Trustee funds)
Thomas J. Devine, $43,255 $5,400 $186,598 (21 funds) $27,150 (21
Honorary Trustee+ funds)
Keith R. Fox, Trustee $44,905 $5,400 $134,390 (18 funds) $17,550 (18
funds)
William H. Luers, $5,068 $0.00 $117,729 (20 funds) $16,350 (20
Trustee** funds)
Wilson Nolen, $40,455 $5,400 $189,548 (21 funds) $25,300 (21
Honorary Trustee+ funds)
Joan E. Spero,*** $0.00 $0.00 $0.00 $0.00
Trustee
</TABLE>
(1) The Adviser paid the compensation to the Trustees for meetings
associated with the Adviser's alliance with Zurich Insurance Company.
See "Investment Adviser" for additional information.
* Scudder Securities Trust consists of seven funds: Scudder Development
Fund, Scudder Financial Services Fund, Scudder Health Care Fund, Scudder
Technology Fund, Scudder Micro Cap Fund, Scudder Small Company Value
Fund and Scudder 21st Century Growth Fund.
** Elected as Trustee of the Trust in October 1997.
*** Elected as Trustee of the Trust in September 1998.
+ Elected as Honorary Trustee in December 1998, after serving as Trustee.
Members of the Board of Trustees who are employees of the Adviser or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Adviser, a Delaware
corporation. The Trust's underwriting agreement dated September 7, 1998 will
remain in effect until September 30, 1999 and from year to year thereafter only
if its continuance is approved annually by a majority of the Trustees who are
not parties to such agreement or interested persons of any such party and either
by a vote of a majority of the Trustees or a majority of the outstanding voting
securities of the Fund. The underwriting agreement was last approved by the
Trustees on August 6, 1998.
47
<PAGE>
Under the underwriting agreement, the Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Fund as a broker or dealer in the
various states as required; the fees and expenses of preparing, printing and
mailing prospectuses annually to existing shareholders (see below for expenses
relating to prospectuses paid by the Distributor), notices, proxy statements,
reports or other communications to shareholders of the Fund; the cost of
printing and mailing confirmations of purchases of shares and any prospectuses
accompanying such confirmations; any issuance taxes and/or any initial transfer
taxes; a portion of shareholder toll-free telephone charges and expenses of
shareholder service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
a portion of the cost of computer terminals used by both the Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of the Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by the Fund, unless a 12b-1 Plan is in effect which
provides that the Fund shall bear some or all of such expenses.
Note: Although the Fund does not currently have a 12b-1 Plan, the Fund would
also pay those fees and expenses permitted to be paid or assumed by the
Fund pursuant to a 12b-1 Plan, if any, were adopted by the Fund,
notwithstanding any other provision to the contrary in the underwriting
agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states in which shares of the Fund may from
time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of the Fund.
TAXES
(See "DISTRIBUTIONS - Dividends and Capital Gains Distributions and
Taxes" in the Fund's prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. It intends to continue to qualify for such treatment.
Such qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code
is required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
If for any taxable year a Fund does not qualify for the special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its shareholders). In such event, dividend
distributions, would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required
to be but not distributed under a prescribed formula. The formula requires
payment to shareholders during a calendar year of distributions representing at
least 98% of the Fund's ordinary income for the calendar year, at least 98% of
the excess of its capital gains over capital losses (adjusted for certain
ordinary losses) realized during the one-year period ending October 31 during
such year, and all ordinary income and capital gains for prior years that were
not previously distributed.
48
<PAGE>
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
Presently, the Fund has no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of federal income taxes paid by
the Fund on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit..
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise a
substantial part of the Fund's gross income. To the extent that such dividends
constitute a portion of the Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law, and is eliminated if
either those shares or the shares of the Fund are deemed to have been held by
the Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital
gain over net short-term capital loss are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($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 $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has earnings in a given year if the
spouse elects to be treated as having no earnings (for IRA contribution
purposes) for the year.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
49
<PAGE>
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 Fund may invest in shares of certain foreign corporations which may
be classified under the Code as passive foreign investment companies ("PFICs").
If the Fund receives a so-called "excess distribution" with respect to PFIC
stock, the Fund itself may be subject to a tax on a portion of the excess
distribution. Certain distributions from a PFIC as well as gains from the sale
of the PFIC shares are treated as "excess distributions." In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the Fund held the PFIC shares. The Fund will be
subject to tax on the portion, if any, of an excess distribution that is
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Excess
distributions allocated to the current taxable year are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds the Fund's adjusted basis in these
shares; any mark to market losses and any loss from an actual disposition of
shares would be deductible as ordinary loss to the extent of any net mark to
market gains included in income in prior years. The effect of the election would
be to treat excess distributions and gain on dispositions as ordinary income
which is not subject to a fund level tax when distributed to shareholders as a
dividend. Alternatively, the Fund may elect to include as income and gain its
share of the ordinary earnings and net capital gain of certain foreign
investment companies in lieu of being taxed in the manner described above.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
stock. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying stock or substantially identical stock in the Fund's portfolio. If
the Fund writes a put or call option, no gain is recognized upon its receipt of
a premium. If the option lapses or is closed out, any gain or loss is treated as
a short-term capital gain or loss. If a call option is exercised, any resulting
gain or loss is a short-term or long-term capital gain or loss depending on the
holding period of the underlying stock. The exercise of a put option written by
the Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts
entered into by the Fund and all listed non-equity options written or purchased
by the Fund (including options on futures contracts and options on broad-based
stock indices) will be governed by Section 1256 of the Code. Absent a tax
election to the contrary, gain or loss attributable to the lapse, exercise or
closing out of any such position generally will be treated as 60% long-term and
40% short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, all outstanding Section 1256 positions will be marked to market
(i.e. treated as if such positions were closed out at their closing price on
such day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term. Under Section 988 of the Code, discussed below, foreign currency
gain or loss from foreign currency-related forward contracts and similar
financial instruments entered into or acquired by the Fund will be treated as
ordinary income. Under certain circumstances, entry into a futures contract to
sell a security may constitute a short sale for federal income tax purposes,
causing an adjustment in the holding period of the underlying security or a
substantially identical security in the Fund's portfolio.
Positions of the Fund which consist of at least one stock and at least
one other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
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Positions of the Fund which consist of at least one position not
governed by Section 1256 and at least one futures or forward contract or
non-equity option governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, certain tax elections exist for them which reduce or
eliminate the operation of these rules. The Fund intends to monitor its
transactions in options and futures and may make certain tax elections in
connection with these investments.
Notwithstanding any of the foregoing, recent tax law changes may require
the Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables, or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain options, futures contracts and
forward contracts, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract and
the date of disposition are also treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
The Fund will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The Fund is organized as a series of a Massachusetts business trust and
is not liable for any income or franchise tax in the Commonwealth of
Massachusetts, provided that it qualifies as a regulated investment company for
federal income tax purposes.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
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Dividend and interest income received by the Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions for the Fund to
pay a brokerage commission in excess of that which another broker might charge
for executing the same transaction on account of execution services and the
receipt of research, market or statistical information. The Adviser will not
place orders with broker/dealers on the basis that the broker/dealer has or has
not sold shares of the Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund, and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Trustees review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable
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For the fiscal period from September 9, 1996 (commencement of
operations) to August 31, 1997 and the fiscal year ended August 31, 1998, the
Fund paid brokerage commissions of $150,026 and $32,583, respectively. For the
fiscal year ended August 31, 1998, $23,987 (74% of the total brokerage
commissions paid) resulted from orders placed, consistent with the policy of
obtaining the most favorable net results, with brokers and dealers who provided
supplementary research market and statistical information to the Fund or the
Adviser. The total amount of brokerage transactions aggregated $53,769,054, of
which $10,797,522 (20% of all brokerage transactions) were transactions which
included research commissions.
Portfolio Turnover
The portfolio turnover rates (defined by the SEC as the ratio of the
lesser of sales or purchases to the monthly average value of such securities
owned during the year, excluding all securities whose remaining maturities at
the time of acquisition were one year or less) for the fiscal years ended August
30, 1997 and 1998 were 92.0% and 119.8%, respectively.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close of
regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Net asset value per share is determined by
dividing the value of the total assets of the Fund, less all liabilities, by the
total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation, the security is valued
at the most recent bid quotation on such exchange as of the Value Time. An
equity security which is traded on the National Association of Securities
Dealers Automated Quotation ("Nasdaq") system will be valued at its most recent
sale price on such system as of the Value Time. Lacking any sales, the security
will be valued at the most recent bid quotation as of the Value Time. The value
of an equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, is its most recent sale price, if there are any sales
of such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean. Lacking a Calculated Mean quotation,
the security is valued at the most recent bid quotation as of the Value Time.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities 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.
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If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, One Post Office Square, Boston,
Massachusetts 02109, independent accountants, and given on the authority of that
firm as experts in accounting and auditing. Effective July 1, 1998, Coopers &
Lybrand L.L.P. and Price Waterhouse LLP merged to become PricewaterhouseCoopers
LLP. PricewaterhouseCoopers, LLP is responsible for performing annual audits of
the financial statements and financial highlights of the Fund in accordance with
generally accepted auditing standards, and the preparation of federal tax
returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund's property or
the acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the Fund's property of any shareholder held
personally liable for the claims and liabilities which a shareholder may become
subject by reason of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Other Information
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Adviser in light of the objective and policies of the
Fund, and other factors such as its other portfolio holdings and tax
considerations, and should not be construed as recommendations for similar
action by other investors.
The name "Scudder Securities Trust" is the designation of the Trustees
for the time being under a Declaration of Trust dated October 16, 1985, as
amended from time to time, and all persons dealing with the Fund must look
solely to the property of the Fund for the enforcement of any claims against the
Fund as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund. No series
of the Trust shall be liable for the obligations of any other series. Upon the
initial purchase of shares, the shareholder agrees to be bound by the Trust's
Declaration of Trust, as amended from time to time. The Declaration of Trust is
on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts.
The CUSIP number of the Fund is 811196 40 1.
The Fund has a fiscal year end of August 31.
Dechert Price & Rhoads acts as general counsel for the Fund.
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The Fund employs State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 as Custodian.
Costs of $23,340 incurred by the Fund, in conjunction with its
organization are amortized over the five year period beginning September 9,
1996.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, a subsidiary of the Adviser, computes net asset value for
the Fund. The Fund pays SFAC an annual fee equal to 0.065% of the first $150
million of average daily net assets, 0.04% of such assets in excess of $150
million and 0.02% of such assets in excess of $1 billion, plus holding and
transaction charges for this service. For the fiscal year ended August 31, 1998,
SFAC imposed fees amounting to $37,500, of which $3,125 was unpaid at August 31,
1998. For the period September 9, 1996 (commencement of operations) to August
31, 1997, SFAC imposed fees amounting to $6,942, of which $6,942 was unpaid at
August 31, 1997, and did not impose fees amounting to $31,183.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston,
Massachusetts, 02107-2291, is the transfer and dividend paying agent for the
Fund. The pays SSC an annual fee for each account maintained for a participant.
For the fiscal year ended August 31, 1998, SSC imposed fees amounting to
$109,029, of which $9,660 was unpaid at August 31, 1998. For the period
September 9, 1996 (commencement of operations) to August 31, 1997, SSC imposed
fees amounting to $14,592, of which $14,592 was unpaid at August 31, 1997, and
did not impose fees amounting to $65,550. The Fund, or the Adviser (including
any affiliate of the Adviser), or both, may pay unaffiliated third parties for
providing recordkeeping and other administrative services with respect to
accounts of participants in retirement plans or other beneficial owners of Fund
shares whose interests are held in an omnibus account.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the fiscal year ended August
31, 1998, STC imposed fees amounting to $10,812, of which $3,299 was unpaid at
August 31, 1998. For the period September 9, 1996 (commencement of operations)
to August 31, 1997, STC imposed fees amounting to $586, of which $586 was unpaid
at August 31, 1997, and did not impose fees amounting to $2,635.The Fund's
prospectus and this Statement of Additional Information omit certain information
contained in the Registration Statement which the Fund has filed with the SEC
under the Securities Act of 1933 and reference is hereby made to the
Registration Statement for further information with respect to the Fund and the
securities offered hereby. This Registration Statement and its amendments are
available for inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the Investment Portfolio of 21st
Century Growth Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements in the Annual Report to
the Shareholders of the Fund dated August 31, 1998, are incorporated herein by
reference, and are hereby deemed to be a part of this Statement of Additional
Information.
55
